All is not well at Tesla. On Thursday, its stock price fell to $166.99 [Ed's note: as of market close on April 8, 2016, Tesla's stock price was $250.07], its lowest since January, 2014. After Elon Musk silenced skeptics by delivering a new quarterly record and reaching the company's target of 50,000 EV sales in 2015, this drop may come as a shock to investors. But Tesla's share price may point to a failing in Musk's strategy – the much-hyped Model X.
When Musk launched the Model X last September, a lot of people lost their minds. The SUV had been anticipated for three years, so Tesla was careful to roll it out with as much fanfare as possible. Those falcon wing doors. That air filtration system. Each Model X feature was more fantastic than the last, and that's exactly where Tesla went wrong.
Back in 2006, Musk shared Tesla's "Master Plan" on the company blog. He had already completed the blueprint for his company's world domination: sell an expensive vehicle to a niche clientele, and use that revenue to expand downmarket. We're familiar with the first half of that story, because it's called the Model S, and it's the best-selling EV in the world. So far, so good, right?
Musk continued to explain that the third vehicle in Tesla's stable – after the Roadster and the Model S – would be its most affordable yet, targeting families. Based on this description, now a decade old, it sounds like he was talking about the Model 3. The Model X crashed Tesla's party somewhere in between, and Musk's philosophy helps to explain why.
Tesla, like most Silicon Valley companies, uses most of its revenue to finance research and development for new products. Rolling out new products with minimal required development is crucial to this strategy, and the Model X began its development as a taller version of the Model S. The shared platform would allow Tesla to conquer new markets without having to develop a complicated, new vehicle.
Then, because Elon Musk doesn't know how to just phone it in, he turned the Model X into a complicated, new vehicle.
Now Tesla is saddled with a very expensive project that wasn't exactly, um, planned. Development took two years longer than initially expected, as the platform changed and new technology was added. Speaking candidly about the Model X's development, Musk said, "If we had known the true engineering costs and the amount of complexity associated with it I think we would have probably done fewer new things."
The result is a car that's impressive in almost every way, but entirely inconsistent with Tesla's stated mission. Instead of moving downmarket, the Model X is even costlier than the Model S, with a base price of $80,000. It also loses the range and efficiency competitions to the Model S, thanks to its bulk. CUVs are a growing segment, but wouldn't a smaller car – like a wagon to compete with the Mercedes-Benz E-Class – fit more nicely between the Model 3 and the Model S?
None of this would matter if Model X sales were up, but a variety of delays have kept it from hitting the showroom floor, and only 208 delivered before the end of 2015. When the Model X debuted, analysts worried that it might cannibalize Model S sales. As Model S demand soars, we know what the Model X is actually cannibalizing: R&D money, engineer time, and space at Tesla's Fremont factory. It was originally intended to boost revenue in advance of Tesla's expansion, but it's turned out to be quite a drag. The question isn't whether or not the mass-market Model 3's development has suffered as a result of this vanity project, but how much.
When the Model 3 finally appears, it will help Tesla realize the vision that Elon Musk laid down ten years ago. Its size, price range, and energy efficiency will likely disrupt the market for family cars, fueling sales volume and warranting an expansion of Supercharger coverage. If some of the crazy tech we saw in the Model X finds its way into the Model 3, that would go a long way in justifying the CUV's costly development. But in the meantime, we have to recognize the Model X for what it is – this brilliant company's biggest mistake yet.
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When Musk launched the Model X last September, a lot of people lost their minds. The SUV had been anticipated for three years, so Tesla was careful to roll it out with as much fanfare as possible. Those falcon wing doors. That air filtration system. Each Model X feature was more fantastic than the last, and that's exactly where Tesla went wrong.
Back in 2006, Musk shared Tesla's "Master Plan" on the company blog. He had already completed the blueprint for his company's world domination: sell an expensive vehicle to a niche clientele, and use that revenue to expand downmarket. We're familiar with the first half of that story, because it's called the Model S, and it's the best-selling EV in the world. So far, so good, right?
Musk continued to explain that the third vehicle in Tesla's stable – after the Roadster and the Model S – would be its most affordable yet, targeting families. Based on this description, now a decade old, it sounds like he was talking about the Model 3. The Model X crashed Tesla's party somewhere in between, and Musk's philosophy helps to explain why.
Tesla, like most Silicon Valley companies, uses most of its revenue to finance research and development for new products. Rolling out new products with minimal required development is crucial to this strategy, and the Model X began its development as a taller version of the Model S. The shared platform would allow Tesla to conquer new markets without having to develop a complicated, new vehicle.
Then, because Elon Musk doesn't know how to just phone it in, he turned the Model X into a complicated, new vehicle.
Now Tesla is saddled with a very expensive project that wasn't exactly, um, planned. Development took two years longer than initially expected, as the platform changed and new technology was added. Speaking candidly about the Model X's development, Musk said, "If we had known the true engineering costs and the amount of complexity associated with it I think we would have probably done fewer new things."
The result is a car that's impressive in almost every way, but entirely inconsistent with Tesla's stated mission. Instead of moving downmarket, the Model X is even costlier than the Model S, with a base price of $80,000. It also loses the range and efficiency competitions to the Model S, thanks to its bulk. CUVs are a growing segment, but wouldn't a smaller car – like a wagon to compete with the Mercedes-Benz E-Class – fit more nicely between the Model 3 and the Model S?
None of this would matter if Model X sales were up, but a variety of delays have kept it from hitting the showroom floor, and only 208 delivered before the end of 2015. When the Model X debuted, analysts worried that it might cannibalize Model S sales. As Model S demand soars, we know what the Model X is actually cannibalizing: R&D money, engineer time, and space at Tesla's Fremont factory. It was originally intended to boost revenue in advance of Tesla's expansion, but it's turned out to be quite a drag. The question isn't whether or not the mass-market Model 3's development has suffered as a result of this vanity project, but how much.
When the Model 3 finally appears, it will help Tesla realize the vision that Elon Musk laid down ten years ago. Its size, price range, and energy efficiency will likely disrupt the market for family cars, fueling sales volume and warranting an expansion of Supercharger coverage. If some of the crazy tech we saw in the Model X finds its way into the Model 3, that would go a long way in justifying the CUV's costly development. But in the meantime, we have to recognize the Model X for what it is – this brilliant company's biggest mistake yet.
Related Video:
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