Tesla Model 3 demand startled everyone, even Musk; now what?

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Tesla Model 3 design prototype  -  reveal event  -  March 2016

Tesla Model 3 design prototype - reveal event - March 2016

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To say that the auto industry has been startled by the volume of deposits on the Tesla Model 3 would be an understatement.

The number of potential buyers worldwide who have sent Tesla Motors $1,000 to reserve a place in line to buy the car is now approaching 400,000, said longtime executive Diarmuid O'Connell.

And at least one financial commentator has asked whether the total could be as high as 1 million by the time the car enters production.

WATCH THIS: Tesla Model 3: video of first ride in prototype $35k electric car

The number of deposits startled CEO Elon Musk, as his flurry of tweets after the March 30 unveiling seemed to indicate.

And the massive deposit queue imposes some new and additional challenges on Tesla, on top of several huge hurdles it already had to overcome between now and the start of Model 3 production.

Tesla Model 3 design prototype - reveal event - March 2016

Tesla Model 3 design prototype - reveal event - March 2016

Enlarge Photo

First, the new hurdles that have arisen since the Model 3 unveiling.

(1) Higher volume requires more cash

Elon Musk tweeted the day after the launch event that the company was "definitely going to have to rethink [its] production planning" for the Model 3.

It remains to be seen whether that means ramping up higher volume production faster, or adding more capacity over time than planned, to give Tesla a higher total capacity faster than that 500,000-by-2020 volume Musk has previously projected.

But either plan will likely require larger capital expenditures sooner than Tesla had projected just last month, before the Model 3 hoopla.

Certainly $400 million in deposits is nothing to sneeze at, and Tesla already has several empty factory buildings at its Fremont, California, assembly plant.

DON'T MISS: Tesla Model 3 reservations rise to 325,000 after one week

But its projections about the ramp of Model 3 production and the associated capital costs—and how they're spread over the coming years—almost surely require more cash quicker than previously expected.

In other words, a Tesla capital raise is more likely now than it was when the topic was discussed after the 2015 financial results were released in February.

(2) Will hundreds of thousands of reservation-holders wait years for their cars?

Few electric-car advocates and financial analysts expect that Tesla will begin its first production of the Model 3 late next year, as it has committed to do.

Tesla Model 3 Driving on a Public Road

Tesla Model 3 Driving on a Public Road

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The company could surprise them all, but thus far, it hasn't come within even a year of meeting the originally-announced production date for any vehicle it's sold.

History also shows that, quite sensibly, Tesla ramps up production gradually to address feedback from the earliest buyers and keep early build quality as high as possible.

That means of the 400,000 current depositors, at least 350,000 of them likely have no chance of getting a Model 3 until 2019, more probably 2020 or later.

How long they will be willing to wait is a huge open question.

Tesla Model 3

Tesla Model 3

Enlarge Photo

(3) The competition noticed

Certainly Tesla's following and the allure of the Model 3 has shocked the industry.

And thus far, the company seems to have largely overcome startup quality hurdles among its owners.

But buyers who want a 200-mile electric car will have several choices from more established carmakers by 2019.

CHECK OUT: Is Chevy Bolt EV's Main Mission To Marginalize Tesla Electric Cars?

Those cars clearly won't have the Tesla cachet, but GM, Nissan, and BMW will likely all have a track record of producing reliable battery-electric vehicles by then.

How many Model 3 depositors want to buy a 200-mile electric car for $35,000, and how many only want a Tesla?

Will the former group be willing to postpone their Model 3 purchase, and start with a 2017 Chevrolet Bolt EV, a 2018 Nissan Leaf, or future 200-mile electric cars from Volkswagen, Hyundai-Kia, or other makers?

Tesla Model 3 design prototype - reveal event - March 2016

Tesla Model 3 design prototype - reveal event - March 2016

Enlarge Photo

Today, no one knows.

But you can be very sure that the legacy automakers are all looking at that question—and asking what it would take to offer their competitors to the Model 3 or Bolt EV sooner than planned.

And the lithium-ion cell makers they will buy from are doing exactly the same.


 
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