Will Ebiefung

About the Author Will Ebiefung

Will Ebiefung studied finance and accounting at the University of Tennesee. He works as a freelance investment analyst focusing on equities with market caps below $100 million. In addition to writing, Will is a full-time investor focusing on web properties and debt-based securities.

Tesla Inc (TSLA): The Model 3 Vs. the Model S

New details emerge about Tesla Inc (NASDAQ:TSLA) Model 3 sedan, the new mass-market electric vehicle expected to be available by the end of this year. Hype for the car is like free advertising for Tesla, and reservations are already estimated to be around 400,000 without Tesla spending a dime on marketing.

In fact, instead of touting their new vehicle, Tesla is actually “anti-selling” the Model 3 to protect the market for their other offerings. While the popularity of the Model 3 will help Tesla meet its lofty sales projections, the new car could have a negative impact on the rest of Tesla’s lineup, particularly the Model S which may face challenges due to confusing nomenclature and lack of differentiation.

The Model 3 vs. the Model S

The issue of nomenclature was brought up in the first quarter earnings call where Elon Musk addressed consumer confusion about the difference between the Model 3 and Model S. Many buyers assume the Model 3 is an upgrade to Tesla’s higher-end Model S line when it is actually intended to be a mass-market, lower-end option.

There is real concern that the Model 3 will hurt Model S sales because not only does the nomenclature and hype make the Model 3 look like an upgrade over the older S line, but the departure from “letter” names to “number” names makes it harder for consumers to know where the cars stand in relation to each other. In comparison, BMW sedans, for example, are clearly differentiated with higher numbers (3-series, 5-series, and 7-series) to mark higher end cars while Tesla’s naming system now appears random.

If Tesla’s Model 3 cannibalizes the market for the Model S, and this is bad news for the stock. The Model 3’s reservation list is already so high that consumers will have to wait over a year to receive their cars, and it would be easier for Tesla if some of these buyers simply went with the Model S. To help clear up the confusion, Tesla has provided a comparison between the two vehicles on its website to help differentiate them for potential buyers.

Vehicle Specifications

At almost $70,000, the Tesla Model S is over double the expected $35,000 base price of the Model 3. But does the Model S actually offer double the value? That is a decision for consumers. But while Tesla cars have unparalleled brand cachet, safety, and social value – they are not known for providing the raw luxury and interior finish of other vehicles in their price ranges.

The problem for Tesla is that the Model 3 offers practically everything the base Model S offers for a cheaper price. And it looks like a significantly better value. Both cars will go from 0-60 in around 5.5 seconds, both have a battery range of above 200 miles and full self-driving capabilities. The Model S has the advantage of more seating and space, but buyers who prioritize space would probably be more drawn to the Model X SUV.

So, what is the biggest differentiator between the Model S and the Model 3? Charging. Tesla has chosen not to offer free unlimited supercharging for buyers of the Model 3, and this seems to be the biggest difference between the two lines mentioned in the website’s comparison page. But is this really a big deal? Tesla’s charging isn’t particularly expensive, and by offering this option only to Model S/X owners, the company may be wasting a major selling point for, presumably, more cost-conscious Model 3 buyers.

Conclusion

Tesla’s new Model 3 sedan is surging in popularity, but the hype for the new mass-market vehicle may put the value proposition of the more expensive Model S in doubt. Many consumers have incorrectly assumed that the newer car is an upgrade over the older line, and Tesla will have to work hard to change this perception.

But to be honest, consumers who think the Model 3 is an upgrade over the Model S may be right – at least when it comes to bang for the buck. The Model S simply may not provide the same value for money as the Model 3. And to change this, Tesla may have to dramatically improve the luxury finish of its higher end car to bring it in line with other vehicles in its price range.

 

  • mdubuque

    Nice article.

    I note that the first “sentence” of your fifth paragraph is actually not a complete sentence.

    Many years ago, I recommended to Tesla that they dispense with assigning numerals to model numbers. For example, I proposed naming the Model “S” “Equus”, Latin for “horse”.

    I said this because it accelerates faster from 0-60 mph faster than a Ferrari Testarossa. I said they could market it (and the Model “3”) as a “muscle car” for this reason. However, they said they wanted to compete with the Nissan Leaf.

    They said no. Your article raises another serious problem with only using numerals to describe model numbers.

    This is what happens when you put engineers in charge of marketing.

    • Will E.

      I’m glad you brought this up because this is a subject I would have liked to explore in greater depth in the article. I absolutely hate number and letter names, and I see it as a holdover from snobbish German automakers like Mercedes and BMW who never even bothered to put cup holders standard in many of their high-end cars until recently.

      Giving cars toaster names just doesn’t appeal to most American consumers who aren’t “car people”. Regular consumers want a car with personality and exclusivity. Right now, most consumers don’t even know the difference between the Mercedes C, E and S classes. And this is bad for the cachet and resale value of the higher-end lines.

      Unfortunately, Tesla seems to have adopted this snobbish style of “marketing” and it permeates every aspect of the Model S, from its name to its panel gaps. Unless they make some big changes to the Model S, I don’t see much future for that car. Not only is the Model 3 a better value but new consumer-focused brands like the Lucid Air will better serve the high-end EV market.

  • No Longer Here

    With respect, you didn’t research this very much…there are factual errors and sloppy assumptions throughout. Just one point: “There is real concern that the Model 3 will hurt Model S sales.” Not only is it unlikely, but even if true it wouldn’t be a “source for concern”. The whole point of the Model S was to prove the concept and generate enough cash and interest to launch the Model 3. The Model 3 is the culmination of the original raison d’être of Tesla. Also, the 400k pre-orders are not an estimate, they were the actual number of pre-orders a year ago….estimates are that the current number exceeds 500k. The Model-3-as-S-upgrade issue was short-lived and over with. Among many other things skipped over, Musk is planning a quick ramp up to optimize the number of deliveries of the Model 3 which will have substantial tax credits attached. One expects that several hundred thousand will be delivered at the reduced price by the end of 2018. And no, “charging” is by no means the primary differentiator between the two models. it’s a fact, but not a significant one…nor is it correct as laid out in the article. Free unlimited supercharging was merely an early perk, and now gone for Model S as well. All future models will receive about 1000 miles/year free supercharging and only pay a small fee beyond that. The primary difference between the cars….is that they’re totally different (!) One is a large luxury sedan, one is a smaller, middle-income family style sedan. And so on….