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Tesla to Go Down-Market with Mainstream Model 3

Tesla Motors has shown it can take on established premium-luxury brands, but the real test will come when it launches a mainstream model.
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Tesla Motors has shown it can take on established premium-luxury brands with its Model S sedan, but the real test will come when it launches an all-new mainstream electric vehicle at roughly half the price.

CEO and founder Elon Musk has long made clear his plans to go down-market, and the new Model 3 (or Model III) sedan, confirmed this week, is expected to come in somewhere around $35,000 — or between one-half and one-third of the price of the bigger Model S, depending on equipment and range. That would position the new offering as a direct competitor to the likes of the BMW 3-Series and Mercedes-Benz C-Class sedans.

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Whether buyers will be as passionate about the mid-range model as Musk might be remains to be seen. While the Model S has been selling reasonably well in select, upscale markets, such as Beverly Hills and Silicon Valley’s Palo Alto, it still is generating demand for barely 3,000 vehicles per month, little more than an asterisk on the industry sales charts.

Battery cars as a whole — including both plug-in hybrids and pure battery-electric vehicles, or BEVs, like the Model S — have so far captured a fraction of 1 percent of total U.S. sales. And conventional hybrids saw demand slide by nearly 10 percent during the first half of 2014.

Industry analysts such as Dave Sullivan of AutoPacific Inc. caution that existing mid-range models have been plagued by limited range and long charging cycles, mediocre performance, and hefty premiums for their battery powertrains.

With the Model S — and for the upcoming Model X — Tesla has tried to overcome as many of those limitations as possible. The sedan, for one thing, can be ordered with an 85 kilowatt-hour battery that provides nearly 300 miles of range under optimum conditions. At the same time, the Model S can launch from 0 to 60 in barely 4 seconds, on par with a Porsche 911. Using the most powerful home set-up, an owner can recharge in about three hours, while an expanding network of so-called Supercharger stations can yield an 80 percent “fill-up” in about 20 minutes.

Price is still an issue, and it’s unclear where Tesla will have to cut back to meet the $35,000 target. At the current cost for lithium-ion batteries, an 85 kWh pack itself would cost the carmaker about that much.

But Musk has set a goal of slashing the cost of lithium-ion technology, and with partner Panasonic is getting ready to set up a so-called Gigafactory, a $5 billion battery plant that will be the biggest lithium cell production center in the world. The goal is to both increase production volumes and sharply drive down costs.

The Model S has drawn strong praise, with Consumer Reports declaring it the highest-scoring vehicle the magazine has ever tested. But it appeals to a rarified niche audience. Tesla has to rapidly expand its appeal if it is to consistently earn a profit – something it has only done through non-standard accounting practices.

Nonetheless, the maker has generated the sort of investor enthusiasm that more traditional automakers can only dream of, its stock hitting a $265 peak earlier this year.

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