Tesla Is Set to Dominate This Segment in the U.S.
Tesla Motors’ (TSLA) path-breaking vehicle, the Model S, has been increasingly giving a hard time to the high-end, luxury car makers in the U.S. In fact, the Model S is now being counted as one of the least expensive options among all luxury cars. As a result, it became the top-selling car in the large luxury market in the U.S. in 2015, taking less than four years to reach the top.
The rise of Tesla has hurt other luxury car makers, while the image also indicates that Tesla managed to overcome the overall weakness in the luxury car market in the U.S. last year, which shrunk 1.21%.
Therefore, Tesla’s pricing and features on offer, apart from the fact that its cars are cleaner and fall in the electric vehicle category that’s growing at a fast pace, has proven to be a tailwind for the company. So, why is Tesla selling more than the other premium brands? Let’s take a look.
Cheaper to run
Not only is Tesla’s Model S cheaper on a sticker price basis, but they are also a lot cheaper to run, especially when you consider the long-term fuel savings. For instance, over a distance of 30,000 miles, a Tesla Model S costs just $934 to run in terms of electricity consumed to charge it, assuming a cost of $0.11 per kilowatt hour. On the other hand, the fuel cost associated with a premium sedan, based on average MPG of 22, comes in at $5,182 over the same distance of 30,000 miles.
Thus, running a Model S is over 80% cheaper as compared to other premium sedans. Hence, apart from a lower price, a Tesla Model S pays for itself as drivers cover longer distances. Additionally, Tesla’s Model S is a complete luxury car that offers high performance as well as safety features. Additionally, the fact that the Model S has been touted as the safest car on offer could also be another key reason behind the strong sales.
Currently, a number of major automakers have been hurt by recalls owing to a variety of problems ranging from airbags to ignition switches. However, the testimonials to Tesla’s safety speak that the lack of a gas-powered engine block that leads to longer crumple zones, along with low rollover probability, and less maintenance headaches due to an electric motor that has less moving parts have been advantageous for the company in terms of sales.
More importantly, going forward, Tesla is on track to replicate this success in the entry-level luxury sedan market with the Model 3.
Tesla’s will continue dominating the luxury segment
The entry-level luxury sedan market in the U.S. is a big and growing one. For instance, last year, sales in this segment grew 8% year-over-year to 611,973 units over 2014. In comparison, the large luxury sedan market in the U.S. was way smaller last year as the first chart in the article shows us. Now, with the Model 3, Tesla will be able to capture a bigger market for entry-level sedans going forward.
The Model 3 is priced half as much as the Model S and still offers almost similar features. Given that Tesla was already dominating the market with a $70,000 car, I am confident that it will dominate the space with the Model 3 as well.
Now, with the Model 3 unveiled and about to hit the market next year, it looks like a serious threat to the low-end luxury cars as well. Given the comparatively smaller price tag but a very high-end range of specs and overall driving experience, I have no doubt that Tesla will be able to outwit its peers once again if it manages to keep up with the demand.
More specifically, the Model 3 will give a tough competition to the likes of BMW 3 Series, Mercedes C Class, and Audi A4. If it repeats the success of its predecessor, the Model S (which had 25% share of the large-luxury market last year), and dominates its market segment in the same way, then that would mean Tesla will be able to sell over 150,000 units and account for a fourth of the entry-level market in a few years.
Additionally, since the entry-level sedan segment will be more concerned about the running costs as compared to the higher-end luxury sedan buyer, the fact that Tesla is way cheaper to run will be another tailwind.
The Model 3 is only going to add to the pressure on the affordable luxury car segment. The segment is already loaded with brands like Audi, Mercedes-Benz and BMW that currently offer vehicles in the $30,000 to $35,000 price range. And then, there are the volume brands like Honda (HMC) and Toyota (TM) who have lately upgraded their technology to include a fairly high level of content and luxury features into these lower-priced models.
Still, I believe that the Model 3 is a superior product and will be able to carve its niche in this crowded market owing to its cheaper running costs and safety. Therefore, I am confident that the Model 3 will boost Tesla’s sales and overall market share in the coming years, especially in the luxury segment.