Whether you believe the Model 3 will be a reality next year or five years from now, its unveiling was an auto industry milestone.
When nearly 400,000 people raised their hands for the Model 3 and cemented the conviction with a $1,000 deposit, a new business model in a staid industry was born. While conventional automakers seek board approval to tap cash reserves or issue bonds to pay for new vehicles, the ever-unconventional Tesla showed crowdfunding gets the job done in two weeks.
Those deposits gave Tesla about $400 million to play with that it did not have before the March 31 unveiling. By CEO Elon Musk’s calculations, with the average Model 3 expected to sell for about $42,000, the deposits equate to almost $17 billion in future sales. By contrast, Tesla had about $4 billion in global revenue last year.
Even Musk was floored by the response. He anticipated fewer than half the deposits he received and must now scramble to find a way to build all those cars.
No one expects all the hand-raisers to convert to buyers. Deposits are fully refundable, and many will want their money back long before they ever get their hands on a Model 3 if Tesla’s past launch history—the Model X was two years late—is any indication.
The deposits are not listed as revenue for Tesla, but they represent an unexpected cash flow with virtually no strings attached. The money is not held in escrow. It is not protected if Tesla declares bankruptcy, and there really is nothing preventing Musk from using it to sail off into the sunset on a giant yacht. It likely will be used to defray costs for a company that is not generating profit and burned through about $2.1 billion in cash in 2015. Tesla has huge bills to pay to complete its $5 billion battery Gigafactory and tool its car plant in Fremont to build the Model 3.
So while FCA CEO Sergio Marchionne sought partners and spun off Ferrari to help fund his five-year business plan, his equally audacious counterpart turned the unveiling of a car into a giant automotive Kickstarter.
“He turned the process on its head,” said Jessica Caldwell, senior analyst for Edmunds.com. “A lot of the money raised was unintended; it was not planned to raise money to fund further development of the car. It was a nice consequence.”
But could it become a model for the rest of the industry? Caldwell does not think so. “It would be hard for anyone except Tesla with a CEO who launches rockets. I doubt others could do it successfully.”
In fact, most automakers don’t take deposits for vehicles not yet on sale—let alone for cars the hand-raisers have not even seen and can’t take home for years.
Even if it was unplanned and cannot be duplicated, Tesla once again turned normal business practice on its ear. Instead of developing a car in secret and hoping it is a hit when it is unveiled years later, it appears the Model 3 will be developed with public input and money. Another mold is broken.
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Source: Motor Trend
