Elon Musk is back to pitching another all-electric vehicle that the Tesla Inc. TSLA 1.02% chief needs to be a hit to turn the upstart auto maker into a mass-market car company.
Days after cutting the price of Tesla Inc.’s Model 3 sedan to reach mainstream buyers, the billionaire entrepreneur is expected Thursday night to unveil the Model Y compact sport-utility vehicle in front of fans and customers near Los Angeles.
While the Model 3 has tested Tesla’s mettle to build an affordable electric car, it is targeting a broader spectrum of buyers with an SUV, the fastest-growing vehicle segment in the U.S. and China. It is critical to Mr. Musk’s bid to move beyond a luxury brand and pump out a long-promised 1 million cars a year, quadrupling what it did in 2018.
“The question is can they get it there, can it be affordable, can you get volume—and I would question all of those things,” said Jeff Schuster, an analyst at consulting firm LMC Automotive.
The Model Y, expected to begin production in low volumes early next year, follows a year of corporate dramas that have tested Tesla’s reputation and investors’ resolve. The company has struggled at times to meet production goals, build its cash position and stem a tide of executive departures. Mr. Musk, meanwhile, has frustrated some investors with seemingly erratic and combative behavior, including waging war with regulators.
The annual Harris Poll, which measures people’s perceptions of corporate reputations, this month ranked Tesla at No. 42, well below its No. 3 spot a year ago. Consumer Reports stopped recommending the Model 3 in its newest report last month, though it ranked owner satisfaction the highest among car brands.
Mr. Musk has shown a mastery of marketing, able to rouse his fans and investors with world-changing ideas, brash talk and a charisma that entertains his 25 million Twitter followers. That bravado helped propel Tesla’s market value to record highs ahead of the Model 3 launch in July 2017, overtaking the much larger General Motors Co.
But Tesla’s stock has fallen about 15% since then. Its latest challenge has been to whittle away the production cost of the Model 3 to deliver on Mr. Musk’s promise to sell the vehicle at a starting price of $35,000. To do so, Tesla is closing some stores, laying off employees and moving to an online-only sales model.
“ The question is can they get it there, can it be affordable, can you get volume—and I would question all of those things. ”
The average price paid for a new vehicle in the U.S. was about $32,500 last year, according to consumer-research firm J.D. Power. Mr. Musk has said on Twitter that the Model Y will be about 10% more expensive than the Model 3, though it will share many of the same parts, bringing the cost down.
The continuing push to lower the cost of the Model 3 has raised concerns on Wall Street about waning demand for the car in the U.S. Analysts surveyed by FactSet have been widening estimates for losses for the first quarter, and Tesla has cautioned it expects to lose money during the period after previously guiding for a profit.
Tesla’s sagging stock price over the past few months forced the company to dip into its limited cash pile to pay off almost $1 billion in debt, rather than using equity.
All of this has reignited scrutiny of Tesla’s finances, in particular its cash position. The reveal of the Model 3 in 2016 helped boost confidence in Tesla, in part because the company began taking $1,000 deposits for the car. Reservations swelled to about 500,000, a much-needed injection of funds.
Following the unveiling of Tesla’s Semi truck and Roadster sports car in November 2017, the company’s customer deposits rose 24% to $854 million from the prior quarter, helping lessen its cash burn for the period, when investors were paying close attention to that figure. Those vehicles haven’t yet begun production.
Tesla hasn’t said when it will begin taking deposits for the Model Y, but analysts expect the company to follow tradition and start soon after Thursday’s unveiling.
The Model Y announcement could also “further impact Model 3 demand since we believe consumers prefer” crossover SUVs, Joseph Spak, an analyst for RBC Capital Markets, said in a note.
Mr. Musk told analysts in a January public call that he expects annual demand for the Model Y to be 50% greater than what he ultimately expects for the Model 3. He has said he thinks global demand for the Model 3 is 500,000 units a year.
China, in particular, is seeing an explosion of new high-end, all-electric compact SUVs as the government there pushes consumers toward battery-powered vehicles. LMC Automotive forecasts there will be 13 entrants on sale there in the next five years, compared with none in 2016. About one in five new vehicles sold annually in China is a compact SUV.
Consumer taste in the U.S. has also shifted to the smaller SUVs that are built on car frames, giving drivers a smoother ride than a truck while offering an elevated view and more interior space than a sedan.
Tesla may have competition on the way. BMW AG aims to market an electric X3 compact SUV in 2020, and Daimler AG’s Mercedes-Benz plans to begin production of the all-electric compact SUV, the EQC, this year.
Mr. Musk has said the Model Y will likely be built at the auto maker’s battery factory outside of Reno, Nev., requiring capital to build an assembly line. Tesla this month arranged a $500 million loan in China to build a factory there for the Model 3 and Model Y.
Related
- Tesla’s Elon Musk Rebuts SEC’s Motion to Hold Him in Contempt (March 11, 2019)
- Tesla, in Reversal, to Keep More Stores Open (March 11, 2019)
- Tesla’s Model 3 Loses Recommended Status From Consumer Reports (Feb. 21, 2019)
- Elon Musk’s China Factory—Now a Field, Soon a Plant—Aims to Pump Out Its First Tesla This Year (Jan. 7, 2019)
- Tesla Reveals Semi Truck With 500-Mile Range, New Roadster Car (Nov. 17, 2017)
Write to Tim Higgins at Tim.Higgins@WSJ.com
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