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Morgan Stanley Cuts Tesla Model 3 Sales Forecasts, But Stays For Long-Term

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Investment bank Morgan Stanley slashed its estimates for the sales of Tesla Motors planned mass market vehicle, the Model 3, but said it still viewed the luxury electric car pioneer as a good long-term investment.

    Morgan Stanley cut its sales estimates for Tesla’s third planned model by one-third in 2020 and by one-half for 2028. The Model 3 is scheduled to be launched in 2017 and notch up its first full year of sales in 2018, which are expected to hit 40,000. Morgan Stanley also raised its dollar sales return on each vehicle. Tesla’s second scheduled new vehicle is another expensive one, the Model X SUV in 2015, to sell alongside the current Model S.

    Morgan Stanley said earlier this year the Model S and X could reach annual combined volume of 150,000 by 2020. Model 3 could hit 220,000 in 2020, and 775,000 by 2028.

    Morgan Stanley said Wednesday it cut its Model 3 sales target for 2020 to 150,000, and 2028’s to 400,000. The Model S and Model X targets for 2028 remain unchanged at close to 126,500 and just over 189,000. Average transaction price for the Model 3 though should advance to between $55,000 and $60,000 in 2020. The base price when it first goes on sale should be between $35,000 and $40,000, with an average transaction price of $60,000. Morgan Stanley said. Average transaction price of the Model S is nearly $105,000.

“Contrary to the prevailing view in the market, we have long viewed Tesla as a play on demand for premium high-performance vehicles, that just happen to be electric,” Morgan Stanley analyst Adam Jonas said. Jonas said the success of the Model 3 depends on three factors –

  • Tesla’s ability to achieve cost reduction on the battery powerpack.
  • The prevailing state of the art and cost of internal combustion technology.
  • Fuel prices.

Despite cutting sales projections, Jonas said Tesla’s ability to use the Model 3 to penetrate the mass market is in a “healthier alignment” today than just two or three months ago. Tesla’s success doesn’t depend on making the traditional internal combustion engine obsolete. If Tesla can achieve better battery costs savings, this won’t make it cheaper to buy, but will enable content to be improved.

“Tesla is an excellent risk-reward investment for those not holding their breath for mass market EV glory,” Jonas said.

Meanwhile, electric vehicles, hybrids and plug-in hybrids remain minor players in automotive mass markets. They often rely on huge government subsidies to register any sales at all. Tesla Motors has been an exception, but it sells in the premium sector, not the cheap and cheerful practical transport sector.

Consultancy IHS Automotive doesn’t see much movement in electric vehicle sales in the near term. By 2020 regular hybrids and plug-in hybrids (PHEVs) will account for about five per cent of global sales compared with less than one per cent for electric only vehicles. By 2025, battery-only will have slowly expanded to 1.5 per cent, while PHEVs and hybrids will push just past six per cent. Fuel cell vehicles will barely register at all by 2025.

Mass market manufacturers like the French-Japanese alliance Renault Nissan invested heavily on the basis that globally, electric only vehicles would account for 10 per cent of the market by 2020. That’s not going to be achieved.

Germany has a target of one million electric vehicles on its roads by 2020, recently reaffirmed by Chancellor Angela Merkel. That target looks like failing.

    Helmut Becker, head of the Munich-based think tank IWK, isn’t even impressed with Tesla’s prospects. Tesla introduced the Model S into Europe earlier this year.    

    “Tesla’s are on sale in Germany now but nobody sees them. It’s a fancy car bought by some pioneer consumers, those with everything,” Becker said.    

    “I pity the Nevada government. It’s spent $1 billion to subsidize the factory. And they will have a factory, but nobody needs these batteries, nobody will buy the cars,” Becker said.    

    In October Nevada awarded tax breaks worth as much as $1.3 billion to bring Tesla's giant $5 billion “giga” lithium ion battery factory to Reno.     The Tesla Nasdaq stock price rose today to about $205 after opening close to $193. It was just over $290 in July. Morgan Stanley’s current price target is $290.00.