Under the hood — the wider, more interesting implications of the Tesla Model 3 launch

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Tesla launched the Model 3, and the car industry just shit a big brick last night in response. Oh to be a fly-on-the-wall at the emergency strategy sessions in the big auto companies this morning.

There’s a lot more to analyse here than is initially apparent:

Tesla just redefined what $35k buys you in a car.

BMW, Audi, Mercedes Benz will all have to go back to the drawing board on their entry-level models, less they decide to take a price cut below the industry-standard ~$30k luxury price floor (which they won’t).

Industry standards for trim, performance and cabin space at that price-point all just got redefined. And that’s before we also factor in…

Self-driving technology already got commoditized.

It comes as standard. For $35k. Tesla’s technology is clearly the most advanced and capable on the market today, and it comes as standard on their mass-consumer entry level model. Boom.

Given their competing autonomous technology isn’t even market-ready, a heavily revised Audi/BMW/Merc $35k entry-level luxury sedan still won’t impress if it comes sans-autopilot.

You could see this with BMW’s all-electric i8, which was billed to compete heavily with the Tesla Model S. Looked like a solid fight until Elon announced out of the blue that the car would be self-driving and the recent models already on the road would gain this feature via a software update. The i8, which has no such technology, was toast.

I still believe that long-term, self-driving technology means the end of personal car ownership. I should write more on that topic I guess. However before we get there, Tesla just changed the game to make auto-pilot capability table-stakes for any luxury car going forward.

Differentiation will ripple all the way up the market.

A BMW 3 series redesigned to compete with the Tesla Model 3 is going to put pressure on the BMW 5 series. BMW will need to differentiate their offering by redesigning the 5 series. That will cascade upwards throughout their range. Ditto for their competitors.

Again, you can already see this in the sheer performance of the Model S and the Model X — they beat many performance cars costing many times more. I remember a TopGear demonstration of a Model S outperforming an Aston Martin.

The industry just got disrupted on profitability

All those features, all that quality, built in California for $35k? It’s reasonable to assume that the Model 3 will be made at cost, or even at a loss, because Elon’s playing the long game.

Just like Bezos did with Amazon vs the booksellers, or Uber vs the taxi-industry, what we’re seeing here is a new entrant prepared to forgo profitability in order to gain market share, thereby taking the bottom out of the market for everyone else.

We’ve seen this in so many other markets, the car industry must have seen this coming. But it’s going to make it very difficult for the industry incumbents going forward, with even thinner margins and public markets who won’t be as lenient on their quarterly earnings as the same markets are on Tesla’s long game.

$150m of free money, several years of orders lined up and 150k sales that won’t be on competitor’s books

Tesla just got a nice injection of free cash last night and can operationally plan for several years of orders already guaranteed. The efficiencies that can be leaned on from knowing that scale ahead of time are huge.

Plus their competitors can expect 150,000 fewer sales in 2016 and 2017 as all those people who reserved a Model 3 presumably just took themselves out of the market for a new car.

For comparison, Audi sold a record 200k cars in the US last year, and while the 150,000 Model 3 pre-orders is world-wide it still demonstrates the size and scale of what just happened.