Tesla’s new Model 3 sedan has test drivers swooning — but quality issues lurk on the horizon

Tesla is on the verge of ramping up production of its mass-market Model 3 sedan, but the company has been giving hands-on demonstrations to selected journalists and financial analysts in recent months. With the first reviews trickling into print, we can judge the general reaction:

People love this car.

We can also spot one cloud on the horizon: Concerns about quality.

The latest comments on that issue come from Toni Sacconaghi, automotive industry analyst at AllianceBernstein, who examined and drove a new Model 3 at a Tesla demonstration in Brooklyn on Nov. 9. “Overall,” he told clients the next day, “we found the Model 3 to be a compelling offering, and believe it is likely to further galvanize the overall Electric Vehicle category.” But he also noted that “fit and finish on the two demo cars we saw — perhaps not surprisingly — was relatively poor.”

Among the shortcomings, two pieces of the glass roof on one of the cars seemed misaligned, with a gap that might allow water to leak into the cabin; body panels didn’t fit together; rubber trim wasn’t snug; and seams in the ceiling were misaligned. Sacconaghi allowed that such shortcomings might not even be noticed by most prospective buyers, but he was struck by the idea that these were demo cars likely to be examined by experts.

“We can’t help noting that Tesla likely chose to share with us its highest quality/best assembled units, so issues on other cars may be even more pronounced,” he wrote. If quality issues with the Model 3 turn out to be widespread, he observed, that could have important ramifications for Tesla’s brand. Tesla declined to comment.

Before we get deeper into that, let’s examine the good news. The few test drivers who have had access Model 3 demos almost uniformly give the car high marks. They praise the car’s pickup and handling, and even its minimalist interior and dashboard, which features a touchscreen instead of most of the dials and levers in conventional autos. “There’s nothing like it in the marketplace today,” Sacconaghi told me.

Many journalists got their test drives in July, so it’s unclear how closely the vehicles they drove resembled those that will be rolling off the Tesla assembly lines. More recently, Tesla offered hands-on rides to members of the financial community. Sacconaghi’s report is one of the first from a multi-day session offered Wall Streeters, and his assessment tracks those from the summer. He had about two hours to examine two Model 3 sedans and drive one around Brooklyn streets.

“We thought the car drove very well,” Sacconaghi, who owns a Tesla Model X, says. “It was very consistent with the ride and performance of other Teslas. In fact, it was arguably so good, and its interior room so much better than I had anticipated, that it risks cannibalizing the Model S going forward.”

That poses a financial risk to the company, at least in the near term, he says. That’s because the Model S sells for $100,000 and gives Tesla a gross margin of $25,000 per car, Sacconaghi estimates, while the Model 3 will sell for about $44,000 reasonably decked out, with a target gross margin of $11,000. If prospective Model S customers decide to wait for a Model 3, Tesla’s profits will take a hit until Model 3 production ramps up toward the target of several hundred thousand vehicles a year.

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