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Tesla Model X: Right car, wrong time

Rick Newman
Senior Columnist

It’s hard to think of a niche vehicle that’s ever gotten as much attention as the Tesla (TSLA) Model X is likely to get. Then again, most niche vehicles don’t have the hauling capability of the Model X.

Tesla needs the Model X — now officially launched, two years behind schedule — to be as much of a hit as the Model S sedan it shares many components with. That's asking a lot. The Model S has won raves from owners and critics alike, earning the highest-ever score for a car from the fussy folks at Consumer Reports. It has transformed Tesla from a one-trick pony (its original car, the Roadster) into a muscular upstart able to challenge automakers that have been in business for a century or more.

But Tesla still loses money, and the Model X offers a chance for Tesla to scale up and double the offerings in its lineup from one to two. Tesla CEO Elon Musk hopes the Model X will also help Tesla double sales, to perhaps 80,000 in 2016, pulling the company closer to profitability. Some analysts think Musk's sales goal is a stretch.

Tesla CEO Elon Musk introduces the new Tesla Model X crossover. (Photo by Justin Sullivan/Getty Images)

The Model X is a crossover, or car-like SUV, that uses much of the Model S hardware in a different type of package. It seats seven passengers in three rows of seats, for instance, so it can haul more kids to after-school games than the five-passenger Model S. That means moms might have a look. A minivan this is not, however; exotic features such as rear “falcon-wing” doors that open up instead of out will differentiate the Tesla from the boringmobiles other automakers offer.

As a pricey people-hauler, the Model X — which will range in price from $80,000 to $140,000 or so — arrives as interest in such vehicles is cresting. Minivans have been losing market share for years, and some automakers don’t even offer them any more. Instead, car buyers want cooler-looking SUVs and crossovers that are nearly as spacious inside. The Model X seems custom-ordered for them.

Money? Not a problem, not at the upper end of the market, anyway. Sales of luxury, full-size SUVs are up 12% so far this year, compared with just 3.8% for auto sales as a whole. Low interest rates and cheap financing clearly help, but so does the broader economic recovery, since some top-end buyers pay in cash.

The problem for Tesla is that electric cars aren’t as buzzy as they were a couple years ago. There’s one obvious explanation for that: gas prices  are the lowest since early 2009, when the global recession was still depressing commodity prices. The average price of regular gas is about $2.30 per gallon, according to the AAA motor club, and in a few states it has fallen below $2. A year ago, gas prices averaged $3.40; two years ago they averaged $3.50.

If you’re able to pony up $132,000 for a car (list price for the handful of Model Xs delivered to customers) you probably don’t care about gas prices. But cheap gas has reversed the whole trend toward thriftier cars. When gas prices hit $4 per gallon in 2008, dealers couldn’t stock enough hybrids and other high-mileage vehicles. Sales of large sedans and SUVs plummeted, contributing to the bankruptcy of General Motors (GM) and Chrysler (FCAU) and the near-bankruptcy of Ford (F).

It’s now the Revenge of the Gas Guzzlers. Sales of full-size SUVs such as the Chevrolet Tahoe are up 6% this year, while sales of midsized SUVs such as the Honda Pilot are up 10%. Total market share for electric vehicles, or EVs, peaked at about 0.6% in 2013, falling back to about 0.4% ever since, according to research site TrueCar.com. Part of the reason for the drop is the aging of early EVs such as the Chevrolet Volt and Nissan Leaf, which are due to be upgraded soon. At the same time, however, EVs have been proliferating, with most automakers rolling out at least one duriung the last few years. And many cities have been building charging infrastructure to accomodate EVs.

Maybe none of this will matter to Tesla or its buyers. The Model X may end up having strong appeal to buyers who simply want to cut their carbon footprint, or who are wowed by its performance. Still, it’s likely that Tesla will cannibalize some of its own buyers, by selling a Model X to people who might otherwise have bought a Model S.

Tesla’s Model 3, supposedly arriving in 2018, will be a more important vehicle than the Model X, anyway. The Model 3 will be Tesla’s “mainstream” car, a full electric with a starting price of around $35,000. At that level, buyers will be much more likely to do the math and gauge the tradeoffs between gas-powered models that generally cost less than electrics and can be fueled quickly, and an EV that’s likely to cost considerably more unless gas prices skyrocket (and electricity costs don’t).

Since the Model 3 will be targeting a different buyer than the Model S or X — and a lot more of them — the price of gas will remain a crucial variable affecting Tesla’s future. The Model X, meanwhile, will test whether Tesla can find signficantly more buyers in the same price range as its other offering. Cheap gas surely doesn't help.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.