Why Tesla’s Model three could mean better, cheaper cars from other luxury brands

Why Tesla’s Model three could mean better, cheaper cars from other luxury brands

Published: Apr Five, two thousand sixteen Two:53 p.m. ET


With 115,000 preorders before the car was even unveiled, Tesla’s Model three quickly demonstrated its appeal even as each one required a $1,000 deposit. For those who aren’t sold, however, the introduction of the more-affordable electrical car could result in more value at lower price points from other luxury car makers.

Tesla TSLA, -0.14% on Thursday made the $35,000 electrified vehicle available for preorder, adding to its current lineup of the Model S sedan (which retails at $75,000 before incentives) and the Model X SUV (which commences deliveries in the 2nd half of two thousand sixteen and starts at $80,000 before incentives).

An affordable vehicle from a luxury car brand isn’t a fresh concept. The request for Tesla’s newest addition, however, could put pressure on other high-end brands to beef up their entry-level offerings, industry experts say.

And further pressure could come from volume brands like Honda 7267, +0.23% and Toyota TM, +0.04% which have begun to catch up to the technology and quality of luxury brands.

“Car makers have been able to pack a fairly high level of content and luxury features into these lower-priced models,” said Karl Brauer, a senior analyst at Kelley Blue Book. “You don’t feel like you’ve compromised as a buyer.”

Brands like Audi, Mercedes-Benz and BMW presently suggest vehicles in the $30,000 to $35,000 price range: Audi’s two thousand sixteen Audi A3 retails for $30,900, the Mercedes CLA Class starts at $32,050 and the BMW three series is available at $33,150. These vehicles are typically marketed to junior customers who could potentially become brand loyalists as they accumulate disposable income.

And the affordable luxury space has lately become “squeezed” by upgraded volume models, forcing high-end brands to improve their vehicles to keep the upper palm as profit margins decrease, said Jessica Caldwell, director of industry analysis at automotive research site Edmunds.com.

“Brand loyalty [for cars] is at an all-time low,” said Brauer. “More companies are commencing to market to customers at an early age with a low-priced car.”

The Model three could further tighten the category, forcing luxury brands to innovate and give consumers more options and quality at lower prices. Industry experts expect the continued request for the Model three to proceed, especially with the likelihood that the price will dip below $35,000 with electrified vehicle incentives figured in.

“Tesla is very aspirational, especially for people who have been waiting to get into a Tesla because they couldn’t afford to buy a Model S or a Model X and they believe in Elon Musk’s vision,” Caldwell said. “Many car buyers would be hard-pressed to name the goes of other luxury car companies.”

Biting the bullet on profits on entry-level cars could be a boon to luxury auto makers in the long run, especially if buyers lease them. Lease deals permit companies to anticipate when the buyer will be back on the market so they can cater advertisements and special offers to keep them within the brand.

“This has been a bread and butter product for the German auto makers,” Caldwell said.

While traditional luxury auto makers may not have the same hype surrounding them that Tesla has, they have the resources to evolve while keeping prices low. Tesla has a limited product line and a history of delayed vehicle launches, making potential modifications and upgrades more difficult.

Tesla has yet to report a net profit, however has said it expects to in coming quarters. “There’s a lot of uncertainty on what will be the technology of the future,” Caldwell said. “These companies must evolve with threats and that would be the strategy that’s going to stir them forward to conquer the market.”

Tesla has gallery and store locations in twenty six states and the District of Columbia, however you can purchase their vehicles online as well. Because of dealership franchise laws, the direct sale of Tesla vehicles is outlawed in five states.

This story was very first published on Feb. 12, 2016. It was updated after Tesla unveiled the Model three on March 31.

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