What the ‘affordable’ Tesla Model 3 rollout means for car buyers

Published: Feb 12, 2016 10:44 a.m. ET
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By
KATHLEEN
BURKE
REPORTER

Whether you’re planning on going electric or not, the introduction of the Tesla Model 3 could be good news for any luxury car fan on a low budget.

During its quarterly earnings call on Wednesday, Tesla TSLA, +0.38% confirmed the $35,000 electric vehicle will be available for preorder on March 31, adding to its current lineup of the Model S sedan (which retails at $75,000 before incentives) and the Model X SUV (which begins deliveries in the second half of 2016 and starts at $80,000 before incentives).

Tesla has gallery and store locations in 26 states and the District of Columbia, though you can purchase their vehicles online as well. Because of dealership franchise laws, the direct sale of Tesla vehicles is outlawed in five states.
An affordable vehicle from a luxury car brand isn’t a new concept; however, the hype surrounding Tesla’s newest addition could put pressure on other high-end brands to beef up their entry-level offerings.
Brands like Audi, Mercedes-Benz and BMW currently offer vehicles within the $30,000 to $35,000 price range. The 2016 Audi A3 retails for $30,900, the Mercedes CLA Class starts at $32,050 and the BMW 3 series is available at $33,150. These vehicles are typically marketed to younger customers who could potentially become brand loyalists as they accumulate more disposable income. “Brand loyalty [for cars] is at an all-time low,” says Karl Brauer, a senior analyst at Kelley Blue Book. “More companies are starting to market to customers at an early age with a low-priced car.”

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Despite the lower price tag, auto makers don’t skimp on vehicle quality when it comes to attracting entry-level buyers, Brauer says. “Car makers have been able to pack a fairly high level of content and luxury features into these lower-priced models,” he says. “You don’t feel like you’ve compromised as a buyer.”

However, as volume brands like Honda 7267, -5.51% and Toyota TM, +0.11% have begun to catch up to the technology and quality of luxury brands, these affordable offerings are beginning to feel more pressure. Over the past few years, the affordable luxury space has become “squeezed” by these upgraded volume models, forcing high-end brands to maintain and improve upon the current quality of these vehicles to keep the upper hand as profit margins decrease, says Jessica Caldwell, director of industry analysis at automotive research site Edmunds.com.

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 the cars. Lease deals allow 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 says.

The rollout of the Model 3 could further tighten the category and force traditional luxury brands to innovate further to maintain competitiveness, giving consumers more options for quality vehicles at a lower price point. Few details on the Model 3 have been released — including what the car will look like — however industry experts are expecting high demand, especially with the likelihood that the price will dip below $35,000 with electric 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 says. “Many car buyers would be hard-pressed to name the heads of other luxury car companies.”

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 to stay competitive. Tesla has a limited product line and a history of delayed vehicle launches, making potential modifications and upgrades more difficult. The company has also yet to report a net profit, however it expects to in coming quarters, according to its earnings report. “There’s a lot of uncertainty on what will be the technology of the future,” Caldwell says. “These companies must evolve with threats and that would be the strategy that’s going to move them forward to conquer the market.”