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The Model Y will be a test of Tesla’s popularity

The Model Y will be a test of Tesla’s popularity


The company’s recent changes risk damaging a key asset: great word of mouth

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Elon Musk often says that the key to Tesla’s success is how people talk about the company. “Great word-of-mouth is why Model 3 is the best-selling electric car, despite no advertising or paid endorsements,” he wrote in September 2018. The company repeatedly admits this, too. In its most recent 10-K filing with the SEC, Tesla said word of mouth, along with media coverage “have been the primary drivers of our vehicle sales leads,” which is how and why the company eschews traditional advertising.

But Tesla is still coming off a volatile 2018, and it has recently made changes in the name of cost-cutting that put this basic tenet of the company in some jeopardy. With Tesla closing many of its stores and shifting sales to an online-only model, the company will also be more reliant on good word of mouth than ever before. If any damage to its reputation has been done, it might become obvious soon because Tesla is about to reveal — and potentially start taking preorders for — its second mass-market car on Thursday: the Model Y compact SUV.

Early reactions to the Model Y will be crucial

While it’s not due until 2020, the early reactions to the Model Y will be crucial, both from customers and from investors. And right now, even before the event, it’s a fairly known quantity. The new compact SUV will share about 75 percent of the same components as the Model 3. It will cost about 10 percent more than the Model 3, Musk said, and it will offer slightly less range and similar performance.

In its first full year of production, the Model 3 became the best-selling EV in the world, and it helped save Tesla from death. With demand for that car potentially fading in the US, and car sales expected to have a down year, the Model Y could eventually help pick up the slack while generating cash for Tesla in the short term. But that only happens if Tesla’s “great word-of-mouth” is still potent.

Elon Musk’s The Boring Company Unveils Test Tunnel In California
A Tesla Model X riding through the tunnel in Los Angeles that was carved out by The Boring Company, one of Elon Musk’s other companies.
Photo by Robyn Beck-Pool / Getty Images

2018 was a roller-coaster year for Tesla, from Musk trying to take the company private to being sued by the Securities and Exchange Commission for securities fraud related to that effort to the CEO smoking pot on Joe Rogan’s show — all while the company tried frantically to get Model 3s out the door in vast quantities.

But the wild ride is apparently far from over.

Tesla started 2019 by announcing layoffs and abruptly killing its referral program. For years, Tesla had given customers a referral code that they could then pass along to other potential buyers. The more people who bought Tesla cars using your code, the more perks you could get, from free charging at the company’s Supercharger stations, all the way up to a free second-generation Roadster.

The wild ride is apparently far from over

The referral program was “adding too much cost to the cars, especially [the] Model 3,” though, Musk said in January. So he killed it.

The decision was mostly met with indifference, even mild encouragement from major Tesla boosters. If anything, it served as an example of how the company’s supporters could respond favorably to a surprise change, even if it involved something that many of them directly benefited from.  

A more recent decision sparked more passionate responses. Tesla announced at the end of February that it was finally ready to make and sell the long-awaited $35,000 Model 3, an affordable electric car that was part of Musk’s original “master plan” for the company, published in 2006. Closing most of the company’s stores and switching to a completely online sales model was how Musk was able to finally achieve this goal, and it also allowed Tesla to lower the price on its other cars.

Normally, that might be seen as a good thing. But many customers who purchased Teslas before the price drops felt jilted.

One of the most vocal critics was comedian Chris Titus, who complained to his 125,000 Twitter followers on March 2nd about how his wife bought a Tesla two days before the prices dropped. “@elonmusk lost a loyal customer,” Titus wrote. “[T]he people that supported you, praised you and cared about you [sic] dream got boned.”

Anger about the price cuts bubbled up in China, too, which is the world’s largest market for electric cars. After Tesla cut prices on all of its models there, a number of owners protested at the company’s store in the Hunan province capital city of Changsha. The upset owners wrapped the store in a banner that apparently translated to “don’t buy now, buy tomorrow at a discount.”

Meanwhile, another set of owners protested outside of a Supercharger station and a store / service center in Taiwan following the price cuts.

Even Fred Lambert, the editor-in-chief of Tesla-boosting blog Electrek, criticized Tesla’s abrupt pricing change. “Tesla’s pricing structure makes them look like amateurs,” he wrote on March 4th.

Then there was the curious situation in February when Tesla held a call with reporters to discuss the news of the $35,000 Model 3. The call was not made public, which rankled investors, because Musk shared details that they said were material to the company’s stock price. (For example, Musk announced on that call that it was unlikely that Tesla will turn a profit in the first quarter of 2019.)

Many in the investor community complained about this decision, especially traders who are betting against the company, known as “short sellers.” But one noted booster of Tesla also spoke out. Gali Russell, the founder of financial internet talk show HyperChange TV (and the YouTuber that Musk infamously turned to during a quarterly call with Wall Street analysts last year after complaining about “boring bonehead questions”) said on Twitter that the move was “super frustrating” and it “completely [went] against democratization of information and financial markets.” This time, Musk capitulated, telling Russell that it was a “mistake,” and Tesla posted a recording of the call to its website shortly after.

Much of this could be taken as cranks simply voicing their displeasure on Twitter. But there is some data backing up the apparent change in sentiment around Tesla. In an Axios-Harris poll of 18,228 adults conducted between November and January, Tesla’s ranking slid across a number of categories. It dropped from being the 14th most trusted company out of 100 to 46th. The company’s “character” ranking fell from 7th to 57th, and its “ethics” ranking slid from 5th to 56th.

There is some data backing up the change in sentiment

Musk’s capricious nature is also wearing thin with some shareholders. The recent impulsive decisions, and especially the resulting blowback, were enough to make Alex Chalekian, the CEO of investment adviser firm Lake Avenue Financial, sell his shares in Tesla.

“That’s not good PR. You’ve got to remember, this is their whole company. They don’t advertise,” Chalekian said in a phone interview with The Verge.

Chalekian, who says he put a deposit down for the Model S “right away” when he saw the concept unveiled in 2009, says he bought shares in the company when they were still trading at around $30.

But in the last few months, he became worried about the number of executive departures and erratic announcements. The recent backlash made him feel like Tesla’s “aura” is in danger. “I do love driving my [Tesla]. Don’t get me wrong. I’ve loved it for years. But if now you start to get a new generation of car owners that are out there and are upset — they’re not going to be helping you with your future sales,” he says.

Some of Tesla’s recent decisions were “sudden and not explained well”

Russell agrees that Tesla botched the communication of the store closings and subsequent price drops in an interview with The Verge, calling them “sudden and not explained well.”

That said, Russell doesn’t think upset customers have a serious basis for complaints. “They all bought the product at the price they paid because they thought it was a good value, and now the company’s dropped the prices and it’s an even better value,” he says. “I understand the frustration, but if the biggest problem a company I invest in has is that customers are so frustrated because the prices are dropping, that’s a testament to the pace of innovation of the company.”

Tesla partially reversed its course earlier this week when it announced that it would halt the store closings. But that, in turn, will also raise prices again. Musk has said customers have until next week before all of Tesla’s cars (except the $35,000 base Model 3) will cost 3 percent more.

The Tesla website’s teaser for the Model Y unveiling event.
The Tesla website’s teaser for the Model Y unveiling event.
Image: Tesla

A true test of the impact of all of this consumer whiplash could come when Tesla unveils the Model Y on Thursday. If Tesla follows the same playbook it used for the Model 3, the company will likely start taking preorders for the Model Y soon after the unveiling.

But while the Model 3 quickly racked up hundreds of thousands of preorders (and hundreds of millions of dollars) in the weeks after it was unveiled in 2016, there’s no guarantee that the Model Y will be met with the same enthusiasm. There are already signs that demand for the Model 3 has tapered off in the US, too, where Tesla’s vehicles are no longer eligible for the full federal tax credit for EVs. The Model Y will be slightly more expensive, while competition in the electric SUV space is mounting quickly. And with fewer stores, it will rely more heavily than ever on Tesla believers to spread the good word.

These factors have some Wall Street analysts skeptical. “A Model Y announcement so shortly after the $35k [Model 3] suggests that consumer reaction toward the $35k Model 3 may not have been as strong as the company had hoped,” RBC Capital analyst Joseph Spak wrote in a note last week.

Morgan Stanley’s Adam Jonas wrote this week that Tesla is “undergoing multiple transitions with sales momentum slowing, shift to online channels, management changes, setting a foot into China and the early Model Y unveil among other developments.”

The Model Y could “open up a market that is just enormous”

That said, SUVs currently account for 49 percent of the US car market, according to JD Power, and more than half of customers who bought a vehicle in the $30,000 to $50,000 price range purchased an SUV. So even if customers are angry or just less sure than ever about what Tesla’s next moves might be, the numbers could (maybe even should) still work out in the Silicon Valley automaker’s favor — something Ross Gerber, president and CEO of investment adviser Gerber Kawasaki and a shareholder of Tesla, agrees with.

“The amount of people who can afford a car geared toward an income of $50,000 is exponentially greater than if you’re only making cars for people who make $120,000,” Gerber tells The Verge. “So you open up a market that is just enormous.”