Much of the critical coverage of Tesla Motors, both here at Daily Kanban and elsewhere, has focused on issues that Tesla is able to get away with as a small-volume manufacturer serving an affluent, early-adopter market segment. From manufacturing bottlenecks to quality control problems, from inconsistent, hype-happy communication to poor service, Tesla has been able to weather a storm of problems because its customers and fans are so patient with and passionate about the company. But as Tesla moves from expensive, low-volume cars to the mass market Model 3 these problems are taking on a new significance. In part this is because higher volumes increase the likelihood of quality and service problems, and in part it is because mass market customers who depend on a single car for their daily routine are more demanding than luxury car buyers who can always take the Lexus to work if their Tesla is broken.
Given Tesla’s pattern of releasing cars with insufficient testing as well as its chronic quality problems, it’s safe to assume that the Model 3 will face its fair share of issues. Thus, investing in service infrastructure that will allow Tesla to promptly and affordably repair and upgrade high volumes of Model 3 is extremely important. As Bertel has written about at Forbes, Tesla is behind the curve on those investments and it will cost billions to catch them up. Just yesterday a piece by former Tesla employee Evan Niu dramatically illustrated just how far Tesla has to go to improve its service time, which has dragged on for 8 long months in Niu’s case. Now an exclusive study of about 800 Tesla Model 3 reservation holders, EV owners and luxury brand car owners conducted last year on behalf of a major automaker and provided to Daily Kanban by an industry source, reveals why Tesla’s quality and service woes are so critical to the success or failure of the Model 3.
Given how new the Tesla brand is and how little experience it has in the mass market, this survey provides an important first look at the people who put down $1,000 refundable deposits for Tesla’s Model 3. Surprisingly, Tesla’s new batch of potential customers turn out to be predominantly “average joes” who own mainstream cars like the Toyota Camry, rather than existing electric car or luxury car owners. This represents a sharp contrast from Tesla’s existing business: the Model 3 reservation holders polled are more than twice as likely to own a Toyota as any other brand, whereas current Tesla owners are four times as likely to own a BMW than any other brand. Similarly, Model 3 reservation holders area most likely to purchase or lease a Toyota in the next 12 months if a Tesla Model 3 is not available. This appears to be tied to income levels: only 37% of Model 3 reservation holders made over $100,000 in household income in 2015, compared to 63% of BMW owners. Moreover, a significant portion of Model 3 reservation holders report a household annual income of between $25,000 and $49,000 in 2015, whereas no BMW owners reported earning less than $50,000 in 2015.
Tesla Model 3 reservation holders may be very different from existing Tesla or other luxury brand customers, but the things that attract them to the Model 3 will be familiar to existing Tesla watchers, owners and fans. Tesla’s traditional brand values of attractive design, free supercharging (the survey was conducted before Tesla announced that Model 3 would not enjoy free Supercharger access), high-speed performance and cutting edge technology are rated as the top reasons for placing deposits on the Model 3, followed closely by the brand halo provided by Elon Musk’s fame, the excitement around Tesla launch events and Tesla’s popularity with Hollywood celebrities. Tesla owners and Model 3 reservation holders rated Musk’s status as a technology sector icon especially high as a factor in their decision to order or purchase a Tesla, suggesting that competitors might struggle to outsell the Model 3 even if their “electric vehicles match or even beat the Model 3 on key features or benefits.” Nor does Tesla’s lack of profitability dissuade Model 3 reservation holders; in fact, about half of Tesla owners and Model 3 reservation holders are unaware that Tesla is not profitable, and three quarters of Model 3 reservation holders say that this lack of profitability actually makes them more likely to purchase a Model 3.
This sets up a fascinating mismatch of values among Model 3 reservation holders. On the one hand, they tend to have lower incomes than buyers of other luxury car brands and as a result they tend to own extremely pragmatic mass-market vehicles like the Toyota Camry, while on the other hand they are clearly attracted to the aspirational, status-conferring attributes of the Tesla brand. Cars like the Toyota Camry are seen as an extremely rational choice, known for its quality and reliability rather than its performance or prestige, and yet the Model 3 reservation holders who have overwhelmingly purchased such vehicles in the past are now attracted to the Tesla brand for predominantly emotional reasons. The fact that these potential customers have made such pragmatic vehicle purchases in the past and yet are far more likely to purchase a Tesla because the company does not turn a profit points to the deeply irrational appeal at the heart of the Tesla brand. People are not putting down deposits because they want an electric car and the Model 3 is just the best option out there, people are putting down deposits because they want to enjoy the status-conferring halo of the Tesla brand.
This kind of powerful emotional brand appeal has been fundamental to major market shifts in the auto industry’s past, most notably when Alfred Sloan’s “brand ladder” strategy propelled General Motors past Ford’s dominant market position in the commodified market it created with the Model T. But that transition towards design- and status-oriented brand appeal, which took place nearly a century ago now, was itself reversed by the rise of Japanese car brands which re-oriented the market towards more pragmatic values like efficiency and reliability starting in the 1970s. Though it’s possible that the rise of Tesla represents another swing of the pendulum, returning the car market to the kinds of values that underpinned Detroit’s post-war golden years, history tells us that this cycle is unlikely to last. Though emotional brand appeal continues to be a significant factor in the car market, particularly at the high end, the overall level of quality and reliability has been driven dramatically upward in recent years. The trade-off between pragmatic appeal and emotional appeal is no longer as black and white today as it was even a few decades ago, when the difference in ownership experience between an emotional but unreliable Alfa-Romeo (for example) and a pragmatic but unexciting Honda Accord was profound. In short, the opportunity to build a powerful, emotionally-appealing brand exists as long as the quality and ownership experience are not significantly worse than the rising industry-wide average.
For now, Tesla’s brand power is clearly at a high tide, as survey respondents overwhelming chose it as the brand whose best days are not yet behind it. The brand’s novelty, the halo effect from Elon Musk’s other efforts, the Model S and X’s appeal with celebrities and its Apple-like launch events all provide Tesla with a unique appeal that other automakers struggle to match. And since nobody knows what the Model 3 will actually be like, reservation holders seem to be assuming that it will be just like any other mass market car only with the design, performance, technology and brand appeal advantages of Tesla’s current lineup of far more expensive vehicles. Those factors will almost certainly give the Model 3 a competitive advantage over competitive electric cars, but the billion dollar unanswered question is whether the Model 3 can also keep pace with the quality, reliability and prompt service that mass market consumers take for granted. Those of us who spend hours every day reading Tesla owner forums know that the current levels of quality and service will come as a rude shock to anyone coming to the brand from a Toyota Camry, but because the media has studiously avoided covering these problems and because Tesla is not featured in many quality surveys, a significant number of Model 3 reservation holders may be in for a shocking wake-up call. Consumers tend not to consciously consider the basic functions that form the base of their pyramid of automotive needs until they are no longer being met, at which point the performance and brand status qualities at the top of the pyramid quickly fade into irrelevance.
The risk that the Model 3 may delight on the superficial level of performance, design and brand appeal but ultimately fail due to shortcomings in quality, reliability and service is not hypothetical. Tesla’s quality has been among the lowest in the industry according to Consumer Reports, and it will be extremely difficult to dramatically increase production volume as planned while simultaneously improving quality. And rather than taking the time to thoroughly validate the Model 3’s design and components, Tesla is rushing its Model 3 development and production schedule in order to meet a timeline that industry experts say is far too aggressive. As I explained in an interview with Vox’s Tim Lee, when it comes to quality assurance there is simply no substitute for the years of thorough validation testing that Tesla habitually skips over. With quality problems all but inevitable and service wait times currently stretching on for months even at Tesla’s extremely low current fleet size, it seems all but impossible for Tesla to provide the kind of ownership experience that the mass market takes for granted. Though Tesla’s most recent shareholder letter claims the company is expanding its service footprint ahead of the Model 3, the company’s assertion that 80% of repairs can be done remotely seems like the kind of assumption that could disincentivize the massive investments in service infrastructure that will be needed to meet the mass market’s expectations. With Tesla’s cash position tightening and with as much as $10 billion in service investments needed to meet Model 3 demand (and no franchised dealers to fund such expansion), Tesla is doubtless tempted to cut corners on service in order to fund the kinds of efforts that add to its high-tech and Hollywood appeal. But if the company wants to survive and thrive in the mass market, it had better focus intently on making dramatic improvements to its quality and service. With the majority of its potential Model 3 customers coming out of affordable, reliable cars like the Camry, they will not tolerate the level of service Tesla is currently providing.