To understand the potential of Tesla, look to the forest, not the trees

Tesla Model S

The bulk of the attention on Tesla recently has been squarely centered on the trees: Tesla’s quarterly earnings, its stock dive and weekly volatility, the three accidents that have led to fires. But don’t forget the forest: Tesla’s Model S has been a big success, and it’s part of a long term evolution that will allow Tesla to eventually deliver its third-generation, mainstream electric car. Finding success with that monumental project will be even more difficult than it was with the Model S, yet it will be even more of a revolutionary step toward moving the world off of gasoline-powered cars.

Think about it this way — the success of the Model S is like when the San Francisco Giants came back from a losing streak and won three division series games in a row to beat the Reds in the 2012. It was jaw-dropping, exciting and the Giants survived that all-odds-against-them series and got to go onto the World Series. Success with the third generation design and manufacturing could be like when the Giants won the World Series in 2012.

Tesla Model S

A solid start

Tesla’s Model S car has been called the best ever tested by Consumer Reports, was declared best car of the year in 2013 by Motor Trend, and also received the safest rating possible by the National Highway Traffic Safety Administration. Getting more Model S cars on the roads has only been constrained by Tesla’s modest supply chain (21,500 by the end of this year), not by its larger demand from the market.

Because of the success of the Model S, Tesla has been able to hit short-term profitability for the first time. It was also able to pay back its controversial Department of Energy loan early and has been able to bring in cash to help open up a wave of stores across the globe (the latest in London), as well as put money into R&D and expansion. The Model S has been the key reason why Tesla has been able to transform itself from a niche automaker that produced ultra high-end — essentially handmade — electric sports cars, into a slightly more mainstream auto company, one that has several products and an automated factory in Fremont, Calif.

Tesla Model X with falcon wings fully open

Tesla Model X with falcon wings fully open

Tesla’s Model X — which is a crossover SUV and will start shipping in late 2014 — is an extension of the Model S tech. The Model X will use the Model S platform — the power train and flat battery pack — but will have a different body, one that has Tesla’s falcon wing doors and seats seven. The Model X is said to use 60 percent of the same parts as the Model S.

The Model X is ultimately a way that Tesla can economically build another product before it spends a couple more years designing the third-gen car. Tesla is only spending modestly now on R&D — $56.3 million for the latest quarter, which is less than last year during that quarter — as the core tech for the Model X has already been defined.

Now for the triple lutz

While the Model S has been a game changer for Tesla, and the Model X could be a big seller too, its third-generation car will be a monumental leap that the company will have to make to move to the next level. The “Gen-III” project — as Tesla calls it — will be risky, expensive and difficult.

The third-gen car is supposed to cost somewhere between $30,000 and $40,000, have a competitive range potentially as large as the Model S (200 miles), be a smaller and lighter car than the Model S, and even have a more expressive form factor than the streamlined Model S sedan. Tesla plans to build an entirely new platform for the third-gen car, Tesla’s Chief Designer Franz von Holzhausen confirmed with us last week. But the public has no idea what that will look like.

Tesla Chief Designer

What we do know is that Tesla is finally in a position to actually approach this high stakes project. Tesla’s CEO Elon Musk said on the company’s recent earnings call that starting next year, the company would start the design process for the third-gen car. The car isn’t expected to be available until potentially 2016, or 2017.

Manufacturing Gen III at a scale that Tesla expects will be an entirely new situation for the company. One of the bigger hurdles for Gen III is that it will be bumping up against the world’s current supply of lithium ion batteries. Musk said on the most recent earnings call that to produce 500,000 Gen IIIs per year, Tesla would need to build a “giga factory” that would have the equivalent of all of the world’s current production of lithium ion batteries made just for Tesla in one factory. So essentially to hit Tesla’s goals for Gen III, the world will have to double the production of lithium ion batteries.

If one product really manages to change the world’s resource supply to such a degree, it will be a sign of how Tesla stands alone. It also shows just how aggressive Tesla will have to be to reach its goal of making a mass market electric car.

If Tesla does eventually get there over the next three to four years, it will have done what no other company on the planet has been able to do: bring the electric car to the masses, and potentially shift a sizable chunk of the world’s transportation off of oil.

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