What the Tesla Model 3 Will Mean to the Auto Industry

Tesla Motors' $35,000, 200-mile electric car may not revolutionize the auto industry by itself, but it could serve as a starting point for a long, steady climb to a day when half of the world's vehicles will be plug-ins.

The Model 3, expected to be unveiled live tonight (watch it here at 8:30 Pacific), represents a very small part of the market -- last year, only about 0.6% of vehicles sold worldwide were plug-ins. Even fewer were pure electric. But with lower-cost, longer-range vehicles like the Model 3 on the horizon, industry analysts expect the plug-in number to hit about 2% by 2020, 8% to 9% by 2025, and 50% by 2040.

"The Model 3 is not going to be the game-changing product that rocks the auto industry," noted Cosmin Laslau, research analyst for Lux Research Inc. "But it's going to be the grandfather of a lot of other game-changing products."

Indeed, other automakers are laying plans for similar vehicles. Later this year, General Motors will roll out its all-electric Chevy Bolt, which will be priced in the $30,000 range (after credits) and will offer a 200-mile driving range. Laslau expects Nissan and possibly Volkswagen to follow suit in the next few years, as well.

The key to the change has been the steady, ongoing development of the lithium-ion battery pack. Five years ago, automakers were typically paying between $500/kWh and $600/kWh for finished battery packs with integrated cooling systems. Today, the leaders of the industry have driven that number down to a little more than $200/kWh. That means a large 50-kWh pack could cost $10,000 today, as opposed to more than $20,000 a few years ago. And the number continues to fall, thanks to new technologies and manufacturing facilities.

Still, the climb to larger sales numbers will not be an easy one for electric vehicles. Today's EV sales are buoyed by a $7,500 federal tax credit and various state credits. But those are expected to gradually expire over the next few years. Tesla vehicles, for example, will lose their federal credits when the company sells its 200,000th vehicle, which could happen between 2017 and 2018.

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Moreover, EVs aren't yet available in some important segments of the market. A recent "EV Report Card" issued by Lux Research gave the auto industry a passing grade in the luxury segment, but gave failing grades to EV efforts in the SUV and large-car categories, along with an "incomplete" in the pickup truck category. In terms of cost, 200-mile EVs still can't compete with high-selling intermediate-sized cars such as the Toyota Camry, which starts at about $23,000, or with the Ford F-150 pickup truck line, which starts around $26,000, Laslau said.

He added that battery pack costs will need to fall to about $100/kWh before sales numbers really start rising. He expects that to occur by 2025. "Until we start to see electric vehicles in the $25,000 to $28,000 range for 200 miles of all-electric range, we will not have a true tipping point," Laslau told us.

The bottom line is that consumers shouldn't expect cars like the Model 3 to revolutionize the industry by 2020. Much remains to be done, he said. "The Model 3 is an exceptional product, and no one has done more than Tesla to drive down the costs of the technology. But the risk is that people will look at it and expect the auto industry to change overnight. And that's not going to happen."

Senior technical editor Chuck Murray has been writing about technology for 32 years. He joined Design News in 1987, and has covered electronics, automation, fluid power, and autos.