Why Tesla Model Y could be the firm's most high-demand car ever

The compact SUV looks set to turn heads when it launches this year. Will it make as big a splash as assumed?

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The Tesla Model Y, the company's next electric car, could send the firm's electric car sales soaring.

The compact SUV, part of a three-phase plan to bring electric cars to the masses, is expected to start shipping in limited quantities by the end of March. During the company's fourth-quarter earnings call this week, chief financial officer Zachary Kirkhorn declared that the company is "forecasting higher gross margins on Model Y compared to the Model 3."

It could end out selling more than first expected. Until 2017, Tesla only sold luxury vehicles like the Model S sedan and Model X SUV. That changed in July 2017 with the launch of the Model 3 sedan, which eventually reached a starting price of $35,000. The Model Y, first unveiled in March 2019, has a higher starting price of $39,000. Its success, however, could come from tapping into a market with high demand.

"We expect the demand for Model Y will be maybe 50 percent higher than Model 3, could be even double," Tesla CEO Elon Musk said during the company's fourth-quarter 2018 earnings call. "As I understand it, the midsize SUV segment worldwide is the most popular type of vehicle, so we'll probably see a higher volume of Y than 3."

He's not wrong. Data from Statista shows that the number one type of car in the United States is the crossover, commanding 40 percent of the market. In second place, on 18 percent, is the pickup truck. Tesla is expected to also answer the latter category with the Cybertruck.

Tesla Model Y with doors open.

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So how does that translate into sales figures? It's important to note how the Model 3 has transformed Tesla's sales figures. When it was first introduced in that summer of 2017, Tesla had only sold around 250,000 cars in its lifetime. As of the fourth quarter of 2019 that figure now stands at over 900,000. The Model 3 set sales records both in the United States and abroad.

Based on Musk's previous comments, the company is aiming high. During the fourth-quarter 2017 earnings call, Musk said the firm "maybe" will aim to produce one million Model Y vehicles per year, "just to give some sort of flavor for optimism."

Tesla does not expect these sales to reduce demand for Model 3. During the third-quarter 2019 earnings call, Musk explained how when the Model X launched, Model S sales actually increased. Musk claimed that, as the Model Y is a different vehicle to the Model 3 in terms of class, the crossover with consumers is limited.

All these Model Ys will have to come from somewhere, which explains why Tesla is building so many factories. The first Model 3s rolled off the production line at Giga Shanghai this month, and the factory aims to eventually produce 500,000 vehicles covering the entry-level Model 3 and Model Y. The Giga Berlin factory announced in December 2019 is also expected to produce 500,000 cars per year. The current Fremont factory is also aiming to reach 500,000 cars per year.

And what sort of car will these factories be producing? One with "really just incredible specs all around," Musk told investors Wednesday.

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