Tesla Could Sell a Million Vehicles Per Year by 2020

Elon Musk’s depiction of Tesla’s competitive positioning in the marketplace, highlighted in the company’s Q4 2015 earnings release, is very similar to an analysis that ARK Invest did 12 months ago to project likely demand for Tesla vehicles in 2020. In this piece we updated that analysis and its accompanying blog post to reflect 2015 numbers.

Tesla TSLA [TSLA] has stated that, when it is fully operational in 2020, the Gigafactory will produce enough batteries for 500,000 vehicles.[1] While skeptics doubt that the demand will be that high, we believe that it will outstrip Tesla’s ability to deliver vehicles into the marketplace, and then some. Given its current pipeline, Tesla could see demand for more than 1.4 million vehicles annually, with Model 3 demand alone exceeding 1 million units by 2020. Perhaps the question should not be whether or not the company will surface a half million buyers in 2020, but how it will be able to scale to accommodate three times that many.

Tesla’s first vehicle, the Model S, has been successful, especially given its high price-point and the precipitous drop in gasoline prices. In the U.S. last year, it outsold comparatively-priced luxury vehicles from established producers such as BMW [BMW] and Mercedes [DDAIF]. Comparative automakers’ unit sales can provide a basis for estimating Tesla’s potential underlying demand, as shown below. Tesla’s Model S is priced competitively with BMW’s 7 Series. The Model X is roughly comparable to BMW’s X5, and the Model 3 is likely to be priced in line with the BMW 3 Series.

In 2015 the Tesla Model S outsold BMW’s 7 Series 25,200 to 9,300.[2] Conservatively, if U.S. Model S sales were to peak at the 25,200 reported in 2015, and the 2.7 ratio today of Model S to BMW 7 Series sales domestically were to be replicated abroad (Supercharger infrastructure permitting), global Model S demand could exceed 130,000 units. As shown below, if the same ratio were applied to the Model X (with adjustments for its higher price-point) and the Model 3 relative to their BMW counterparts, demand for Teslas could soar to nearly 1.5 million vehicles (130,000 Model S, 130,000 Model X, and 1,200,000 Model 3) after the debut of the Model 3.

Of course, other models will likely add to future potential demand. Tesla does not have a BMW 5 Series-equivalent yet, but that segment could accommodate another 670 thousand units annually if Tesla were to maintain similar share.

While Tesla is the only luxury electric vehicle manufacturer producing at scale, BMW is not far behind with the i3 and i8 at 20,576 combined through the first three quarters of 2015. That said, even if Tesla were to cede half its share of the 1.46 million unit market depicted above, it still would surpass the 500,000 unit projection that has drawn so many skeptics.