With more and more sightings of the Model Y in the wild, it’s looking increasingly likely that the first deliveries of Tesla’s latest vehicle will take place ahead of an already accelerated schedule.

What will Wall Street analysts (previously concerned that there was “no demand” for what turned out to be the best selling EV in the world) worry about now as Tesla expands into this lucrative new vehicle segment?

A hot topic has been cannibalization: the idea that Model Y would kill all sales of the Model 3, and cause big problems for Tesla.

Pierre Ferragu of New Street Research asked about this on the Q3 earnings call:

Analysts were not satisfied with this answer, and as recently as last week you heard analysts like Adam “$10” Jonas suggest that Model Y’s cannibalization of Model 3 demand would be “significant”.

We are cautious on Tesla’s prospects in China, given geopolitical/CFIUS concerns, we believe that the Model Y will likely cannibalize a significant amount of demand for the Model 3

Adam Jonas, Morgan Stanley

The Best Disaster Ever

Analysts speak about cannibalization as if it’s some kind of doomsday disaster scenario for Tesla. In reality, the Model Y won’t cannibalize the Model 3 –– but Tesla wishes it would. People ordering Model Y instead of Model 3 is the best thing that could possibly happen for Tesla.

Why order a Model 3?

Why would anyone order a Model 3 when the newer Model Y is available? There are many reasons:

1. Some people simply prefer sedans aesthetically. I am one of those people, and I have no interest in the Model Y. Model 3 has more than enough room for my needs
2. Model Y will be at least $3,000 more expensive than a similarly configured Model 3
3. Model 3 provides more range than Model Y due to the smaller size
4. Model 3 provides faster acceleration than Model Y
5. Initially, Model Y will not have a Standard Range option. If you want SR+, you need to get a Model 3

There are many reasons why someone might want to buy a sedan over an SUV, but pricing and functionality alone should generate significant demand for Model 3 even as Model Y becomes available.

Model Y will Boost Model 3 Sales

The Model Y is built on the Model 3 platform and is quite similar to it’s older sibling. It’s an SUV Model 3 for a few thousand bucks more. As Elon noted in his answer on the conference call when Model X was introduced Model S sales actually surged as well. Why is that?

First, Model Y expands the total addressable market for the Model 3 platform. There are SUV people and sedan people. Some people loved a lot of things about the Model 3, but for whatever reason, they’re just not into sedans. Now that there is an SUV option, Tesla’s more affordable vehicles are an attractive option for at least twice as many people.

Each Tesla sold creates network effects. Whether it’s a Model 3 or a Model Y, when people show their friends and see the cars driving around they are prompted to learn more about Tesla and possibly consider one for themselves. All of the attention that goes into promoting the Model Y and the spotlight of the new vehicle will shine on the Model 3 as well –– and likely even the S & the X.

The final and possibly the most significant factor is that when the Model X was introduced with the new front fascia, the Model S was updated to match. Tesla has said that the Model Y shares 75% of its parts with the Model 3. This means it’s likely that any improvements to the Model Y design will also make their ways into an improved Model 3. A Model 3 refresh of any kind is sure to provide a boost to Model 3 sales, just as it did with the Model S.

Cannibalization Would Be Great

As much as evidence leads me to believe that there won’t be significant cannibalization of Model 3, I hope I’m wrong. Cannibalization would be absolutely fantastic for Tesla.

Since a Model Y is about $3,000 more expensive than a Model 3 at an average selling price of $50,000, a complete conversion of Model 3 orders to Model Y would increase platform gross margins by 3% – 6%. This could bring automotive gross margins well over 25%. Tesla has said that Model Y costs almost the same (only slightly more) than the Model 3 to produce. That means most of the higher price tag goes straight to the bottom line.

Furthermore, since the SR+ option will not be available for Model Y… complete cannibalization of demand would raise the selling price well over $50,000 as the cheapest Model Y produced would be around $52,000. This would further pad Tesla’s profit margins.

Because Model 3 and Model Y use so many of the same parts, it should be easy to balance demand between the two vehicles as needed. A Model 3 battery works just as well on a Model Y.

Model Y Sales Will Be Insane

Model Y will likely sell more than Model S, X, and 3 combined –– and S, 3, and X sales will keep growing!

In the United States and increasingly in Europe, SUVs are becoming very popular. However, pollution taxes and low gas mileage make it harder for consumers to drive the cars they want.

That all changes with a completely electric SUV. Fuel savings are even higher when compared to the alternative gas-powered SUVs. That makes Model Y fuel savings higher than Model Y when compared to the gas-powered competition. What’s more, the Model Y looks likely to launch with feature-complete Autopilot. It won’t be perfect, but it will shock and amaze anyone who sees it.

Model 3 broke the ice by showing you could build an electric vehicle people love. The Model Y is when things really get serious: It’s a dagger in the heart of the internal combustion engine.

Model Y is set to launch before the Summer of 2020, according to Tesla. That means the first deliveries will happen in Q2, or maybe even Q1 if we’re lucky.

Will the Model Y cannibalize Model 3 sales? I sure hope so @elonmusk @tesla

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