As Tesla's Model 3 heads toward production in July, a branding problem emerges

Tesla Motors unveils the new lower-priced Model 3 sedan at the Tesla Motors design studio in Hawthorne, Calif., Thursday, March 31, 2016.
Justin Prichard | AP

Tesla said Wednesday that it remains on track to begin production of its Model 3 sedan in July, with road testing already underway.

But as the vision of selling a lower priced electric car moves closer to reality, the company is grappling with how it can keep the Model 3, which will be priced at about $35,000 for a four-door sedan, from cannibalizing the sales of its pricier Model S.

"We have seen some impact on Model S [orders], as a function of people being confused that Model 3 is an improved version of Model S," said Tesla CEO Elon Musk, during the company's earnings conference call Wednesday.

"The Model 3 was supposed be call the Model E, but then Ford came to sue us," Musk joked. "I thought we were being clever by calling it the Model 3, but the jokes on me."

"We want to be super clear that Model 3 is not version three of our car," he added.

This point was also driven home in the company's earnings release:

"Moving past Q2, particularly as Model 3 becomes available, one of our challenges will be to eliminate any misperception about the differences between Model S and Model 3. We have seen a belief among some that Model 3 is the newest and more advanced generation of Model S. This is not correct."

"Model S will always have more range, more acceleration, more power, more passenger cargo room, more displays (two), and more customization choices, and Model S, X and 3 will all have equivalent Autopilot functionality. We will continue to clearly communicate these distinctions to avoid any misperceptions."

Enthusiasm for the mass-market sedan has helped drive Tesla's stock to all-time highs in recent weeks, and pushed its market cap above both General Motors and Ford, the two largest U.S. auto makers by sales.

In the company's earnings release, it detailed the progress it is making toward releasing the Model 3.

"Release Candidate vehicles, built using production-intent tooling and processes, are being tested to assess fit and finish, to support vehicle software development and to ensure a smooth and predictable homologation process. Road testing is also underway to refine driving dynamics and ensure vehicle durability," the company said.

The homologation process is the steps needed to certify vehicles meet regulatory standards.

In addition to scaling up its production facilities, Tesla also is working to improve its ability sell and service a growing number of vehicles — a must as the company shifts to a larger owner base.

Tesla plans to boost the number of retail, delivery and service locations by 30 percent, and add its first company-owned body repair shops this year. At the same time, it will expand its network of third-party certified body shops, and add more than 100 mobile repair shops in the second quarter alone.

Meanwhile, work continues to expand its Supercharger network. In 2017, Tesla expects to at least double the number of Superchargers and Destination Charging connectors globally to more than 10,000 and 15,000, respectively.