As more details emerge about Tesla’s $25,000 electric car, it will have a huge impact on automakers, the car market, and buyers. But according to analysts, the cheap new electric car will be comfortable to drive but may be a bit spartan.
Many car buyers may believe that the most important factor driving down the cost of electric cars is the $7,500 tax credit that was expanded in the U.S. last summer, followed closely by Tesla’s cost-cutting drive to gain more market share. The underlying reason, however, is that car companies are improving electric vehicle technology and developing critical new manufacturing processes.
This has led to the emergence of more new models and made electric cars cheaper and more mainstream. Tesla has promised that the company’s next-generation electric cars, set to go on sale next year, will be sold at lower prices, expected to start between $25,000 and $30,000. The rise of mass-market electric vehicles will be an important milestone, environmentally, economically, financially and politically. The Biden administration is pushing for reforms that will aggressively reshape the automotive market in favour of electric vehicles faster than previously expected.
The Kelley Blue Book found that the average price of a new car in the U.S. is $48,763, a 30% increase over the past three years. If electric cars sell for much less than that, the “electric car is for the elite rich” narrative will go away. If these new models catch on, they will cement electric transportation as a mainstream consumer product, while also enabling Tesla, a repositioned Ford and General Motors, and a group of not-yet-exhausted electric car startups to become mainstream automakers.
Dan Ives, an analyst at Wedbush Securities, said, “Tesla is going to have to come out with cheaper cars if it wants to get to the mass market.” He believes Tesla’s cheaper model will be a compact luxury car similar to the gas-powered Audi A3, which starts at $35,400 for the base model. According to Ives, “The mass market will be the most important market for electric cars.”
Tesla’s lowest-priced model is currently the base Model 3, which has a suggested retail price of $41,990. According to market researcher Edmunds, three EVs currently have a base model MSRP below $30,000: the Chevrolet Bolt, Bolt EUV and Nissan Leaf, but the average sales price for the first two models was still above $30,000 in March, and the Leaf’s average sales price was above $34,000.
The low-cost electric cars are one of a number of new electric models that have already begun to hit the market, with more than 60 new electric vehicles expected to hit the market in the next few years. The Volkswagen Group announced the launch of the ID.2 in Europe on March 15 for less than 25,000 euros (about $27,465). Startup Fisker plans to launch the PEAR, a $29,900 crossover, in the U.S. next year, and General Motors plans to launch the Chevrolet Equinox SUV in the fall for less than $30,000.
Ives said most companies will compete fiercely in the compact car market, and global sales of compact electric cars could reach 10 million over the next five years, even though automakers originally focused less on small cars and more on SUVs.
All of these were prices before last year’s Inflation Reduction Act, which allowed U.S. buyers to get up to $7,500 off most electric cars made in North America, extended the tax credit, but the incentives have become increasingly complex, including rules for qualifying for the credit based on battery origin. There are also more financing options available in the auto loan market designed for eco-friendly vehicles.
The Biggest Problems Facing Manufacturers of Cheap Electric Vehicles
The rise of cheap electric cars presents a host of problems for automakers, but by far the biggest question is: What kind of electric car are consumers likely to get when sold at such a low price? Will they buy them? Think of Toyota’s gasoline-powered pillar, the Corolla, and other entry-level cars,” said Stephanie Brinley, associate director of global mobility research at S&P. There’s nothing wrong with having a base car as a first vehicle, and its having fewer features is in line with expectations.”
Analysts believe a model like the Fisker PEAR (an acronym for Personal Electric Vehicle Revolution) will not compete with large SUVs like Ford’s gasoline-powered Explorer. Instead, the PEAR looks more like a scaled-down version of the Honda CRV or Toyota RAV4. Both were the best-selling SUVs in the U.S. last year, according to Goodcarbadcar.net, with the RAV4 selling for as little as $27,500, which is longer than expected for the PEAR, and the larger CRV selling for slightly less than $30,000.
Ives said Tesla’s initial low-cost car, commonly known as the Model 2, is expected to be a hatchback and will likely be built at a plant built in Monterrey, Mexico, with some production also likely to take place at Tesla’s plant in Austin, Texas.
Brimley said models similar to the next-generation Tesla and other cheap electric cars could include the Honda Civic or Toyota Corolla, which have base retail prices of $25,050 and $21,550, respectively. The data shows that these two vehicles rank 9th and 13th in U.S. sales of all models, respectively, and first among compact cars. Other similar models include the Hyundai Kona and Honda Fit.
CFRA Research analyst Garrett Nelson said the lowest-cost electric car could have a range of only 400 miles per full charge, similar to current cars like the Nissan Leaf and Hyundai Kona, which cost about $30,000, and consumers could save money by buying smaller, cheaper batteries.
Brimley said consumers are unlikely to accept lower prices and may insist those lower-priced electric cars also retain popular safety features such as lane departure warnings. Fisker CEO Henrik Fisker said during a Feb. 27 earnings call that consumers may accept shorter ranges in exchange for lower costs as they use PEARs as a second car or in cities where they have time to recharge during short trips.
Fisker added, “If people are just using electric cars as urban transportation, they may not need to carry around huge and expensive batteries. So, we can offer different options in that area.”
For market leader Tesla, the key to bringing costs down from $41,990 for the Model 3 standard series is new or redesigned factories, significant scaling up and advancing battery technology, Nielsen and Ives said. After years of declines, Ives said, there is still room for a 30 to 50 percent drop in battery costs.
As the second-largest U.S. electric vehicle maker, Ford expects simple economies of scale to improve operating margins on electric vehicles by 20 percentage points by 2026. Another 25 percentage points of profitability will come from lower battery costs and redesigning vehicles to use smaller batteries, said John Lawler, Ford’s chief financial officer. To save money, Fisker outsourced the production of PEAR to Foxconn.
How does Tesla plan to reduce costs?
Tesla spent a lot of time at its March 1 investor day explaining its future strategy. The company said the new strategy will reduce already low unit production costs by another 50 percent. While Musk has broken his promise several times, the company said it’s a trick that has worked once before, when Tesla shifted from the high-priced Model S and Model X models to a lineup now dominated by the Model 3 and Model Y.
The key is a new, larger factory and a design that lets the car’s large, flat battery act as the car’s chassis at the same time. Lars Moravy, Tesla’s vice president of automotive engineering, said at the investor day that the moves have allowed Tesla to assemble the cars in a different order, skipping steps such as removing doors after painting and making it easier for workers to install seats and other interior components, thereby reducing downtime during production. The company’s new powertrain plants cost 65 percent less than the ones they replaced, he added.
Tesla contends that its vertical integration will further reduce costs. In this integration, Tesla designs its own batteries and much of its manufacturing equipment and software. Tesla says its overall effort has reduced the cost of the drive unit, including the motor, to $1,000.
Engineering firm Munro & Associates backs that up, saying Colin Campbell, the firm’s vice president for powertrain engineering, “We don’t think any other automaker comes close to that.” Cory Steuben, president of Munro & Associates, said, “This is absolutely huge news.”
While Tesla hopes the entry-level car will cement its position as an automaker that can serve all market segments, the automaker has been reducing its presence in the lower end of the market, where margins are lower, for years, preferring instead to focus on larger vehicles with higher margins. In fact, a spokesman for Hyundai’s U.S. operations said the company has no plans to launch a low-end electric vehicle.
In a statement, Hyundai said, “At this time, it is difficult to launch an electric vehicle priced at $25,000 without compromising range.” Hyundai expects the ICE and BEV models to eventually achieve parity, but the exact timing is unclear.
The companies hope that the solution to the low-end electric vehicle’s low profitability will be to offer them a variety of options, like mid-priced cars and trucks, Nielsen said. In the case of Tesla, he added, that could mean upgrading batteries and subscription services, or even letting drivers drive cars at home for automatic carpool driving. Or, the automaker could simply try to sell leather seats, more powerful batteries and premium stereos to buyers of smaller electric cars. Relying on such tactics, Honda has prompted many Civic buyers to spend more than $43,000 on the sporty Type R.
Brimley said the automaker may just not want to make new cars as cheap as they now promise. “Tesla hasn’t reached that price point yet,” she said.
The real answer depends on just how much costs will fall and how much Tesla cuts prices, as a recovering supply chain and its own declining costs give Tesla the ability to offset some of the recent rise in car prices. Ives said, “Everyone is watching where Tesla is going, and that will determine pricing and market competition.”