Tesla Motors is pretty popular these days. The stock prices have soared this year, Elon Musk is always up to something, and everyone seems to have an opinion. So what does all this mean for the price of the actual cars they sell?
Tesla’s mission is to make electric vehicles and zero-emission energy available to as many people as possible. If Tesla is to succeed as a company, this means the price of its cars must become more affordable. The company is scaling production now to achieve their mission.
They’ve turned the electric car market on it’s head, and have come out on top. Read on to see how they’re plans to scale will reduce the MSRP of their vehicles.
What Is The Metric For “Affordable?”
Making cars “more affordable” can be a relative term. So let’s compare Tesla’s lowest priced car, the Model 3, with the best 2020 sedan ranked by Kelley Blue Book.
|Tesla Model 3||$37,990|
|2020 Honda Accord||$24,060|
Almost there, but not quite. When we think of the affordability of a car, we often jump right to the price tag. Another factor, though, is cost of ownership. We’ll jump into that in this article as well. First let’s take a look at what Tesla is doing to lower the number on the price tag of it’s electric automobiles.
Will Tesla Cars Ever Be Affordable?
Simply put-yes. Tesla is a relatively young company, and the majority of their time and effort has been researching and developing some of the most efficient battery technology the world has ever seen.
Not only are their cars the most efficient on the EV market, they are still improving that efficiency. This is great, but what about improving the efficiency of their production so that buyers can reap some of those savings?
It’s In Their Company Mission
“To accelerate the world’s transition to sustainable energy.”
The long-term mission of this auto manufacturer is to get as many people using zero emission technology as quickly as possible. The company is driven by this overarching purpose.
The way to be successful in that endeavor is to reduce the cost of their products. So, according to their own mission, Tesla will not be successful as a company if it does not reduce the cost of its cars.
And as we’ve mentioned earlier, they are taking steps to do just that. Most of the company’s short life span has been spent researching and developing their battery technology. Well, now it looks as if they’ve got the right stuff, and it’s time to scale.
The Gigafactory(s) are Revving Up
What makes us think that? The construction of the Tesla Gigafactories. This indicates that the company is shifting their R&D dollars over to scaling the great products that they have developed.
It’s the most fundamental principle of economics: supply and demand. Right now, demand for Tesla’s cars is higher than it’s supply, therefore prices and pre-orders are high. As the supply increases to match the demand, Teslas will become more affordable. Here’s what Tesla has to say about the Gigafactory in Nevada:
“By reducing the cost of batteries, Tesla can make products available to more and more people,”
They also mention that for Tesla to achieve it’s Model 3 production goal of 500,000 cars per year, it would need the entire current, worldwide supply of lithium-ion batteries. So this is the purpose of Gigafactory 1, located in Sparks, NV. To produce hundreds of thousands of batteries per year.
This is economies of scale at work. Tesla is at a point now where they need to grow production and efficiency in order to maximize their overhead savings. Building these giant factories is evidence that Tesla is taking big steps to improve the affordability of their vehicles.
With battery construction moved in-house and scaled, Tesla will be able to improve the cost of it’s vehicles’ batteries, which make up most of the price tag. Gigafactory 1 will not only produce car batteries, though.
Gigafactory 1 will also produce Tesla’s stationary power storage units, the Powerwall and Powerpack. These products use the same battery technology, just package it in a different application. Selling these two products in industries other than the auto industry will offset the cost of the Gigafactory, and it will not all be passed on to auto consumers.
Gigafactory 2 is located in Buffalo, New York. While this factory does not produce batteries for its cars, it specializes in solar panels and solar roofing tiles. This does not equate to direct auto costs savings but it does show signs of scaling up. Economies of scale works favorably for larger companies. As Tesla grows beyond just the automotive industry, it can use its size to improve the efficiency of all its manufacturing.
A prime example of this is Toyota Industries. Many people know them as the automotive manufacturer, and most know them as the gold standard in automobile manufacturing. What flies under the radar though is the gambit of other products from Toyota. In addition to cars, they also make:
- Automotive Stamping Dies
- Materials Handling Equipment (Forklifts)
- Textile manufacturing material
Toyota Industries did not become a goliath of a company by only selling cars. And neither will Tesla. Much in the way that Toyota specializes in automotive engine manufacturing, Tesla is ramping up battery production for themselves, but they are not putting all their eggs in the automotive basket. They’re also manufacturing:
- Solar Roof Tiles
- Solar Panels
- Home Energy Storage Packs
Learning from Toyota is a pretty surefire way to improve the affordability of your cars.
Gigafactory 3, also known as Tesla Giga Shanghai, began construction in late 2018. What’s one tried and true method for American corporations to reduce production costs? Move it to China. The first Tesla factory in China will be responsible for the final assembly of the Model 3, and eventually the Model Y.
Currently, the factory produces about 3,500 cars per week. Tesla’s goal is to ramp this to just under 10,000 per week to meet their annual production target of 500,000 per year.
Gigafactory 4 will be in Berlin, Germany and Tesla is calling it the most advanced high-volume electric vehicle production plant in the world.
Germany is also known as a successful player in the automotive industry, so it appears Tesla is looking to draw on the expertise of German engineering. This plant will begin by producing the Model Y and makes claims such as:
- Cutting edge casting systems to improve vehicle safety
- The most efficient body shop technology
- A next generation paint shop, bringing beautiful new colors to the road
- World class final assembly quality
Giga Berlin is expected to begin operations in July 2021.
Gigafactory 5 is currently the last of the production expansion efforts, for now. It is being built outside of Austin, Texas. Tesla’s plan is to have this factory operational by the end of 2021. This site’s main purpose is to manufacture the Tesla Cybertruck and the Tesla Semi truck.
As mentioned with Gigafactory 2, Tesla’s growth beyond just consumer automotive products is a key piece of what will make their cars more affordable.
It is clear that Tesla is implementing scaling methods to reap the economies of scale savings that are possible.
They are making large efforts now to ramp up production, which will ultimately be the key to making their cars more affordable. That’s what Tesla is doing as an individual company, but there are other market forces at play here that may also help.
Market Competition Doesn’t Bother Tesla
When it comes to the EV market, Tesla is the top dog. However, other automakers are becoming more competitive. Electric vehicles are not a fad, and other automakers are trying to play catch-up with Tesla.
As they do, Tesla will not be able to rely on being so technologically advanced to justify higher prices.
This is in line with Tesla’s goal, too. In 2014 they released all of their patents to help the competition catch up, because the goal is to get as many people using zero emission energy as possible… not as many people using only Teslas.
So, in time the market will become more competitive, and competition always favors the consumer.
Cost Of Ownership: Comparing Apples To Oranges
When considering the affordability of Teslas, it’s only fair to discuss the cost of ownership benefits.Tesla shows two prices on their website. If you were to go to tesla.com and click “order” on any car, you’ll see an option for “Purchase Price” or “Include Potential Savings”
These savings include tax incentives for owning an all electric car, and obviously the money you’ll save annually on gas.
No More Pumping Gas
For example, the gas savings if you were to purchase a Model 3 would be $4,300 according to Tesla. They don’t specify if this is annual savings, lifetime savings, or some number in between. But it seems like a lofty number, and may be padded to sway buyers. According to the Motley Fool, Americans on average spent just over $1,500 per year filling up their tanks.
Not quite the $4,300 per year. However, any way you look at it, you won’t be pumping gas anymore. So whatever you were spending on gas, you won’t be spending that anymore. Yes, you might notice a bump in your electricity bill from charging your electric car, but you can still expect a sizable savings margin at the gas pump.
One Model 3 owner made a video about his cost of ownership. Using his anecdote for reference, he spent about $750 on electricity to charge his Model 3 over the 40,000-mile life span. He compared that to the over $3,000 it would cost to fuel up a BWM 3 series over 40,000 miles.
No Oil Changes, Ever
Teslas don’t have motor oil, so there is no motor oil to change. In general, Teslas are virtually zero-maintenance vehicles. In the example above, this Model 3 owner has spent $0 on routine maintenance in the first 40,000 miles. He did claim that he’s due for a new set of tires, so there’s not much savings there.
But over 40,000 miles, any typical internal combustion car will require at least 4 oil changes. The manufacturer usually recommends additional maintenance at around 30,000 miles as well. This can get pricey, especially if you bring your car in to the dealership for this.
The 30,000 mile maintenance package for my 2014 Subaru ran me $600. A lot of that work is just not necessary with an electric vehicle.
- There are no spark plugs to change
- No fluids or fluid filters to change
- No traditional transmissions
- No timing belts to inspect
One of the biggest selling points of Teslas is their significantly lower amount of moving parts. Less moving parts means less things to break means less cost for maintenance and repairs.
Depending on the state you live in, you could be eligible for tax credits when you purchase a Tesla. These vary over time, but currently, Tesla estimates that you could receive up to $1,500 back from Uncle Sam.
When the cost of ownership is factored back in, the standard Model 3 seems like it already is “affordable.” Let’s re-evaluate our comparison to the 2020 Accord factoring cost of ownership.
The table below lists the cost of a standard range Model 3 with Tesla’s “Include Potential Savings” option turned on. We are comparing it to the Edmunds true cost to own data for a 2020 Honda Accord. Have a look.
|Car||Purchase Price||5 Year Cost of Electricity/Fuel and Maintenance**||Cost Including Cost to Own|
|Standard Range Model 3||$36,490*||$2,233||$38,723|
|2020 Honda Accord||$24,060||$10,930||$34,990|
That “affordability” gap isn’t as big as we originally thought. Now, there are a few assumptions and disclaimers about the table above.
* The Tesla Purchase price includes a $1,500 tax credit
** Electricity cost to charge a Model 3 was assumed to be 80% less than the cost per mile to fuel up an internal combustion car. Tesla maintenance costs include tire rotations and one tire replacement.
Disclaimer: The full tank range of the Honda Accord is about double the full-charge range of the Model 3. So make what you want of that, the owner will need to make more charging stops on long trips. But if they’re plugging their Tesla in every night and going about their normal commute, this difference is not felt.
Again, all of these comparisons are made using the standard Model 3 as a baseline.
The Layman’s Tesla, The Model 3.
Yes, the Model 3 is Tesla’s most affordable car, but if you’re going to buy it, you’ll be tempted to go for the more expensive Long Range or Performance models. This could easily add $20,000 to your price tag.
Let’s not get on the subject of the costs of the Model S or the Model X either. Tesla is doing some serious work to make these models more affordable, and it looks like the production scaling they are doing will bring down the cost of the high performance batteries in these desirable models.
While these more expensive models still have a lower cost of ownership, it doesn’t yet come close to closing the affordability gap between comparable premium sedans or SUVs. The value is definitely there, Teslas are certainly high quality products, but the price tag is still high nonetheless.
A Farther Look Down the Road
In addition to making their existing cars competitive, Tesla is not just interested in doing what the rest of the automotive industry is doing. There are a few novel things about their products that also add value to their consumer base.
Tesla Distributes Cars Differently
Tesla does not distribute their cars through traditional franchised dealerships. This is mainly a move to enable them to compete with gasoline cars. A dealership would be advertising against their bread and butter: the gasoline car, in order to sell electric Teslas.
In addition, Tesla is committed to making buying one of their cars the most pleasurable car-buying experience ever. No price haggling or pressure to buy from a dealership. In terms of cost of the car, this could go either way.
The price is the price, straight up. There’s no room for dealerships to somehow get you a good deal or additional savings, but it also prevents buyers from getting a raw deal as well.
RoboTaxi Can Get Your Money Back
If Tesla’s efforts to decrease their cars’ price tags fail, they have another trick up their sleeve to help offset the cost.
We’ve all heard of the brilliant auto-pilot feature available in Teslas. We’ve seen the pictures of people sleeping at the wheel. How about a driverless taxi?
Tesla has had a long goal of giving its customers the ability to put their car to work for them. When exactly this will happen is unknown, but the company is working hard to make it happen. When it does, Tesla owners could enlist their car in a fleet of autonomous taxis and make money much like an Uber driver… but they don’t need to be there to drive.
Elon Musk’s other company has been hard at work building a network of internet broadband satellites. This internet network known as Starlink would make GPS navigation for robotic cars seamless. This is the stuff of the future, and it’s coming sooner than we think.
Affordable Teslas Are On Their Way
In conclusion, Tesla is doing a lot of work to lower the price of their cars. They are also implementing many “outside the box” solutions that make owning their cars more affordable for those who look beyond just the price tag.