Tesla has created some of the most technically advanced vehicles in the world. So much so a waiting list is a norm to purchase a Tesla, despite its steep price. Discussions have taken place over the past few years that ask if Tesla should lower their vehicles’ costs.
For Tesla to survive in the long term, they will need to lower the prices of their vehicles. The waiting list for purchasing a Tesla has as much to do with the company’s low productivity as it does with the number of buyers. By lowering the cost of a Tesla, it will ensure a wider customer base for the company and, in the end, a profit.
For people who can afford a Tesla, they are getting a superbly built vehicle. In the end, there are only so many people who can afford the current cost of a Tesla. In this article, we will discuss the future of the company, how the current cost of the Tesla affects sells, and what the company can do to lower its operating and vehicle costs.
Will Tesla Cars Survive?
The jury is still out if Tesla cars will survive. Although doing well in the investment realm, it can only be a matter of time before we find if Tesla will become a leading car manufacturer and continue to grow, or be piled on top of heap of companies that had great promise but failed to deliver.
Here are a few items we will discuss in the article to explain what Tesla is up against.
- Higher Costs to Operate
- Ability to Lower Costs
- Ability to Price Their Cars Lower
- Competing with Leading Manufacturers
- Reliance on Foreign Materials
- The Economy
- Expanding the Market
All of these possible problems in the list and more are part of doing business as a young company. Other companies have struggled and made it while others have not.
|Average Price of Gasoline Vehicle in the US||Average Price of Mid-Range Tesla in the US|
To be fair, the lower end Tesla, the Model 3, has a price tag of around $41,000. The average gasoline car cost includes luxury cars in the price, which adds more quality vehicles to the gasoline vehicle price range. One point of good news is that Tesla’s operating costs are about $460 a year compared to the gasoline car at around $1,100 a year. This takes some of the Tesla’s price impact away, as you will save money on operating costs.
How Will Tesla Lower Vehicle Costs?
Even the owner of Tesla has agreed that the cost of their vehicles needs to be reduced. Some help has come in the form of around $5,000 at lower prices in the last couple of years. While it has not been enough to change the type of buyer Tesla currently has, it has indeed shown that the price reduction is possible and on course. Here are some ways Tesla is working to reduce costs.
Initiatives to Lower Costs
- Full Cost Cutting: Elon Musk, the CEO of Tesla, has initiated a new cost-cutting initiative that reviews every purchase type, salary, expense, etc. that the company has in a way to reduce costs. One part of the initiative is that the CFO of the company will sign every outgoing payment. Musk himself will review every ten payments the company makes for waste.
- Employee Cuts: To reduce operating expenses, Tesla reduced its workforce by 7 percent.
- Operating in a Cheaper Environment: Opening a plant in China and even in cheaper areas of the U.S. is one of the plans to reduce Tesla vehicles’ costs.
- Increase the production of Model 3: As discussed before, the Model 3 is the company’s cheapest vehicle for the cost to manufacture and purchasing price. As a cost-savings plan and a way to make more profit, Tesla will focus more on this model of car.
- Manufacture Lower End Vehicles: The Model Y is an upgraded Model 3 Tesla. This shows that Tesla is opting to make money from their lower-priced vehicles. There are rumors of a “Model 2” in the distant future, which would be the most affordable Tesla in the lineup.
How Does the Tesla Compare to Other Fully Electric Cars?
Comparing Tesla’s against gasoline cars in the long term is a good idea since this is where most of the new business will come from. In the short term, however, it is a good idea to compare Tesla with other fully electric manufacturers of cars. This will give us a better understanding by comparing apples to apples.
Accounting for over sixty percent of all fully electric vehicle sales in the U.S. are Tesla, Nissan, and General Motors. The rest of the market is made up of other companies, including Audi, Porsche, and mainstream brands.
A General Motors product, the Bolt EV and the Nissan Leaf EV both start at around $36,000. This is around the price that Tesla is attempting to bring the $41,000 Model 3 down to. While chasing the lower end costs with the Model 3, companies like Audi and Porsche are competing in the high-end market with both cars coming in around $75,000 for the Audi and over $100,000 for the Porsche. That places Audi at an advantage on the high end, coming in cheaper than all the Tesla cars except the Model 3.
Of course, some of these cost savings for General Motors, Nissan, and Audi are due to the fact, they all have years of infrastructure and processes to build on.
The Nissan Leaf has been in production since 2012, giving it a unique advantage in production cost savings. For example, when a part is improved upon and can be made cheaper, it takes up to six months to be able to mass-produce the new, improved part. Those companies who have been in business longer have an advantage.
What Are Some Impediments to Surviving?
Now that we have covered why Tesla needs to lower costs and what some of those plans are let’s focus on what is in their way. There are a few scenarios that could keep Tesla from lowering costs as needed and even be detrimental to their overall business plan. As of this article, Tesla has yet to make an annual profit, so only by improving will they keep investor money coming in.
While there are several different types of batteries for electric cars, there are arguments of which are the better ones. Regardless of the future, Tesla has placed all its proverbial eggs in the basket of lithium batteries. This may be the correct choice in the future, or it may not, but one thing is for certain and that most lithium is mined outside of the U.S. With
South America being the largest producer of lithium ore, there are geopolitical influences that come into play. It only takes a de-stabled government, or a strike that Tesla cannot control, to raise the cost of their batteries. They have taken some care, such as purchasing from other countries like Australia, but without a massive lithium mining operation in the United States, lithium purchases could become unstable.
We touched on the subject earlier but now let’s dig into how competitors could have a long-term advantage over Tesla. It appears that in the beginning, Tesla counted on wealthier people to purchase their cars to make a profit. This appeared to be a good idea, as they had plenty of people in line to purchase the cars. The problem is, as some were purchasing the higher end cars, Tesla realized more people were buying the lower end Model 3.
To make a profit, the company needed to produce cars cheaper and at a faster pace. As we have seen, the competitors of Tesla have an advantage in manufacturing costs and selling prices.
End the end; it is not only if Tesla can come down to the price of its competitors. If Nissan, Audi, General Motors, and others can continue to lower their costs and prices, Tesla will always be chasing the market instead of taking it over. This will eventually be great for all consumers of electric cars, but may not work for Tesla in the end.
For most of history, technology has grown during times of overall good economics and investment. A major recession could play havoc with Tesla’s plans to reduce its costs and stay in business. If investor’s money dried up during a recession, Tesla’s chances of even surviving could be in doubt.
Not only would investment money stop rolling in, but purchases of all-electric cars may be seen as unnecessary. At the same time, there are still gasoline operated cars or cheaper electrical vehicles on the market to choose from.
You may not even need a recession for Tesla to not survive. Technology stocks have become increasingly more valuable and more expensive. Tesla is one of the technology companies that has led the way in extremely raising the value of tech stocks. There is, however, beginning to grow a consensus that tech stocks have created a bubble.
Without making its own yearly profits, Tesla relies heavily on new investors for cash to run the company. And they have certainly taken in cash over the last few years. If, over time, a large correction in tech stocks hit and the bubble bursts, Tesla could find itself in a situation where it loses investment money. Without it, Elon Musk’s fortune and the company itself could be at risk.
This fear is one reason Tesla recognized it must cut its costs and not rely so much on investments. For now, though, the company needs the stock price to not only stay where it is but to rise to continue to have money invested for its operations and growth.
Tesla and other electric vehicle companies have been and continue to receive the benefits of government incentives. While those incentives in the U.S. came in the form of tax breaks for the purchasers, other countries around the world have had their benefits to Tesla. Aside from the U.S., here are other countries that help Tesla and other electric vehicle makers to earn money.
- Norway: Has in place a twenty-five percent value-added tax exemption used for cars burning fossil fuels. This has created a market where as much as 40% of cars sold each year are electric.
- Canada: Canada has established rebates with its zero-emissions program, which it uses to fight pollution. These rebates are as much as $5,000 for the buyers of all-electric cars.
- China: China did not set up rebates or tax exemptions. What it did do was to directly subsidize manufacturers of electric cars with government money, including Tesla’s factory in China. Threats to reduce subsidies have persisted, and some have come to fruition, although overall subsidies remain. For companies that did see subsidies decline, a decline in sales also occurred.
- The Netherlands: The Netherlands offers a tax break on all-electric cars until the end of 2025. The prices for eligibility is lowered each year. As of now, Tesla’s inability to lower it price enough has pushed it out of price compliance for the tax break.
- Germany: The German government allows for a $4500 grant for buyers of all-electric cars and less for hybrids. The German model for grants, like the Netherlands, has a limit on the price of the car, which favors manufacturers who can make a car at less cost. Unfortunately for Tesla, this grant only applies to the Model 3 car.
- England: The United Kingdom has offered rebates for the purchase of all-electric vehicles. At around $4600, these rebates are substantial in the fact that all the Tesla vehicles produced are eligible for the rebate.
As we see, Tesla has, over the years, has had help when it comes to having the benefits of government rebates, grants, and tax breaks. The issues arise as companies either pull back on the rebates or discontinue them altogether.
Other car companies that have solid sales in fossil fuel burning cars are not as affected as Tesla, who only sells electric vehicles. Each time a subsidy is reduced, there has been a correlation in a drop in sales. Without gasoline cars to fall back on, Tesla is at a disadvantage.
Tesla Could Be It’s Own Worst Enemy
When it comes to Tesla’s ability to lower costs or to become financially secure for the long run, the company may be its demise. Tesla is a company that has become popular around the world, not only for it promise of helping save the environment. Sure, that is a benefit of driving an electric car, but have no doubt, Tesla is a technology company.
Elon Musk is the type of CEO who will never be happy with just making an electric car. The company and its wizard are about more than cars. Self-driving cars, batteries that last forever, rocket ships that go to Mars, and the technology behind it.
These are the things that drive Musk, and with him being dethroned of his “CEO” status in one of his companies already (Paypal), it has some worried the same may happen. Although there is no arguing that Musk is a genius and has a great ability to be a creator, but he may have his hands in just too many fields at this point.
These things may also be the downfall of Tesla. To reduce costs and focus on sales, do not require any of these heavy tech promises. People come to a car show and look at the Tesla vehicles with all their tech, but in the end, purchase a Nissan or Ford because it gets them to work, on time and at a much less cost.
To reduce costs and possibly stay in business, some think that Tesla may need to focus less on ingenuity and more on getting what they have now moved into the market. At some point, many believe the shiny new technology needs to be replaced with a sound business approach to technology instead of throwing money at it until it works. One example of this is Tesla’s autopilot program.
A self-driving car is awesome and needs to be researched and tested, but the Tesla way has been to test, stick with their technology, and try to make it work. A collaborative effort among Tesla and other manufacturers and technology providers may be a better way to go. It certainly could cost less.
Tesla has wowed the world with its vehicle technology and created jobs in the US and around the world. Still, the cost of a Tesla is out of reach of most Americans as production costs still lag that of other companies. The company knows it must lower costs and prices to survive and has enacted several cost-saving plans to reduce its operating costs. Tesla has been able to lower the sale price of its vehicles by around $5,000 each, but other more established automakers have been able to sell at a lower price. Time will tell if Tesla can maintain its place in the industry and succeed where others have failed. One thing is for certain; the company must lower its operating costs to continue to compete.