Tesla co-founder and CEO Elon Musk has again hinted that a small “compact” Tesla could be in the pipeline, as he also admitted the cost of electric vehicles was still too high.
In his conference call with analysts and retail investors this week, Musk said: “The thing that bugs me the most is that our cars are not affordable enough. We need to fix that.”
There are a couple of ways to do that – lower the cost of production, lower the margin of profit from each vehicle delivery, or build smaller or cheaper cars.
At least two of those seem to be top of mind, with the third (controlling margins) more problematic because the company does need to make a profit, and it has only just learned how to do that. And those margins are still very fine.
“We’re all making progress in that regard, just sort of steadily gaining progress,” Musk said of the cost reductions and the profit margins. “Last quarter, it was only like 0.1%. So we want to be profitable. I think just we want to be, like, slightly profitable and maximise growth and make the cars as affordable as possible, and that’s what we’re trying to achieve.”
In recent months Tesla has sent mixed signals on the price of its vehicles. It has lowered the price of many models, citing production and manufacturing efficiencies, but then canceled the production of lower-cost versions of the new Model Y, meaning there will be no “standard range plus”.
That’s because Musk now believes EVs must have longer range, so they need a bigger battery, and he’s aiming for around 500km as standard. In Australia, the prices of Tesla cars have gone mostly upwards, thanks to falls in the value of the local currency, and Australia’s refusal to provide any incentives for EV ownership.
One solution for Tesla could be in delivering a smaller, cheaper EV to the market. Musk recently Tweeted a hint that a compact car could be in the offing. Pressed on this at the investor’s briefing, he suggested it was a possibility, but would not be any time soon.
“I don’t think we can comment on our detailed product roadmap beyond what’s announced because I think we want to reserve that for product launches,” Musk said.
“But it would be reasonable to assume that we would make a compact vehicle of some kind and probably a higher capacity vehicle of some kind. These are likely things at some point. But I do think there’s a long way to go with 3 and Y and with Cybertruck and Semi.”
There is an argument that EVs are not that much more expensive than their petrol and diesel rivals. Tesla rightly claims that its Model 3 competes with and beats other “premium” sedans such as Audi, BMW and Mercedes on price and performance.
Studies show that EVs on a four-year lease deliver lower costs than a petrol or diesel vehicle over the same period. A new survey has shown that personal ownership – albeit over 12 years – will also deliver (minor) cost savings.
But the reality is that there are few options – and none in Australia – for consumers to go out and buy a good quality, low-cost EV. The difference in price between “comparable” models such as the petrol, hybrid and full electric Hyundai Kona is an example of that.
There is big debate about when “cost parity,” i.e. the ticket price, will be achieved. Some say within a few years, some say by 2025, some say by 2030. The big legacy car makers don’t seem to be in too much of a hurry to make that happen, despite their talk of embracing the future.
Tesla, meanwhile, is focused on thinking about value rather than cost.
“It is important for people to distinguish between two things,” Musk said. “There’s value for money that our product has; and then there’s affordability.”
One of the things that makes the Tesla share price so huge is the assumption that the car will deliver value, in the same way that tech stocks can deliver value from their devices. No one, until Musk, has thought about doing that with a car, but that is clearly the strategy with options like Full Self Driving, which Musk insists will lift the value of the cars five-fold.
But there is still the problem of access.
“And even if you have value for money, like infinite, if people don’t have enough – if people do not have enough money in their bank account to buy the car, they simply cannot (buy it),” Musk conceded.
“So then you used to have this cycle or something that nobody can buy. So it is important to make the car affordable, and we will not succeed in our mission if we do not make cars affordable.”