Why Tesla’s Next-Generation Vehicle Won’t Be $30,000
Below, I explain why the next generation Tesla will be much less expensive than expected and how Tesla can do this. We know Tesla sells the Model 3 for under $40,000 in China today, and it has a project code named Highland to reduce Model 3 costs further next year. This will get the Model 3 below $35,000, which is $27,500 after the tax credit.
As my friend Warren Redlich mentions above at the 1 minute mark, Elon clearly stated a couple months ago during the Q3 2022 Tesla Earnings Call that they are working on a smaller next-generation vehicle which will be about half the cost of the Model 3/Model Y platform. Existing estimates of the Model 3 are that it costs $36,000 to make now (probably more in the US and less in China). Elon mentions a 2-for-1 target and half the effort and half the floor space many times (at about the 2 minute stamp of the above video). Warren mentions it costs about $32,000 to make the cheapest Model 3 (my research above suggests $36,000), but I would certainly expect the Highland project to take out at least $4,000. Half of $32,000 is $16,000.
If Tesla sells that car at $20,000, it makes a 20% margin, which is fine (Warren says 25%, but my math says 4/20 is 20%). Warren has a bunch of ideas on how they get the price down. Most of his ideas are things Tesla is already doing with the Model 3 and Model Y. I have some more radical ideas to get there.
- 3 years ago, Sandy Munro stated that the Tesla Cybertruck will realize massive savings because it won’t need a half a billion-dollar paint shop. Tesla specifically said they will use what they learned making the Cybertruck on their next generation vehicle.
- Sandy spoke recently at Teslacon Florida about how having front and rear castings will make manufacturing much easier (and thus will drive down costs) because they reduce variability in the manufacturing process.
- Tesla will introduce two major enhancements to the wiring of the next-generation Tesla:
- The wiring will be much stiffer so that it can be installed by robots. This article from 2019 discusses how traditional wiring is round and not rigid, which makes it difficult to automate the installation of the wiring in the car.
- Reducing the length of the wiring from 1500 meters to 100 meters. Tesla had hoped to implement this innovation in the Model Y, but Tesla engineers talked Elon out of it in order to get the Model Y out early instead of delaying it to add many new features like Tesla did with the Model X. Instead of sending a different wire to the back of the car for the brake lights, taillights, backup lights, left turn signal, and right turn signal, what if you just had one wire for all of those and then had a smart taillight that used the 12V or even 48V (that reduce wire size) to ground based on either a high frequency signal in that single wire or a wireless signal to tell the car when to show the taillights, brake lights, turn signals, and backup lights. See the video below:
- Tires and wheels. Warren mentions smaller wheels and tires at about 9 minutes in his video. Researching wheels on Amazon showed that you can get a 13 inch wheel for about half the price ($63) of an 18 inch wheel ($132), and it is about half the weight (16 pounds vs. 30 pounds). Looking at the tires reveals a similar savings. This tire (which I bought a year ago for my Model 3) is warranted for 70,000 miles for $165, while this tire (I bought a similar tire for my Toyota Tercel in 1991 for about $20) is warranted for 75,000 miles for $80.
- As I wrote two years ago in my article about reducing tire costs, retreading tires is a proven and effective way to reduce tire costs and has great environmental benefits since it greatly reduces the oil needed to make tires and also solves the problem of tire disposal. As you read about retreading tires, note that almost every manufacturer claims to have prices about half of new prices for comparable tread life.
- It’s almost a must that Tesla would need to go to sodium-ion batteries, at least for the entry level model. It isn’t just the cost savings of up to 30%; the big advantage for Tesla is there isn’t any shortage of sodium like there is of lithium. Although I think we will have plenty of lithium in 10 years, many people are worried we won’t have enough mining and refining capacity in the medium term (maybe 2025 to 2028) as both electric vehicle markets and energy storage markets grow more quickly than anticipated.
- Less expensive audio system with 8 speakers instead of 21.
- The car will be 30% smaller, reducing material costs by that amount. It could be narrower, so that it is only a 4 passenger car. I don’t think it will be as small as the ~$4,000 Wuling Mini EV, but it will be similar in size to the BYD Dolphin.
Let’s start with the $32,000 cost that Warren started with and see if the sort of innovations discussed above reduce the cost enough to make a difference. I found this 4-year-old CleanTechnica article by Eric Kosak very helpful in doing this. It states that cost of materials for a Tesla Model 3 was about $16,500. Just by making the car 30% smaller, we could reduce costs by $5,000. That would be using the same battery technology and reducing the 54 kWh pack (with 51 kWh of usable capacity) to 38 kWh (with about 36 kWh usable). If the smaller car can improve on the Model 3’s 5.3 miles per kWh by 30%, to about 7 miles per kWh, the next-generation (base model) would have an acceptable 252 miles of range. Eric figured about $6,800 in battery costs ($80 times 85 kWh), and reducing that 30% cuts $2,000 of cost out of the battery (we can’t add that to the $5,000 savings above since it is part of the $5,000). Moving from nickel-based battery to LFP to sodium-ion should cut costs at volume another 30% or $1,500. So, I think we can add the $5,000 in material cost savings from reducing size 30% and the $1,500 from using sodium-ion batteries to come up with $6,500 in material savings or a material cost of $10,000.
Now, let’s move to labor costs. He estimates there is $3,500 in labor and depreciation of capital in the Model 3 at high volumes. This will certainly be reduced by more than half if the model doesn’t need a paint shop and uses castings to dramatically reduce the part count. This could go down $1,500, a reduction of $2,000. So, we are at about $12,000 in cost to build the car vs. our projection of $16,000. I think the difference is 4 years of inflation have increased both labor and material costs up to 30%.
Regardless of how Tesla gets there, a compact EV that it can make in Mexico or the US for $16,000 and sell in the US for $20,000 — and people receive the full $7,500 tax credit (either the buyer or the leasing company, who can pass the benefit to the buyer) — will make if very difficult for anyone to sell gas cars as economy cars. The only cheap cars in the top 20 selling models in the US are the Toyota Corolla (which starts at $21,650) and the Honda Civic ($24,650). If you go all the way to the cheapest car in the US, the Mitsubishi Mirage ($16,245), it has just been discontinued in Japan and may not even be available in 2024. The Nissan Versa has a similar price and also sells about 12,000 cars a year. Clearly these will be crushed by a car that is cheaper to buy, cheaper to fuel, cheaper to maintain, and better to drive. If you are reading this in 2023, this isn’t far into the future, this is expected next year.
Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], XPeng [XPEV], and Hertz [HTZ]. But I offer no investment advice of any sort here.
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