Why Tesla’s Next-Gen Vehicle Won’t Cost $30,000
Below I explain why the next generation of Tesla will be many cheaper than expected and how Tesla can do it. We know that Tesla is selling the Model 3 for less than $40,000 in China today, and it has a project code named Highland for further reduce Model 3 costs next year. This will drop the Model 3 below $35,000, or $27,500 after the tax credit.
As my friend Warren Redlich mentions above at 1 minute, Elon clearly stated a few months ago on the Tesla Q3 2022 earnings call that they were working on a smaller next-gen vehicle that will cost about half the cost of Model 3/ Model Y Platform. Existing Model 3 estimates are that it costs $36,000 do now (probably more in the US and less in China). Elon mentions a 2 for 1 goal and half the effort and half the floor space several times (about 2 minutes from the video above). Warren mentions that it costs around $32,000 to make the cheapest Model 3 (my research above suggests $36,000), but I would definitely expect the Highland project to cost at least $4,000. Half of $32,000 is $16,000.
If Tesla sells this car for $20,000, that’s 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 to bring the price down. Most of his ideas are things Tesla is already doing with the Model 3 and Model Y. I have more radical ideas to make it happen.
- 3 years ago, Sandy Munro declared that the Tesla Cybertruck will make massive savings because he won’t need a half-billion-dollar paint shop. Tesla specifically said they would use what they learned from building the Cybertruck on their next-generation vehicle.
- Sandy spoke recently at Teslacon Florida on how to have front and rear castings will make manufacturing much easier (and therefore reduce costs) as they reduce variability in the manufacturing process.
- Tesla will introduce two major improvements in the wiring of the next generation of Tesla:
- The wiring will be much more rigid to be able to be installed by robots. This article from 2019 explains how traditional wiring is round and not rigidwhich makes it difficult to automate the installation of wiring in the car.
- Reduced wire length from 1500 meters to 100 meters. Tesla had hoped to implement this innovation in Model Y, but Tesla engineers talked Elon out of it in order to release Model Y earlier instead of delaying it to add many new features like Tesla did with Model Y. X. Instead of sending a different wire to the rear of the car for brake lights, taillights, reverse lights, left turn signal and right turn signal, and if you only had one wire for all of those and then you had a smart tail light that used the 12V or even 48V (which reduce the size of the wire) to ground depending on a high frequency signal in that single wire or signal wirelessly to tell the car when to display taillights, brake lights, turn signals and reverse lights. See the video below:
- Tires and wheels. Warren mentions smaller wheels and tires at about 9 minutes into his video. Search wheels on Amazon have shown that you can get a 13 inch wheels for about half the price ($63) of a 18 inch wheels ($132), and it’s about half the weight (16 pounds vs. 30 pounds). Examination of tires reveals similar economy. This tire (which I bought a year ago for my Model 3) is guaranteed for 70,000 miles for $165, while this tire (I bought a similar tire for my Toyota Tercel in 1991 for about $20) is guaranteed for 75,000 miles for $80.
- As I wrote two years ago in my article on reducing the cost of tiresRetreading tires is a proven and effective way to reduce tire costs and has excellent Benefits to the environment as it greatly reduces the oil needed to manufacture tires and also solves the problem of tire disposal. When reading about tire retreading, note that almost all the manufacturer claims to have prices about half of new prices for a comparable lifetime.
- It’s almost a must that Tesla would need to go to sodium ion batteries, at least for the entry-level model. It’s not just about savings of up to 30%; The big advantage for Tesla is that there is no shortage of sodium like there is of lithium. Although I think we will have a lot of lithium in 10 years, many people are concerned that we will not have enough mining and refining capacity in the medium term (maybe 2025 to 2028) because the electric vehicle markets and energy storage markets are growing faster than expected.
- Cheaper audio system with 8 speakers instead of 21.
- The car will be 30% smaller, which will reduce material costs by the same amount. It could be smaller so it is only a 4 passenger car. I don’t think it will be as small as the ~$4000 Wuling Mini EV, but it will be similar in size to the BYD Dolphin.
Wuling Mini EV. Image courtesy of Wuling HongGuang.
BYD Dolphin. Image courtesy of BYD.
Conclusion
Let’s start with the $32,000 cost that Warren started with and see if the kind of innovations discussed above lower the cost enough to make a difference. I found that 4 years Clean Technica article by Eric Kosak very useful for this. He says the cost of materials for a Tesla Model 3 was around $16,500. Just by making the car 30% smaller, we could cut costs by $5,000. This would mean using the same battery technology and reducing the pack from 54kWh (with 51kWh of usable capacity) to 38kWh (with about 36kWh usable). If the small car can improve the Model 3’s 5.3 miles per kWh by 30%, to around 7 miles per kWh, the next generation (base model) would have an acceptable range of 252 miles. Eric calculated about $6,800 in battery costs ($80 times 85 kWh), and reducing that 30% reduces the battery cost by $2,000 (we can’t add that to the $5,000 savings above). above because it is part of the $5,000). Switching from nickel-based battery to sodium-ion LFP should reduce volume costs by an additional 30% or $1,500. So I think we can add the $5,000 in material savings from the 30% size reduction and the $1,500 from using sodium-ion batteries to get $6,500 in savings from materials or a cost of $10,000.
Now let’s move on to labor costs. He estimates that there is $3,500 of labor and capital depreciation in Model 3 at high volumes. This will definitely be more than halved if the model doesn’t need a paint shop and uses castings to drastically reduce the number of parts. That could go down $1,500, which is a reduction of $2,000. So we’re at about $12,000 in cost to build the car versus. our projection of $16,000. I think the difference is that 4 years of inflation has increased labor and material costs by up to 30%.
However Tesla gets there, a compact electric vehicle that it can make in Mexico or the United States for $16,000 and sell in the United States for $20,000 – and people get the full tax credit of $7,500 (either the buyer or the leasing company, which can pass the profit on to the buyer) – will make it very difficult for anyone to sell petrol cars as economy cars. The only cheap cars in the 20 best-selling models in the United States are the Toyota Corolla (which starts at $21,650) and the Honda Civic ($24,650). If you go as far as the cheapest car in the US, the Mitsubishi Mirage ($16,245), it was just discontinued in Japan. and may not even be available in 2024. The Nissan Versa is similarly priced and also sells around 12,000 cars a year. It is clear that these will be crushed by a car that is cheaper to buy, cheaper to fuel, cheaper to maintain and better to drive. If you’re reading this in 2023, that’s not far in the future, it’s expected next year.
Disclosure: I am a shareholder of Tesla [TSLA]BYD [BYDDY]Nio [NIO]XPeng [XPEV]and Hertz [HTZ]. But I am not offering investment advice of any kind here.
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