Gigapress
Trying to be less wrong
I agree. The question is timing. I just mean that Tesla doesn’t necessarily need it as soon as a lot of people are expecting. I'm estimating that a $25k Model will hit initial production in '24 or more likely '25, and its production run rate will not pass 3/Y until more like '27, but then it will account for the majority of the growth thereafter.
Here comes another essay I've been wanting to write that was inspired by your comment but not really directed at you in particular.
3/Y Growth Prospects & Devastating Economics
The next-generation car mentioned last night will supposedly be half the cost of a 3, so roughly $17k COGS and maybe $25k ASP. Currently 3/Y are selling for roughly $50k ASP. The majority of sales in the global car market are between these two price points.
Direct Sticker Price Comparison is Misleading; Total Cost of Ownership Matters More
A $35k Tesla would actually be very affordable for the average new car buyer. Very. At lower vehicle price points, the Tesla vs. ICEV cost differential on fuel, maintenance and longevity is a higher percentage of the overall cost.
Let me take that further. A $35k M3 would be cheaper per mile, in most people's circumstances, than *any* ICEV currently popular in rich developed countries like the USA or Canada.
For example, let's use an entry-level gas-powered Toyota Corolla priced at $20k as a representative benchmark for comparing to a $35k economy Model 3. Sure, the hypothetical entry-level Model 3 has a $15k sticker price penalty, and of course normally the buyers who are looking a $20k Corolla (or Honda Civic, Hyundai Elantra, Kia Rio, etc.) would not consider a $35k car because it's 75% more expensive. However, the loan/lease payments are only one portion of the typical annual costs of ownership.
Let’s start by comparing with assumptions that are heavily biased in favor of the Corolla:
- Both vehicles will last for 200k miles
- Even though we're comparing to a 3 with an LFP battery which should last a very long time
- $3/gallon gasoline
- Over the life of the vehicles, oil prices are likely to increase as supply continues to become harder to find
- The entire refining and distribution supply chain will lose economies of scale due to declining demand as EVs take over and the remaining ICEV fleet has increasingly good fuel economy
- $0.20/kWh electricity
- Corolla will actually get EPA-rated 35 miles per gallon efficiency
- Assume also that the Corolla maintains this efficiency for the entire anticipated service life
- 300 Wh/mile for the M3 including powertrain and everything else (climate control, sound system, Autopilot/FSD computer, etc.)
- 14k miles per year of driving (around American/Canadian average)
- Corolla lifetime average maintenance cost of $700/year
- M3 lifetime average maintenance cost of $350/year
- Insurance premium $150/month for M3 and $100/month for Corolla
| Per-Mile Cost | Corolla | Model 3 | Difference |
|---|---|---|---|
| Vehicle Purchase Price* | $0.10 | $0.175 | $0.075 |
| Energy | $0.086 | $0.06 | -$0.026 |
| Maintenance | $0.05 | $0.025 | -$0.025 |
| Insurance | $0.086 | $0.129 | $0.043 |
| Total** | $0.32 | $0.39 | $0.07 |
** Neglecting parking, registration fees, car washes, and other stuff because no difference between the Corolla and M3
So the $35k Model 3 would be about 20% more expensive to drive than a base Corolla under circumstances and assumptions that are biased heavily in favor of the Corolla. That's a pretty damn good deal, and I think a lot of people would stretch their budgets that extra bit to upgrade to the M3, like we saw a decade ago with people's willingness to spend on mobile phones and data plans after smartphones and 4G arrived.
Let's try again with more realistic assumptions for the typical American/Canadian buyer.
- Model 3 lasts 300k miles
- $3.50/gallon gasoline
- $0.12/kWh electricity
- Corolla will actually get 30 miles per gallon efficiency in real-world usage on average across entire service life
- 270 Wh/mile for the M3
- Remember this is for a future, better M3 a few years from now which would probably have full front and rear castings and other energy-saving improvements
- Corolla lifetime average maintenance cost of $1000/year
- Engine and transmission maintenance costs increase significantly in later years of life
- M3 lifetime average maintenance cost of $350/year
- M3 insurance cost average of $80/month to reflect:
- It being $35k instead of insurance based on today's average M3 insurance costs for more expensive M3s currently on the market
- OTA updates substantially improving collision avoidance/mitigation software over time, especially as Tesla AI continues to make progress
- Tesla Insurance taking over due to offering savings as the algorithm is improved and gamification of driving safety actively improves risk profile
- My brother has a friend in Houston, Texas (a place with above-average collision danger) driving a Model 3 Performance as a 20-something male (one of the riskiest age-sex demographics) with a Tesla Insurance premium around $95/month, so $80/month for a cheap M3 in the future is probably conservative
- M3 reparability improving over time with design changes
| Per-Mile Cost | Corolla | Model 3 | Difference |
|---|---|---|---|
| Vehicle Purchase Price* | $0.10 | $0.117 | $0.017 |
| Energy | $0.117 | $0.0324 | -$0.085 |
| Maintenance | $0.0714 | $0.025 | -$0.0464 |
| Insurance | $0.086 | $0.069 | -$0.017 |
| Total** | $0.37 | $0.24 | -$0.13 |
** Neglecting parking, registration fees, car washes, and other stuff because no difference between the Corolla and M3
Wow! This model says that a $35k Model 3 would be $0.13/mile less expensive for a typical American/Canadian buyer than the worst, cheapest new Corolla money can buy. Game over.
The cheap Model 3/Y would still be a great car for most people who just want to get around in something safe, comfortable, affordable, practical and not too slow.
The economics look even more favorable if we compare to the small sedan segment as a whole (which is still the most affordable vehicle segment and is not the segment Model 3 is in) instead of a stripped-down, base $20k Corolla. For small sedans, AAA has estimated (link) the average nationwide cost in America is $7114/year, which works out to roughly $0.54/mile for a typical driver. Since the $35k future M3 has an estimated cost of $0.24/mile, or maybe $0.27/mile after accounting for the other stuff I didn't include, it would therefore have half the cost and be twice as affordable as economy sedans currently on the market. Make no mistake; this indicates an imminent hardcore economic smackdown against all ICE passenger vehicles on the market. We're talking about a cost per mile that's approximately equal to the subsidized price of a bus or train fare in an American city.
Can we make the economics even more compelling by shaving an additional $10k off via making a smaller car that's actually the same size as the Corolla? Yes, of course, but a $10k difference plus a slight improvement in energy efficiency thanks to the smaller size would reduce the total cost by around $0.04/mile, which would be around 15% of the already-low cost of the M3. That's not the gigantic difference I think a lot of people are expecting. Maybe there's a psychological benefit or marketing benefit to having the lower $25k price tag, but when owners of $35k 3s/Ys simply start talking to people they know about how much money they're saving overall (and they will do so), word will spread quickly enough. Consumers are also getting wiser over time thanks to the internet providing easy information for car shopping and total cost comparison.
At a certain point reducing the cost any further is kind of overkill. I mean, walking costs about $70 for shoe and sock replacement every 600 miles or so, which is $0.12/mile, which is only half the estimated cost of the $35k Tesla. And that's with a relatively frugal decision to keep using a pair of shoes that long. A lot of people replace at more like 300 miles, which would make for costs equal to a $35k Tesla. I think having costs as cheap as walking will be good enough for almost everybody.
What about vehicle size limitations? Outside the USA and Canada there is a whole world where 75% of all vehicles are sold.
True, but Tesla has limited production capacity, ultimately limited by battery supply. They have to decide how to allocate battery supply to maximize the rate of transition to sustainable energy. With clear advantages to focusing on USA/Canada from both a mission and profitability perspective, I think they will be able to sell tons of S3XYC vehicles for years to come without needing to resort to smaller cars for a while.
American/Canadian market advantages:
- Per-capita gasoline/diesel consumption that is quite high compared all other major markets due Americans/Canadians driving more average annual distance with worse average fuel economy, making this market a top priority for the mission
- Home of global headquarters for Tesla, SpaceX, Boring and Neuralink
- Most profitable light-duty vehicle market in the world
- Colossal subsidies for clean energy from the Inflation Reduction Act between now and 2032
- Market where Tesla's competitive positioning is strongest
- Home of Giga Texas, which when fully constructed and ramped up will be by far the largest and most productive vehicle manufacturing campus on Earth
- Also the home of Fremont to supplement output from Giga Texas
- Probably the future home of Giga Montreal or something else in the Great Lakes region, and/or maybe Giga Nashville or something else in the automotive states of the South
- A market with road and parking lot infrastructure big enough to easily accommodate S3XY + Cybertruck pretty much anywhere you might want to travel (Cybertruck can even fit in Manhattan if you avoid narrow alleys)
Also, that 19 million flow rate of new cars and light trucks was the result of a steady-state dynamic equilibrium in which new vehicles were mostly just replacing old vehicles that were being retired. The Bureau of Transportation Statistics (a US federal government agency) says that the US fleet size for these kind of vehicles has barely been growing at all in the 21st century. Below is a snapshot of recent years.
(Source)
So, we have a fleet of about 250 million ICE light-duty vehicles in the USA alone, and if the 17-2 ratio is a guide then we have probably about 30 million more in Canada for 280 million combined.
Is the dynamic market equilibrium likely to be disrupted by the arrival of massive BEV supply? Yes.
A phase-change transition will probably occur over about 15 years, with new dynamic properties during that time. This is not a mere substitution; it's a technology disruption. Customers will at some point start to get rid of their ICEVs earlier than planned and upgrade to BEV. The oldest vehicles in the fleet have the highest maintenance costs, worst reliability and worst fuel economy, making the benefits of swapping them for a new BEV relatively more tantalizing. A lot of people and organizations will be asking themselves why they should keep paying $1500 per year in maintenance and repairs and $2000 per year on fuel to keep old ICEVs running when a brand-new EV would be better and cheaper and receive a $7500 tax credit for US buyers that expires in 2032 . This could lead to a prolonged period of elevated demand for light-duty vehicles while the fleet switches to the new tech, although the magnitude of the hypothetical increase is very difficult to predict.
I will boldly attempt to estimate it anyway using napkin math.
With 280 million total vehicles in USA+Canada, there is quite a lot of potential for higher sales across many years. The historical replacement rate was about 19/280 = 6.7% or an average lifespan of 15 years per vehicle. If the desired average age of retirement for ICEVs were to cut in half to 7.5 years and the overall market grows another 10% like it had been trending before the disruption that's beginning now, then we'd have demand at current price points for replacing 13% of the fleet each year which would be ~42 million annual sales. Gee, that's a big pool of demand for Tesla to pursue with its measly 20M per year global production target for 2030.
To be clear, I'm not saying the supply for 42 million sales will materialize that quickly, but rather that the quantity demanded would be something like that at today's prices. When there's that large of a supply-demand mismatch, usually that means prices will rise to compensate and reduce the quantity demanded.
It looks to me like the US clean energy subsidies have set a strong incentive for Tesla to bias for growing faster within the American market in the next decade at the expense of other markets. The subsidies really are a game-changer. I haven’t kept up closely with all relevant government policies worldwide, but I'm not aware of other major markets with $11-12k subsidy for electric vehicles (Norway is not a major market).
~80 kWh battery * ($45/kWh Advanced Manufacturing Tax Credit + ~$5/kWh mineral tax credit) = $4k
$7.5 customer tax credit
Total: $11.5k subsidy
This is set up to be in effect until the end of '32.
With respect to 3&Y demand, this is not even counting the plenty of people in other parts of the world, notably China and Europe, who apparently still want 3/Y badly and somehow are making it work despite smaller roads and parking options. Otherwise the product wouldn’t be selling so well in these markets already.
2 for 1
Tesla did mention that they’re thinking of the next-gen car as 2 cars for the effort of 1. That point I hadn’t considered until yesterday and it might justify making a Model 2 before economics dictates so in order to scale faster. However, that’s still predicated on battery supply being available for it. The profit per kWh should be much higher for 3/Y. However, the total vehicles that can be produced per year with a finite supply of batteries and factories might be substantially higher with the Model 2. If so, that fact may outweigh everything I've written above when it comes to the strategy adopted by Tesla. On the other hand, Elon has mentioned in the past that the complexity and hassle of adding new models when they can't meet demand for existing models would actually slow down overall volume growth relative to just doubling down on what's already working. I will need to think about this aspect more. Solving autonomy could also greatly change the picture by incentivizing a rapid pivot to dedicated robotaxi models. What do you think?
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