It would seem that some people think an affordable Tesla compact is coming in 2024, at a price
point of $30,000.
Some stock analysts even think this is necessary in order for Tesla to continue their substantial
growth.
In this video we will explore the economics of Tesla offering an affordable Tesla, along
with the supply side, and judge what the chances of that occurring might actually be.
SUPPLY I mean we know there is going to be plenty
of demand for, what people are saying a $30,000 affordable Tesla, but economics doesn't just
focus on demand, there is also supply.
Just a lot of businesses most of the time don't struggle so much with supply, and it
is more a demand issue, and want more customers and advertise in order to get more customers.
Tesla is not even at the advertising stage yet.
They are still just going by word of mouth, in a fairly new industry, that the average
consumer still doesn't actually understand that well.
I think in our community, because we understand EVs so well, and are in an echo chamber, we
don't realize how much less everyone else realizes about Teslas or EVs in general, I
still hear so very old FUD come out when I talk about it with some people.
But like I said, there are enough people already who do understand enough, and are willing
to buy a Tesla, because their neighbor has shown them their's.
However, Tesla are building more and more factories, and we would hope that eventually
at an exponential rate too.
But Tesla can't build factories if they can't make cars with all the necessary ingredients,
namely batteries.
LFP Now what battery cells will this affordable
Tesla be using.
4680 cells cost less to Tesla than CATL's LFP cells, at least when 4680 is in full effect.
PROFIT PER KWH I have often talked about Tesla trying to
generate as much profit per kWh as they can, and a lot of you immediately understood what
I meant by this, as it makes for good business.
Tesla are limited by battery cells, a battery is a store of energy measured by kWh.
Tesla has a scarce number of kilowatt hours.
A Model Y Performance sells for $70,000, whereas a Model 3 Performance sells for $63,000.
The Model Y may only cost slightly more than the 3 to build, what with gigacastings.
So perhaps each Model Y makes $5,000 more profit per vehicle.
As a result at a rough guess the Model Y is getting about 17% more gross profit per kWh,
of course when that goes through the rest of the financials it likely comes out close
to 25% improvement in operating margin.
OPPORTUNITY COST Therefore if Tesla were to build an affordable
EV, every kWh that went into that vehicle would have an opportunity cost of being deployed
in a higher value car.
I know people will say but the compact version will have a smaller battery.
But even if had a battery as small as 50 kWh, then would that make a difference?
Well let's say that Tesla have managed to get the cost of this compact Tesla down to
$20,000, and the price is $30,000.
Then we are looking at just $200 profit per kWh.
That is not good business.
DEMAND But wait, Tesla shouldn't care about profits,
they have a responsibility to just get as many EVs out there as fast as possible to
transition the world to renewable.
Well that is one massive project and will cost a fortune, Tesla need a lot of capital
for that.
On top of that though, there is the natural demand of such a car, what good is it, if
the waiting list ends up being 5 years for such a desired vehicle.
The thing is, think how much demand a $30,000 Tesla would have, 5 million a year, 10 million,
probably 20 million.
Oh but that would be 25% of the new car market, sounds unlikely.
Sure, but it won't just be new car buyers wanting one, but used cars buyers too.
The average used car price in the US was $33,000 for a start.
Then you factor in all the other cost savings of a Tesla, it becomes a lot cheaper than
that.
So who knows, perhaps this car would break some sort of rule of supply and demand, and
even end up at demand for 50 million a year.
So many people can make enough sacrifices to spend $30,000 on a Tesla, when they instantly
save thousands of dollars a year on gas, servicing and maintenance.
Oh wait, and $7,500 tax credit, so it's almost free after all the savings.
MODEL 3 But if the Model Y has hit saturation, and
finds the correct market clearing price, where supply meets demand optimally for the highest
amount of profit, then Tesla would need to increase demand somehow with a new a model.
On the assumption that Tesla has not cracked FSD and demand has not gone through the roof
again due to people now wanting an AV, on top of an EV.
Well we talk and hear so much about the Model Y, that the little old Model 3 is often forgotten.
Yes, remember how popular that car also was?
Perhaps with this next North American factory and Texas the Model Y is approaching close
to 2m sales just in the US, highly possible thanks to the tax credit, and potentially
a slight price drop, but probably not necessary, of course the 4680 Model Y is going to be
so amazing demand will increase for that, I still think that is under rated alone, its
going to be an exceptional vehicle.
Well then, what if this new factory and Texas also have have a Model 3 factory, using 4680s,
structural pack, front and rear castings, and whatever else Tesla have come up with
by then, as they are continually improving, and re-inventing.
TIMELINES Ramping up the Model Y supply to meet demand
in North America alone is still going to take until probably 2024, and the Cybertruck on
top of that.
So Tesla wouldn't even really wouldn't need to find additional demand until about mid
2024.
But this would still have the US Model 3 at around 200,000 sales a year, using old manufacturing
processes.
Therefore Tesla wouldn't even need to focus on Model 3 demand until that time.
With the new techniques, they likely have a Model 3 cost down to perhaps $20,000.
If it had a price starting at $40,000 then that's 50% gross margin.
Of course the actual price to consumers would only be $32,500.
ECONOMY Maybe it's the economy though, if we are in
a recession or depression, then people simply can't afford $60,000 on a new Tesla, and $30,000
may be the right price point.
But bear in mind these analysts are saying mid 2024, that's 2 years from now.
For one, we would hope to be out of whatever economic slump we see by then, and secondly,
it would take Tesla years to even ramp up, so probably couldn't get close to any sort
of demand until 2026, by which time we would certainly hope to be out of a recession.
Therefore this is not a product necessary for a recession, as it will be simply be too
late.
ROBOTAXI Elon has said the next vehicle will be the
Robotaxi, however, this doesn't mean the compact might not be the same vehicle potentially.
The reason the Robotaxi may indeed take precedence over a potential Model 3 expansion, is because
nothing is more profitable per kWh than the Robotaxi.
On top of that, as it can potentially replace 5 ICE cars, it has a much larger impact on
transitioning the world to renewables.
It's good that from an investment stand point, that things that have the most effect on the
mission, also are the most profitable.
FSD I don't think Tesla are going to be pushing
out this affordable version until they have the supply, and FSD adoption is really high.
If Tesla can generate $2-300 a month income from FSD from these vehicles too, then they
suddenly become vastly more profitable.
That $10,000 profit could be closer to $50,000 per vehicle if we assume FSD subscription
over perhaps 20 years.
MARKETS However, we do hear that compacts are a lot
more popular in the other markets like Europe and Asia.
And perhaps China is supplying enough LFP cells for Tesla to actually make enough of
this compact version Tesla for these markets.
It would not enter the US though.
And it would not be as an opportunity cost for any of the other vehicles.
It would require a massive expansion in Shanghai and Berlin, as there would still be demand
for 5 or 10 million of these a year.
Perhaps in a couple of years China really could be making that many cells that this
is possible.
Remember though, if Tesla are purchasing cells from China, then it is less profitable than
their own in-house cells.
These cells could equally be used in a Model 3 RWD or Model Y RWD, and Tesla could reduce
the prices of those models to create more demand.
However, I think that even if Tesla did launch a compact in this market, it may start at
a price point more like $35,000 as they expand supply.
But even so, Tesla would still need massive factories to cater to that much demand.
SUMMARY So to all those analysts out there, pushing
for Elon to launch and affordable compact for consumers, then it doesn't make sense.
The only scenario I see it occurring is in the Euroasian markets, they don't have the
same subsidies as the US.
There may be an abundance of LFP cells that Tesla doesn't want to use in the US, especially
if it means they are not eligible for tax credits.
So it's a possibility for markets outside of the US, but I don't think it will be quite
affordable as people expect, at least not to start with.