Economics just might kill the EV dream
Report that Tesla may abandon its affordable Model 2 poses dilemma for North America
Well, didn't Reuters set the wolf loose in the henhouse last month? Or, more accurately, didn't its Exclusive: Tesla Scraps Low-Cost Car Plans Amid Fierce Chinese EV Competition make the decisions facing those tasked with enforcing the world's electric-vehicle mandates just a tad more epochal?
For those who missed it, Reuters reported that, according to three sources close to the company, plans for Tesla's long-promised US$25,000 Model 2 have been “cancelled,” the company's focus instead reverting back to Elon Musk's dream of self-driving taxis.
The blogosphere — or at least that part of it reserved for the polemics of electric-car adoption — blew up. Electrek, true to form, rushed to Musk's defence, doubling down on its “you can't trust the media” narrative, an incredible hypocrisy given the generous kickbacks that chief editor Fred Lambert — the source of that quote — has received for all his fawning coverage of Tesla.
Cleantechnica, usually a Musk supporter, on the other hand, took Tesla to task, noting “Elon always said he had a master plan and we believed him. But now it seems he has no credible plan at all.” If there's been one common theme to the discussion on the axing of the Model 2 so far, it is that it has, like coverage of so many subjects these days, been woefully devoid of nuance.
Musk, meanwhile, seems nonplussed. Worse yet, he seems distracted. As Barron's reported, last week's shock announcement that first-quarter sales plummeted — the announcement that started this recent stock swoon — resulted in no fewer than 52 angry Musk tweets. But according to author Al Root, only two were about the EV maker's failing demand.
Instead, his juiciest missives were reserved for politics, immigration and wokeness. “Even tweets about Disney topped tweets about Tesla,” said Root. When your Twitter spat with a CEO — in whose company you have no monetary investment — takes precedence over the fact your own US$500-billion company just took a dramatic nosedive, it's appropriate for analysts to wonder whether you're engaged enough to make informed decisions about its future. And tweeting a brief “Reuters is lying (again)” (in response to the Model 2 report) is hardly a rallying cry likely to sway skeptics.
Much has been made of the folly of Tesla reverting to its robo-taxi dreams. Much of it is legitimate. For one, Musk has been promising that Full Self Driving's future is imminent since at least 2016, with little evidence the technology is yet ready for prime-time. Technological experts decry Tesla's lack of lidar sensors, and the multiple safety investigations into automatically piloted Teslas seem to be gathering steam.
Lost, for instance, in the maelstrom of Tesla turmoil this last week is news the company settled its lawsuit with the family of Apple engineer Walter Huang, which stemmed from the fatal crash of his 2017 Model X driving into a barrier when it was being steered by Autopilot.
Indeed, even a generous recounting of Full Self Driving's safety history would conclude it has not been nearly the flawless transition to computer-driven automobiles we've been promised. More importantly, there's little indication self-driving cars will generate the billions of dollars Musk seems to be constantly promising. As Philip Kooperman, a Carnegie Mellon University professor working on autonomous vehicle safety, told Automotive News, “Everyone else has found out that what they thought was a two- or three-year project turns out to be a 10- or 20-year project. Tesla's found that out, too.”
Even factoring in the slowdown in the EV market and the price cuts that have been largely blamed for TSLA's drift downward, the fact that robotaxis seem no closer to mass adoption is at least part of the reason Tesla's market cap is less than half of what it was two years ago.
All of which makes any notion of the Model 2 being cancelled or even delayed problematic. Even if Musk does somehow pull the robo-taxi rabbit out of his hat, the profits promised would seem at least a decade away. A cheap electric vehicle, on the other hand, is the here and now. Indeed, an affordable battery-powered offering has always been the cornerstone of not just Musk's promise of producing 20-million cars annually by 2030 — twice the number market leader Toyota sells today, by the way — but the entire EV revolution. No matter how headline-generating they may be, US$262,500 Cybertrucks are not the road to mass adoption.
And, judging by the slowing pace of EV sales growth around the world, we're running out of early adopters willing to foot the price premium that driving electric demands. More to the point, after factoring out all the hype about Tesla being a tech company — recent discounting and the use of advertising for the first time in its history should put paid to that delusion — and not a car company, the reason TSLA stock commands price-to-earnings ratios four to eight times more generous than legacy automakers is because everyone always assumed Tesla would reach price parity with ICEs first.
If Tesla has given up on the Model 2, that upsets all manner of apple carts. The road to 100-per-cent ZEV adoption, as Canada has mandated, is nigh on impossible without an affordable battery-electric. And on the heels of that, if the industry leader can't conquer the US$25,000 barrier, then who can?
Oh, a few, like Renault and General Motors, have claimed they will soon offer cheap and cheerful zero-emissions vehicles, too, but Twingos won't sell in North America, and GM has completely bombed the building of its first in-house Ultium-powered SUV so why would anyone believe that automaker could build a workable, cheap EV? (The Equinox blew right through GM's original “around US$30,000” estimate.)
If we have to wait for legacy automakers — be they American, European or Japanese — to produce a US$25,000 (without subsidies) BEV equivalent of a Honda Civic, then our planned conversion to 100 per cent ZEVs is going to have to wait well past 2035. Hell, even with the generous subsidies we're throwing at them, they can't seem to do it.
But the Chinese can. In fact, as has been documented here and elsewhere, they already are. Their advantage in the production of low-cost electric vehicles is reported to be as great as US$15,000, more than even the richest governments can hope to counter with subsidies.
The reason, says my friend Steve Levine of The Electric, is the cost of a CATL lithium-iron-phosphate (LFP) battery built in China is about US$75 per kilowatt-hour, roughly half the cost of a lithium-nickel-manganese-cobalt (NMC) battery built in America. That would make China's advantage, for the time being at least, insurmountable, even with the Inflation Reduction Act's generous $45/kW subsidization for local battery production.
That advantage, thinks Peter Ramsay, is already looming large in Europe, where China's invasion is causing panic in Germany, France and Italy, whose economies depend on auto manufacturing.
According to the editor-in-chief of EVinFocus, the automakers are taking a more “dovish” approach to competition from China, hoping their co-operation with Chinese automakers can help them reduce their manufacturing costs.
The real meat to Reuters' recent missive, then, is that, if it is true that Tesla can't build a cheap BEV, we may all have to choose between an electric revolution (fuelled by cheap Chinese EVs) or a healthy domestic auto industry. It's a question that everyone — from politicians to voters and car company CEOs to environmental activists — will have to ask themselves. And that is a much bigger story than wondering whether Tesla can hit its stock-market projections with robo-taxis.