Tesla must launch cheap EVs but Musk’s talking of robotaxis
Autonomous cars are still a dream but Tesla’s sales slump is real
At this year’s China Development Forum (the highest-level annual meeting between senior Chinese policymakers and top CEOs, current and former policymakers, and academics like me), the discussion focused squarely on the risk of China falling into the dreaded ‘middle-income trap.’ After all, few emerging economies have successfully joined the ranks of high-income countries.
Will China be an exception to this pattern? Following 30-plus years in which China achieved annual growth rates close to 10%, its economy has slowed sharply this decade. Even last year, with a strong rebound from the “zero-covid” era, officially measured growth was only 5.2%. Worse, the International Monetary Fund estimates that China’s growth will fall to 3.4% per year by 2028, and, given its current policies, many analysts expect its potential growth rate to be only 3% by the end of this decade. If that happens, China will indeed find itself in the middle-income trap.
Moreover, China’s problems are structural, rather than cyclical. Among other factors, its slowdown is due to rapid ageing, a burst real-estate bubble, a massive overhang of private and public debt (now close to 300% of GDP), and a shift from market-oriented reforms back towards state capitalism. Credit-fuelled investment has grown excessive as state-owned banks lend to stateowned enterprises (SOEs) and local governments. Also, Beijing has been bashing China’s tech sector and other private enterprises, eroding business confidence and private investment.
In this new period of de-globalization and protectionism, China appears to have hit the limits to export-led growth. The West’s geopolitically motivated technology sanctions are constraining the growth of its high-tech sectors and reducing inflows of foreign direct investment (FDI); and the combination of a high domestic household savings rate and low consumption rate (owing to weak social insurance and the low share of household income) is further hampering growth.
The old Chinese growth model is broken. Initially, China’s low (and thus internationally competitive) wages meant it could rely on light manufacturing and exports, before pursuing massive investments in infrastructure and real estate. Now, Chinese authorities are advocating high-quality growth based on technologically advanced manufacturing and exports (electric vehicles, solar panels and other green- and hightech products) led by financial incentives to already-bloated SOEs. But without a matching increase in domestic demand—especially private consumption—over-investment in these sectors could lead to over-capacity and the dumping of these products in global markets.
China’s excess supply (relative to domestic demand) is already producing deflationary pressures, heightening the risk of secular stagnation. When China was smaller and poorer, a sharp increase in its exports was manageable in global markets. But now that it is the world’s secondlargest economy, any dumping of its excess production will be met by more draconian tariffs and protectionism targeting Chinese goods.
China therefore needs a new growth model concentrated on domestic services (rather than goods) and private consumption. Services as a share of GDP are too low by global standards, and though Chinese policymakers continue to talk about boosting domestic demand, they seem unwilling to adopt the fiscal and other policies required to boost private consumption and reduce precautionary household savings. The situation demands larger pension benefits, greater health-care provision, unemployment insurance, permanent urban residency for rural migrant workers who currently lack access to public services, higher real (inflation-adjusted) wages, and measures to redistribute SOE profits to households so that they can spend more.
While China obviously needs to boost privatesector confidence and revive growth with a more sustainable economic model, it is not clear that Chinese leaders fully appreciate the challenges they face. While President Xi Jinping has overseen the move back to state capitalism over the last decade, Premier Li Qiang, a known marketoriented reformer, appears to have been sidelined. Li neither held the customary press conference following the recent National People’s Congress, nor met with the full foreign delegation at the latest China Development Forum. Instead, Xi himself hosted a smaller delegation of foreign business leaders.
The most charitable interpretation of these signals is that Xi now realizes he needs to engage the private sector and international multinational corporations to restore their confidence and boost FDI, private sector-led growth and private consumption. Since Li is still around, perhaps he is pushing quietly for “opening-up and reforms,” while keeping a low profile to show deference to Xi.
But many observers have a more pessimistic interpretation. They note that after sidelining market-oriented technocrats such as Li, former Premier Li Keqiang, former People’s Bank of China Governor Yi Gang, advisers like Liu He and Wang Qishan, and a variety of financial regulators, Xi has created new party panels on economic and financial affairs that supersede government bodies. He has surrounded himself with advisors like He Lifeng, the vice-premier for the economy, and Zheng Shanjie, the new head of the National Development and Reform Commission, who are sympathetic to the obsolete dogma of state capitalism.
Lofty statements and mantras about reforms and attracting foreign investment mean little. What matters are the actual policies that China pursues over the next year, which will show whether it can circumvent the middleincome trap and return to the path of more robust growth.
The great thing about X, the rebranded Twitter owned by Elon Musk, is its frictionless capacity for escalation. Let’s back up to several hours before that post on what was a bizarre Friday even by the standards of Tesla and its chief executive officer. Late that morning, a story, citing several unnamed sources and internal messages, reported that Tesla has scrapped plans for a cheaper electric vehicle (EV) dubbed ‘Model 2.’ Tesla’s stock dropped by more than 5% in short order. Soon after, Musk replied to a tweet noting the story, accusing the news agency of “lying (again).” The stock made back some lost ground, but still ended the day down 3.6%. Less than an hour after that, Musk tweeted again with an announcement. Tesla’s stock jumped in after-hours trading.
I cannot speak to the accuracy of the
piece; Musk’s accusation of lying came with no specifics. His reaction as a whole is interesting, though.
Tesla walking away from the low-priced EV model would be a bombshell; hence the immediate drop in the stock. Only on Tesla’s last earnings call, in late January, Musk had provided a tentative date for first production in the second half of 2025, saying of the low-cost project that “this is really going to be profound, not just in [the] design of the vehicle itself, but in the design of the manufacturing system.”
Moreover, gathering evidence of a slowdown in Tesla’s sales, culminating in shockingly weak figures for the first quarter released last week, points to the need for a cheaper model that could expand the company’s market meaningfully. Any other company faced with a media report calling into question one of its biggest strategic initiatives might be tempted to issue a detailed rebuttal rather than just a one-line tweet from the boss, but Tesla is different.
More intriguing was Musk’s upping the ante with that later tweet promising a robotaxi reveal in 125 days. For one thing, the story reported that a big reason for ditching the low-cost EV was to focus resources on developing a Tesla robotaxi. I like to think that if I wanted to demonstrate that a story claiming I had ditched my plans for a cheap EV in order to build a robotaxi was incorrect, I would avoid that same day suddenly announcing the imminent unveiling of a robotaxi.
There is much context to consider. Friday’s drama closed out a bad week for Tesla. The big miss on sales, below even the lowest analyst forecast tracked by
tees up not just a poor set of first-quarter results but also, potentially, a year where sales either barely grow or actually drop—a big problem for a growth stock. Musk, in his own way, forewarned of the miss by previously announcing a big push on upselling buyers to Tesla’s full self-driving (FSD) system; signalling a need to support sagging margins, explain slower sales and, perhaps above all, keep investors focused on the company’s touted artificial intelligence chops.
The mooted robotaxi unveiling is in keeping with this. Musk has been claiming that a Tesla robotaxi—meaning a vehicle that can safely drive itself while the user snoozes or tweets or whatever—is around the corner since at least 2016, including a rousing analyst day dedicated to the theme in 2019.
It is 2024 now and full self-driving, despite the name, is decidedly not that; Musk even felt the need to caveat it with a “supervised” in the recent tweet announcing the big push on sign-ups. However, the idea that Tesla will crack autonomous driving is the key to having its stock trade on a tech-like earnings multiple north of 50 times, rather than closer to a Detroitlike 5 times. That is especially so when Tesla is doing distinctly Detroit-like things, such as offering discounts to clear a swelling backlog of inventory.
I have no doubt that something will be unveiled on 8 August. As with Musk’s riposte to the original story on Friday, his after-market announcement lacked details. Perhaps, finally, despite all the false starts and missed deadlines, Tesla will reveal a car that can actually drive itself from Los Angeles to New York and then park itself—a vision Musk touted when Barack Obama was still US president. Perhaps not. Maybe it will be something else. Unveiling the physical design for a robotaxi—pending the actual roll-out of fully autonomous capabilities and regulatory approval, you understand—is also one potential outcome.
For the Tesla faithful, that could be enough. For everyone else, it might be worth remembering that Elon Musk has been known, at a moment of stress on Tesla and himself, to tweet the odd grandiose, less-than-concrete claim. Robotaxis secured?