Will electric vehicles ever be truly affordable?
Elon Musk just acknowledged something interesting, even though he didn’t actually say so.
He raised the base price of the Model 3 by almost $4,000 — to $38,990. Which is an admission — without formally saying it — that the $35,000 price point he promised for years isn’t tenable. That Tesla would lose money on each sale.
Which raises an important question. Several, actually. The first is: Will electric vehicles ever be affordable? And if not, how can they ever become mass-market vehicles? And if they can’t ever be mass-market vehicles, what is the relevance of their being “clean”?
Put another way, economics trumps politics. And mandates. People buy what they can afford.
And the economic truth is that most people can’t afford a nearly $40,000 electric car like the Tesla 3, or even a $30,000 electric car like the Nissan Leaf, which is the least expensive on the market. It costs twice as much as an otherwise-similar compact economy car without the electric drivetrain.
Unless the cost of gas doubles, it is unlikely the Leaf will ever save its owner any money, even if he never spends a cent on gas.
The $15,000 difference between the Leaf and the non-electric equivalent — a car like Nissan’s Versa hatchback, which starts at $12,460 — buys about 6,250 gallons of regular unleaded gasoline at current prices. That works out to about 218,000 miles of driving before the Leaf offers any economic advantage. It takes about 15 years to accrue 218,000 miles, or about five years longer than most people keep a car.
It is almost certainly longer than an electric car’s battery pack will last before it needs to be replaced — at a cost of several thousand dollars more. Electric cars remain specialty cars — not because they are electric but because they are expensive. They constitute about 1% of the market.
They cannot become mass-market cars until they become much more affordable, not just to drive but to own.
And that doesn’t appear to be forthcoming and may never be, primarily because of the cost of the EV’s most important component — its battery pack. Most EVs use lithium-ion battery packs and the materials (including cobalt and nickel) are inherently costly. Absent a massive reduction in battery costs, EVs will remain expensive specialty cars that happen to be electric.
But what happens when the market is flooded with high-cost electric cars for which there aren’t buyers?
This will happen in the very near future as every major car company ramps up EV production to meet government demands. These include “zero emissions” vehicle mandates that amount to electric car quotas that must be filled — even if they can’t be sold without giving them away.
Therein lies the rub. The market for electric cars is inherently limited by what people are able to pay for them.
Federal subsidies — especially the $2,500-$7,500 per car tax rebate — have shoved some of this under the rug. But the tax rebate was based on low volume, as an inducement to spur electric vehicle sales.
The rebate declines and disappears as EV production ramps up. Once a car company produces 200,000 EVs, the prospective buyer is no longer eligible for them. This just happened to Tesla, which is another way of saying that EVs are about to become even less mass-market.
Push is about to come to shove.