The 4 ways I’m going to look at the auto market is by looking at supply and demand, looking at each from a Tesla perspective and from the perspective of the rest of the industry. My gut feel going into this analysis was that all cars sold would be electric by 2025. I was wrong. Let’s look at why.
It is popular in many circles to think markets are all about demand, but classical economists had it right. There can be no economic activity without supply. That is called dreaming. People dreamt of electric cars for many years, but until Tesla and Nissan built cars that people could buy about 10 years ago, it was just a fantasy. So, for this thought exercise, I’m assuming the global auto market has slow growth over the next 5 years. We could have a big collapse for many reasons, including COVID-19, debt crisis, or autonomous vehicles encouraging people to ditch their cars and just take a robotaxi around. If any of those things happen, the transition to EVs will accelerate considerably compared to the following analysis. The base case is 100 million cars a year sold in 2025.
Tesla’s plans are pretty well known. As Elon laid out in an interview and I documented in this article, they plan to continue incredibly fast growth for a large company of 40% to 50% a year. It is somewhat unclear whether Elon is talking about just automotive sales or total Tesla sales, including Tesla Energy (residential and commercial solar and residential, commercial, and utility battery packs). Regardless of the answer, Tesla will produce around 5 million vehicles in 2025. At about 500,000 vehicles in each gigafactory and having about 10 gigafactories around the world, that is as many cars as they can hope to make.
This assumes Tesla is financially healthy and continues be successful in cutting a “deal” with each local/state/federal government that “wins” a Gigafactory.
The deal is always the same. The government works their butt off (by providing permits, arranging financing, and suppressing opposition) to make sure the factory can be built faster than anyone has ever done in the history of automotive manufacturing, and also some modest financial incentive.
In return, the location receives a huge boost to their economy. They don’t just get a large quantity of very high-paying jobs from Tesla. They also attract a great many suppliers that will also invest in the area. It will instantly remake the area’s image as a leading region for high-tech manufacturing.
Even with the advances in batteries we hope to hear about soon at Tesla’s Battery Day, I doubt the company will be able to grow much faster than this.
Watching the industry for the last 10 years, you can tell what everyone is doing by what concept cars they show at the auto shows and what factories they build. It is obvious that only a few manufactures are going all in on electric vehicles at this time. The current recession seems to have delayed some plans. I have not seen announcements that the rest of the industry is starting construction of 50 to 100 battery and electric motor plants to convert their present production to electric vehicles. Instead, they announce plans for cars and trucks, rarely with any volume commitments. So, even though I think we will have hundreds of decent EV models by 2025, if most of them only have production capacity of 10,000 or 20,000 a year, that will only be a few million vehicles out of the 100 million market.
Volkswagen has been consistent and clear on its message that it is using the diesel scandal as a chance to convince those within the company that it must pivot to electric vehicles or it won’t survive. They have not only invested in designing many electric vehicles for release over the next 5 years, but they have also invested billions of euros into building the plants to build these cars and securing the batteries they need. Their current goal is to produce 3 million EVs in 2025, which would be over 25% of their production.
I got a chance to talk with Volkswagen’s worldwide head of design, Klaus Bischoff, at the 2019 LA Auto Show. I started off the conversation asking why we should believe Volkswagen is serious about building electric cars, when all we have seen for 10 years is promises and concept cars. All we get is compliance cars. VW has been singing this song for 10 years and it is only at about 1% EV share. Klaus was ready for my aggressive question and replied with 3 very good points.
- VW has recently (only a week before I spoke to him in November 2019) announced $50 billion in investment in electric vehicle manufacturing! That is not just happy talk — that is putting your money where your mouth is!
- VW has a detailed plan to roll out a whole line of affordable electric cars. They have 3 announcements for each car now and these are not just concept cars with no plans for building them. These are volume cars that will be the backbone of the company. He emphasized several times that these cars would be affordable to VW’s existing customers — not knocking Tesla, but differentiating their strategy.
- He explained that it is very difficult to change the direction of a large and established company like Volkswagen. Even when top management is committed to a new direction, many different stakeholders — like unions, employees, shareholders and the communities they presently have factories in — are all affected by this massive change and have to be consulted and convinced to change direction. I came away with a deeper understanding of the difficulties VW faces. I emphasized my sincere belief that no matter what the difficulties, VW has to rise to the challenge and make the transition or they won’t survive. I told him the media will be watching and if they deliver on their promises, I will be happy to sing their praises and promote their vehicles in my articles, but if they decide to retrench and just produce more gas and diesel cars, then I will remember their promises and criticize the company for breaking them.
General Motors and Ford have some exciting electric vehicles coming in the next 5 years, but according to my forecast, all their trucks, SUVs and cars (they barely make any cars anymore) that they sell domestically will add up to 320,000 units, or 6% of their production, in 2026. That’s less than what I expect Tesla will sell of several different models that year (Model 2, Model Y and CyberTruck).
Now, to be fair, that is just their North American plans. Mandates in China that they make 20% of their vehicles electric will mean that most of their most advanced vehicles will be sold there first. The euro zone has a more complicated set of standards that look to encourage automakers to make 15% of there vehicles electric by 2025. In both China and the euro zone, you can meet the goals with either fully electric vehicles or a larger number of plug-in hybrids. For all the companies except Tesla, it seems the strategy is to do just enough to meet the requirements to sell cars in the region without huge fines. Some companies like FCA plan to do even less and just pay others for the credits.
For demand, I will talk about how consumers decide what cars to buy. I like to imagine they all sit down with a spreadsheet and analyze all the variables, but the truth of the matter is only about 1% of the people are like me. For most people, they buy what they are familiar with (same brand) with a small chance that a friend or ad convinces them to try something different.
Tesla has a lot of demand levers, but the two biggest ones I’m going to talk about here are its referral program and cost reductions.
1. We have written a lot about Tesla’s referral program, because it is Tesla’s main way of promoting its vehicles. It was originally intended to just encourage Tesla owners to show their cars to their friends and family (not that owners need much encouragement, since most Tesla owners love to talk about their cars). It ended up encouraging the creation of a lot of YouTube channels, too.
Even as the rewards for the referral program have diminished (no more free Roadsters for 55 referrals), there is no lack of Tesla content on YouTube. Apple still has plenty of people covering their products without an referral program. Although the global industry spends about $35 billion a year on ads to sell 86 million cars, which is about $400 per vehicle, I think Tesla can continue to grow at its current rate as owners just show their cars to their friends and family and get organic publicity from YouTube, Twitter, and Facebook stories.
If Tesla wanted to grow faster than 50% a year, it might need to do some advertising, but since it can’t build factories any faster, the company might as well stick to its existing strategy.
2. Tesla’s cost reductions are unique in the automotive industry.
Perspective: You look at the big success stories in the industry over the last 50 years and they look nothing like Tesla. Let’s take Toyota and Honda. They both made small economical cars and broke into the market when GM, Ford, Chrysler, and AMC in the 1970s just couldn’t make a decent small car. The Ford Pinto, Chevy Vega, Dodge Horizon, and AMC Pacer were all trying to compete with Toyota and later Honda, which made more reliable and comfortable cars. Then, from the ’80s till today, Toyota and Honda have gradually increased market share and moved their cars gradually upmarket. Making the Lexus and Acura brands helped in that move. Hyundai and Kia have the same playbook, but started a few years later.
They all make good cars (IMHO), but their average “all new” model introduction is to make a car that is a little bigger, a little safer, a little faster, and a little more economical than the model it is replacing, at a little higher price. Once you adjust for inflation, cars cost about the same as 35 years ago. I bought a 1984 Toyota Corolla new for a little more than $6,000 (equivalent to $14,806 today). A new Corolla now starts at about $19,000 and is rated at 31 combined MPG, while the 1984 was rated at 29 combined MPG. Now the Corolla is faster, much safer, and more luxurious, but it hasn’t really changed markets.
Tesla, on the other hand, has changed its target customer. Tesla in only 10 years has gone from selling cars to the wealthy at over $100,000 a car to the Model 3 and Model Y, which are entry level luxury cars that middle class people can afford with a small stretch. Their low depreciation, maintenance, and fuel costs lower their total cost of ownership to reasonable levels even without subsidies.
As Tesla dramatically lowers the cost of its batteries over the next 5 years, I expect the company will ship a “Model 2” at $25,000 in 2022. If Tesla doesn’t have robotaxis widely approved by 2024, I expect the company to drive costs further down by introducing a “Model 1” for about $15,000 in 2024 or 2025. Just like the Model 3 had 90% of the Tesla Model S goodness for 50% of the Model S price and the Model Y has 90% of the Model X price, I expect the Model 1 and 2 to offer the Tesla experience with few compromises to millions of customers who just can’t afford a $40,000 Model 3 or Model Y.
Keep these future models in mind when we discuss the rest of the industry. They won’t be competing with the Model 3 designed in 2016 in 2025. They will be competing with the Model 1 and 2 designed closer to 2025.
With Tesla’s extremely high customer satisfaction ratings, it won’t be hard for Tesla to sell a lot more cars as it reduces prices. People like me who have one Tesla would quickly buy one for each member of the family if they are available for $15,000 or even $25,000 instead of the $60,000 I spent on my Model 3. Of course, this is in addition to all of the other families around the world who don’t own a Tesla now but would love to buy one if they could afford it.
I think there will be a lot of competitors that fail in making the transition to the EV space. It will be very tough to compete with Tesla since it not only makes a very good product but it also learning to make vehicles very cheaply. Tesla doesn’t plan to just milk profits from its cars, but to continually lower prices to drive the cars into additional markets. This is common in electronics markets, like the flatscreen TV market, but isn’t the way things have been done in the slow-moving auto industry, where, before Tesla showed the industry how it can be done, it was normal to take 3 to 5 years to build a factory or to create a “new” model. I put new in quotes because a new model was typically a small revision to an old model and not all new, regardless of what the commercials say.
I think Volkswagen’s EVs will sell well because they have designed a great performing line of products that look great. The will have to prove they can scale production and work through their software issues.
GM, Ford, and the others should be able to make compelling EVs that will appeal to those who don’t like Tesla. I explained previously why I think Ford has a winner on its hands with the Mustang Mach-E. We have to realize that the other manufacturers can have big hits without hurting Tesla. The market is expanding so quickly that it will have lots of room for all competitors. People are starting to realize that they can afford the benefits of an electric car they thought they would never be able to afford. Not everyone likes the techy/geeky image of Tesla, and many people will buy other vehicles that are technically inferior to the competing Tesla just because they don’t relate to the company. The same thing has been going on forever with Ford and Chevy trucks. People buy one or the other because their family has always bought Ford (or Chevy) trucks.
As we get to 2024, I think the non-Tesla automakers will start to suffer from an Osborne effect. They will have too much demand for their EVs as everyone realizes the benefits only a few people realize today. Charging stations will be available everywhere and gas stations will continue closing down. Range anxiety will be the term gas and diesel owners use to describe their worry about whether they will be able to find stations to fuel their vehicles (more in Europe and China initially, but eventually in the US). Automakers will try to expand their production of EVs, but since they don’t have the battery supply to do so, they won’t be able to. They will invest more so they have batteries in 2030, but by 2025, they will be severely limited.
I started this article thinking that all auto sales by 2025 would be electric. I had seen that none of the analysts thought it would transition that quickly, but I thought once people experienced what Tesla has done with the Model 3, they would change their plans and convert their factories. As you can see by my discussion above, I was overly optimistic.
I now think we will have about 5 million Tesla sales and about 5 to 10 million non-Tesla EV sales in 2025. I do think that everyone will realize by then that EVs are better, but they just won’t be able to make them. I also think the industry has some great ideas on how to satisfy customers who want EVs but can’t get them. They will “trick” them into buying an “electrified” vehicle. This means a hybrid or plug-in hybrid. This isn’t all bad because this is all they can do since they don’t have enough batteries for EVs. We will have to wait till 2030 for the industry to fully convert.
I know many think it will take till 2040 or 2050, and it may, but I still think once you get to the tipping point where it is obvious to everyone that EVs are better in all use cases (which I thought was this year, but people are slow to realize this, so I now think it will be 2025), it should only take 5 years to build the factories to satisfy the demand.