Published on August 8th, 2020 | by Paul Fosse0
How Tesla Could Use Its Financial Strength To Drive MASSIVE Demand For Electric Cars — $87/Month Lease?
August 8th, 2020 by Paul Fosse
In this article, I’m going to discuss an idea I came up for Tesla to dramatically increase demand for their cars after I watched a certain YouTube video and did some more research. Let’s start with the video.
This is a good video by Casgains Academy and I recommend you spend the 6 minutes to watch it yourself. If you don’t have time to do that, the key points are below.
- COVID-19 has been a huge boon to Tesla. Tesla has been able to maintain sales and profits while almost everyone else has lost massive sales and gone from profits to huge losses. Why?
- Dealers are a huge expense of other automakers, and the current pandemic has people hesitant to go to a dealer. Tesla has a few showrooms (unclear if that will change after the pandemic) but was already set up with a fully online and mobile sales process that we sing the praises of here.
- Loan interest: Tesla recently sold a bond with the top possible rating, AAA, allowing it to only sell the bond at extremely low rates, the largest part at 0.56%. Ford recently was downgraded and had to pay 8.5% to 9.625% interest for the $8 billion in bonds it felt it needed to sell to get it safely through the pandemic. If Ford was able to borrow at Tesla’s interest rate, my back-of-the-envelope math suggests it would save $640 million a year! ($8 times 8% savings.) Generally, this will make it hard for all legacy automakers to be able to afford to invest in the transition to electric vehicles.
- Other manufactures are losing sales in China as Tesla is gaining massive share in China. For example, GM International lost $270 million in Q2 2020 even though it has 27 plants open and no clear effect from the pandemic. We recently reported that Tesla has rocketed to the top of the Chinese EV charts, and with the highly desirable Model Y poised to begin production, this trend is likely to continue.
- Tesla’s financial strength means it has the money to upgrade its production facilities to increase production and lower costs during this difficult period. Tesla even built another “tent” to build the Model Y, ignoring the mocking it received 2 years ago for the unconventional building (technically, it’s a sprung structure, not a tent). Here is our more favorable coverage of the innovative structure. Tesla has also added space to allow Tesla to pilot its battery manufacturing.
Be sure to check out our article series on “7 Reasons Why Tesla Well Benefit From The Crisis.” This is all possibly great news for Tesla, but what does this have to do with increasing demand for its cars? Well, that is an idea I had which hasn’t really been discussed that was inspired by the video above.
What If Tesla Used The Combination Of Its Low Borrowing Costs & Low Depreciation To Lower Monthly Payments?
On the night of the earnings call, I wrote an article on Tesla Leasing. In that article, I mentioned that Tesla has been cautious about leasing its vehicles as opposed to other luxury automakers who use leasing to boost sales considerably. I wrote about how Tesla’s relatively poor financial condition in the past was the main reason for discouraging leasing and how Tesla’s recent strong financials could allow the company to expand leasing. At that time, I didn’t realize how far Tesla could take it.
I don’t expect Tesla to take these steps until it massively expands production, since Tesla is famous for saving demand levers until it needs them. I expect we will hear some impressive news at Tesla’s battery and power train day on September 22 that will cause many people to say, “if they make THAT many vehicles, where will they find all those buyers.” I’ll try to answer that question below:
- Sales generate sales. I’ve been a big believer that when someone in your friend and family group gets a Tesla, they are very likely to talk about how great it is continuously until their friends conclude that either the car might be something special or the new Tesla owner has gone completely crazy, or both. But that approach has its limit. As I learned in economics courses, demand has two components — you need to #1 want the product and also have to have the #2 ability to pay for the product. I get a lot of people excited about owning a Tesla, but it is still too expensive for them to buy if they are driving an 8-year-old Honda Civic with a $99 a month payment.
- Tesla is continually working on optimizing the “machine that builds the machine” to make it more efficient. Even its first Model 3 factory in Fremont will start to get some real advantages as its equipment becomes fully depreciated and is still useful for building cars. Elon said 2 years ago in an interview with YouTube star Marques Brownlee that in about 3 years Tesla could make a $25,000 car. So, assume they can either reduce the cost of the Model 3 by that much in the next year (unlikely) or come out with a smaller vehicle that they can make for less than $25,000, so they can sell it profitably at $25,000.
- We have written frequently about how well Tesla cars hold their value, most recently here and here. For example, in the first year (the year that cars traditionally lose the most value), the Tesla Model 3 only lost 5.5% over a comparable new car. Over a 3 year period, it might only drop by 15% or 20%, versus the 42% the average car depreciates or the higher rates of deprecation for the BMW and Mercedes vehicles it competes with.
Before I explain the shocking price that Tesla could offer, I thought I’d pull up a car I’m familiar with since I own a 2015 Hyundai Elantra. This is a very affordable car, and although it missed this list of the 10 cheapest cars for sale in the US by $810, it might make the list next year since I was recently shocked that the Honda Fit and Toyota Yaris cars on this list are being discontinued. I liked both of those cars.
I was as shocked as you must be that when you plug 3 pieces of known information into a lease calculator, you get a shocking result! A $87.18 a month lease for a new Tesla would blow many minds! It doesn’t take much imagination to realize that offering a car as desirable as a Tesla at a monthly cost slightly more than half the cost of the most affordable lease offered on the website of one of the most affordable cars would drive a stampede of demand.
We know Tesla is working on a cheaper car. We know that Tesla cars hold their value better than other cars. We know that Tesla is in a strong financial position. Put those 3 things together and it appears that when Tesla is ready to pull the ultimate demand lever, it should be able to offer a lease that nobody else can match — and, frankly, even your brother-in-law who is driving an 8-year-old Honda Civic with a $99/month payment will find it irresistible!
This doesn’t even touch the many other cost advantages of electric vehicles that we frequently cover in our Total Cost of Ownership articles.
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