When you heard or read that Elon Musk claimed the Tesla Model Y was going to be the world’s best-selling car, truck, on SUV in the world in 2022 or 2023, you had one of 2 reactions, both of them valid. For the 1% of the people who are Tesla superfans and read CleanTechnica religiously (thank you), you said, “That’s consistent with what I said 2 years ago, and with the tune Elon has been singing since the Model Y unveiling, the Model Y will outsell the Model 3, Model S, and Model X combined.” As far as the rest of the world that is paying attention, they said, “What has Elon been smoking now? Is this part of a publicity stunt to promote his role as host of SNL on May 8th?”
What accounts for that disparity? Well, the Tesla faithful sometimes act like there is unlimited demand because Elon consistently says (including on the earnings call this week) that “demand is not a problem.” That isn’t technically true. What Elon Musk really means is that demand is a problem, but we have a bunch of demand levers that we can pull over the next 2 years to solve the demand problem.
What is Demand, and a Recent Example
The definition of demand (I taught economics for a year 30 years ago) is the willingness and ability to pay a price for a specific good or service (a Tesla Model Y in this case). The problem that most people instinctively get is that even if the whole world wakes up tomorrow and decides the Tesla Model Y is the car for them (which solves the willingness clause of demand), it does nothing for the ability clause. You can will all day long, but if you don’t have the money (or credit), you can’t buy the car. As Alex Voigt said in a great article on Model 3 demand, “Demand is a mystery that can only be measured once supply is provided.” This article will go over a number of demand levers that Tesla can pull if it finds it needs to increase demand as it ramps up production. You may ask if I’m going to cover the supply of Model Y, and the answer is no. The answer to supply is Giga Berlin and Giga Texas.
The recent example of a supply problem quickly turning into a demand issue is vaccine distribution in the US. It has been going pretty well, but from the late December announcement that Pfizer and Moderna vaccines were available, you had a bit of a mad scramble to secure the very limited supply of vaccine appointments. But then a few weeks ago, you noticed demand started to slacken. The high-risk older and sicker people who wanted the vaccine had pretty much all been vaccinated and the younger and healthier folks were less eager to take a chance on the vaccines. So you went from supply being much lower than demand to supply being a bit more than demand seemingly overnight. So, did governments have demand levers to pull to solve this problem? Yes, they responded by opening up the vaccine to all ages and expanding availability to more places to make it more convenient. This seems to be working to get more people vaccinated. Likewise, Tesla needs to be prepared for its Model Y to go from supply constrained to demand constrained overnight.
First, why am I saying that we need to pull demand levers? The answer is that when you look at the best-selling vehicles in the world, they all have a starting price under $30,000, and the top-selling car (the Toyota Corolla) starts at $20,025 in the US. The Tesla Model Y (after some recent price increases) starts at $50,990, or more than 2½ times as much! That’s a problem. Next, I’ll go over the levers that I think Tesla may pull to enable its willing customers to be able to afford the Model Y in large numbers next year as production ramps up to VERY high volumes when it is made in Fremont, Shanghai, Berlin, and Texas.
- Bring back the Model Y Standard Range that costs $10,000 less. This is an obvious choice if the number of customers at $50,000 starts to wane. I think the only reason Tesla pulled this model (temporarily) is demand was unexpectedly strong (remember the quote about how you never know what demand is until supply is provided) and they figured they might as well just supply the $50,000 demand for now.
- Use large castings to massively reduce costs and simplify build complexity (in addition to many other innovations, including battery innovations). I figure this could save about $5,000 per car.
- Use Lithium Iron Phosphate (LFP) batteries to cut another $2,000 from the low-end Model Y cost. This not only helps with cost, but it also helps ensure that if there is a supply hiccup with nickel-based batteries, Tesla won’t have to stop or slow production. It could just shift more production to the LFP-based models until the higher-performance nickel batteries became available again.
- Target extra deliveries to the countries and states that offer the best EV incentives. There are a variety of EV incentives out there. Presently, in Florida, there are none and the Model Y still sells very well. But as we recently wrote, in California, they offer up to $13,000 in incentives, and many other states offer smaller incentives. In addition, the Biden administration is attempting to revive the federal tax credit for Tesla and GM.
- Tesla will continue to expand to new markets like India and Brazil, two of the largest countries in the world that Tesla has no presence in.
- Tesla is ramping up its insurance product in many areas and this could help reduce the cost of ownership.
- We have written a lot on the Total Cost of Ownership over the last few years, but that is a fancy way of saying you can expect to save about $10,000 over 5 years (and $20,000 over 10 years) over a gas-powered crossover with similar space and much slower performance in fuel and maintenance costs.
- At some point, the longevity story will become a thing (that Tesla cars can be used about twice as long as a gas car without high repair costs), but I don’t think awareness of that will happen so quickly, I think it will take years for that record to get out there and it to be publicized by articles like this one.
So, to add up all the levers, let’s imagine Tesla brings back the Model Y Standard at $40,000 early next year as production starts ramping. But since Tesla makes the vehicle using the new casting and using LPF batteries, it prices them at $33,000. Incentives vary widely, but let’s say the customers next year are eligible for $8,000 of incentives for their new EV. You notice we got to the magic $25,000 figure without even designing a new car! Let’s not forget the option that Tesla’s strong financial position gives it. If Tesla gets the price of their car down to $25,000 using the demand levers detailed above and uses its recently upgraded bond rating to borrow money for Model Y leases at 1%, this would allow Tesla to offer lease rates below $100 a month as I detailed in this article last year. At those prices (don’t forget the over $6,000 in fuel and maintenance savings over the 3 year lease), I think all of us can agree that Tesla would once again have a large supply issue and not a demand issue. As you can see in the screenshot above, Tesla isn’t going to pull this demand lever all at once — it will gradually increase leasing by reducing leasing rates if needed to match demand to supply.
Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], and Xpeng [XPEV]. But I offer no investment advice of any sort at any time or anywhere.
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