Tesla Surprises Investors With A Tiny Y & A Tiny 3 As Soon As This Year!

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A lot has been written about the Tesla’s next-generation compact car that used to be widely called the Model 2, including Zach’s excellent article last week about it. Zach asked who might pick up the challenge in place of Tesla doing it. Today, Tesla announced it would follow through with this and that it isn’t rocket science. If Toyota can make a Corolla and Ford can build a Fiesta, why can’t Tesla, with its wealth of talent, make a smaller electric car? Many (including myself) were thinking Elon was going all in on robotaxis, but it appears the rest of the company convinced him once again that sales have stalled now and they need a vehicle that can sell for about $10,000 less than the Model 3 and Model Y ASAP to keep investors happy.

If Full Self Driving (FSD) works as quickly as Elon thinks, these new models may be the last new cars Tesla introduces with a steering wheel, but if they hit some issues, whether technical or regulatory (as I speculated about in this article last year), Tesla made it clear that they still want to realize all the dramatic cost savings enabled by their Unboxed method, described in some detail a year ago at Investor Day, with the robotaxi to be announced on August 8th of this year. They also made it clear that they would achieve significant cost savings on future low-cost vehicles, this year or early next year, without the radical new manufacturing space and the massive capital that would be required to build it.

My Speculation On The Tiny Line

Let’s first talk about how you avoid Osborning existing sales. The obvious way is to make the new vehicle less desirable in some ways than the existing vehicles. Now, you don’t want to go too far in that direction or the new model won’t be a success, but I’ll list a few obvious ways to reduce costs and differentiate the new Tiny lineup.

1. Make the new models significantly shorter and narrower. This will save a lot of material costs, and since a lighter vehicle doesn’t need as large of a battery, that further compounds the savings. What I learned 5 years ago when I wrote this article on Model Y styling tricks was that you can trade height for length and still have the same interior room. We all know the most efficient container is a sphere (if you are trying to maximize volume and minimize surface area). That wouldn’t be practical for a car, but let’s look at the cheaper cars out of China. The Wuling Mini EV is about the same height as the Model Y (2 mm shorter). The BYD Seagull is a bit shorter (8 centimeters, or 3 inches shorter). You just sit more upright with your legs going down instead of forward. With the battery keeping the center of gravity low, you don’t have to worry too much about the car being top heavy. This will make the cars look a bit dorky and less sexy, which is perfect for creating a new market. Economists call selling the same product for different prices “price discrimination.” This isn’t exactly this — it is more about market segmentation, like Apple does. Apple has a very simple product line, but it finds a way to have a few different price points.

2. Use smaller wheels. Four years ago, I wrote about tires and how they cost consumers more than batteries but get a lot less attention. As an aside, I just spent close to $1,300 getting 4 new tires for my daughter’s Model Y. My three points in that article were
   1. Increase the use of retreaded tires (I got the chance to interview the CEO of Goodyear recently and shared a lot of good info on retreads here).
   2. Shop around.
   3. Use smaller wheels. The BYD Seagull uses 15 or 16 inch wheels. I wasn’t able to find the exact same tire, but I found a similar quality and brand for about half the price of the tires I bought last week for the Y. Once again, this is a dorkier look, but that is the point. Reduce costs while minimizing the impact on sales of your existing successful products.

3. Use the $1,000 motor announced at Investor Day a year ago. I think the existing motor costs twice to three times that much.
4. Use lower-cost batteries. Use LFP or in the future sodium-based batteries to reduce the costs.
5. Design a model with 200 miles of range. This doesn’t mean you can’t have a model with more range, but many people don’t need more than 200 miles of range for a second car. Even if it is your main car that you take long trips with, if you travel in an area with abundant fast chargers, 200 miles is plenty for cost-conscious buyers.
6. Use 48V vehicle architecture pioneered by the Cybertruck to cut the cost of wiring by 75%.
7. Use drive, accelerate, and brake by wire to minimize the design differences between left-hand drive markets and right-hand drive markets.

8. Design it to use framed doors like most inexpensive cars do, lowering costs and simplifying fit. This may also increase safety.
9. Realize economies of scale and capital efficiencies by fully utilizing the manufacturing plants you have already built.

Conclusion

If the current costs of the Model 3 and Model Y start at about $32,000 (they obviously vary by plant of manufacture), Tesla originally wanted to cut that cost in half to about $16,000 per vehicle. Even if they can’t get to that goal with an existing line, if they could cut the costs $10,000 and make the savings from the changes I speculate about above, that would bring the cost down to $22,000, which would allow them to sell the car for $25,000 for a 12% margin. Not a lot, but Tesla hopes to make the big money on the software, not the hardware. And note that all manufacturers price their smaller vehicles aggressively to bring people to their brand.

So, what do you think? Did I pick features that would reduce costs sufficiently? Will this reduce the impact on demand for Tesla’s Model Y and 3? Would the car still be a smash hit? Or did I take too much of the magic out of the car, so it wouldn’t be a Tesla?

Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], XPeng [XPEV], Hertz [HTZ], NextEra Energy [NEP], and several ARK ETFs. But I offer no investment advice of any sort here.