Revolution or repetition? Tesla’s future victory is far from certain

Tesla recently celebrated hitting 4000 Model Ys per week at its plant in Berlin, Germany. But because plants are at their most efficient (and therefore cost per vehicle is at its cheapest) when they're running as close to full capacity as makes sense, the pressure to sell becomes intense, leading to spiralling price cuts. 

In China, Tesla aimed to run its Shanghai plant at 20,000 per week in the first quarter after enacting price cuts there, but weekly data seen by Reuters shows that demand for the Model 3 and Model Y there is slowing, despite selling them more cheaply.

Tesla’s cost-cutting is reminiscent of “old-school” car makers, Renault CEO Luca de Meo said on his company’s recent earnings call. “Probably they entered into a loop, because they have a lot production capacity,” he noted. “We did it ourselves with combustion cars until a few years ago. We killed our business to push.”

The Renault-Nissan Alliance under former CEO Carlos Ghosn is probably the classic recent example of how growth-led expansion can kill profits if it’s not matched by customer demand, so de Meo is well qualified to speak here.

Tesla's growing operating margin

At the investor day, however, Musk was dismissive that there might be a lull in demand for his company’s cars. “The desire to own a Tesla is extremely high,” he said. “The limiting factor is being able to pay for it.”

Tesla’s intense search for economies of scale has led to a ruthless trimming of variety. It restricts options - except those that can be added via software updates - to speed up manufacturing and will digitally interrogate its cars to see how much those it does offer are being used. An opening sunroof was deleted because of this, Tesla said on the investor day.

Tesla’s dislike of variety, which strongly recalls Henry Ford and his quip about offering any colour as long as it’s black, extends to models as well as options. Musk said Tesla can hit 20m with just 10 models in response to an analyst question on the investor, but he didn’t present the number at all confidently, as if he hoped he could get away with fewer. “The number seems low,” Roeska at Bernstein noted.

Musk then took a pot shot at his rivals and their model diversity. “How many variants of car are there? It feels like hundreds,” he said. “Are they good variants? Mostly not. Just variants for the sake of variants.” He compared cars the pre-smartphone era, when hundreds of models become a handful once the big screen took over.

The trouble is that one or two sizes rarely fits all. “It will be very hard to launch a product and try to sell it globally in the next three to five years,” said one executive at a Chinese firm competing with Tesla, who wished to rename nameless. “Tesla focuses so much on production, so much on economies of scale. They are very important, but on the other hand, you need to think about use cases for EVs.” 

Musk’s analogy of flip phones versus smartphones doesn’t work. “We can all use iPhones, but you don’t want to drive a minivan when you first graduate,” the executive said.

Tesla is diversifying. The “next-gen” Tesla is “not just one vehicle but multiple,” said Lars Moravy, Tesla's head of vehicle engineering, at the investor day, indicating that Tesla is creating a scaleable platform along the lines of Volkswagen’s MEB architecture.

There’s also the Cybertruck pick-up arriving this year, but given this will be a niche vehicle largely confined to the US in terms of demand, it will fit oddly into Tesla’s model line-up, given the company’s obsession with scale. The Roadster is another niche car somewhere in the plan, but no mention was made of that at the investor day.

However, Tesla’s long-hinted at push into smaller segments that could be enabled by the next-generation platform (not confirmed at the investor day) would give Tesla access to a wider pool of buyers, given a cheap enough price. Tesla’s average selling price last year was $53,000 (£44,000), according to Bernstein data, giving it a lot of room to go lower.

Tesla’s competitive cost advantage achieved with production innovations such as mega-casting (combining multiple underbody parts) as well as partnership with China’s CATL on cheaper lithium-iron-phosphate (LFP) batteries could even allow it make next-generation cars with a decent range and size while still undercutting smaller EV rivals on price, giving them more global appeal.

Tesla’s target with the next car is to build it 50% cheaper than current Model 3s and Model Ys, Kirkhorn said, something the company believes it can achieve due to its vertical integration. That would be a staggering achievement.

Even so, 20m is a lot of cars. Toyota, the world’s biggest car company, last year sold just over 10m and the Japanese company has a global reach stretching into nearly all markets, some of which it dominates entirely. It sells dozens of models globally, tailored to specific local needs. Its biggest-selling model and indeed the world’s best-selling car, the Corolla, accounts for only around 1.2m of those 10m.