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

Depending on who you talk to, Tesla is heading one of two ways. Either it’s revolutionising the car industry by streamlining production on the way to its goal of selling 20 million cars a year by 2030 or it’s plummeting headlong into making the classic car-industry error of creating the capacity to build too many cars with too few customers. Tesla’s presentation earlier this month held at its headquarters in Austin, Texas, disappointed many for not revealing the ‘next-generation’ model that’s going to juice the company’s next big sales push. What CEO Elon Musk did instead was parade his executives to talk at a deeper level than ever before about how Tesla was going to drive down the cost of future vehicles, including replacing Henry Ford’s linear production process with an ‘Unboxed’ concept whereby finished sections all come together in a final frenzy of highly efficient assembly. While this was engrossing, it left many analysts wondering exactly how Tesla was going hit all its annual sales targets on the way to 20m, given that it’s currently relying on almost entirely on Model Y and Model 3 with nothing visible in the pipeline until 2025 at the earliest. Those two cars helped push Tesla deliveries last year to 1.3m – a mighty achievement for a company that only cracked 100,000 sales in 2017. That figure should rise to 1.9m in 2023, according to estimates from the analysis arm of the bank Bernstein. But then comes the crunch. Number of Teslas delivered annually How do you maintain sales of two cars when they’re already part of the road furniture in many markets and new rivals are launching all the time? “EV models have generally struggled to increase volume beyond the third or fourth year of introduction,” Daniel Roeska, Bernstein’s lead autos analyst, wrote in a report following the investor day. “We struggle to see how Tesla can meet consensus expectations of 2.4-2.5m [sales in 2024] without a new model.” Tesla has already chosen the nuclear option to stimulate sales: cutting prices, by as much as £8,000 on the Model Y and Model 3. Tesla reckons it can do this without harming its now consistently impressive profits, because these cars are cheaper to build. At the investor day, chief financial officer Zach Kirkhorn bragged that the company had taken 30% of the cost out of building the Model 3 since 2018. “Cost reduction is deeply ingrained in our culture,” he said. Tesla is now building cars from four global assembly plants, and it will add a fifth in Mexico, the company announced at the investor day. More will have to be built to fulfil Musk’s goal. But with more production capability comes more pressure to sell, and that’s something car makers have long had to grapple with. 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. Tesla would say Toyota’s business model is inefficient, and at the investor day it noted Toyota’s recent praise for the Model Y’s engineering after it stripped one down. But Tesla is fighting against an increasingly fractured global car market where best-sellers stretch from pick-ups to city cars, depending on country, but where one rule still applies: the newer the car, the bigger the consumer pull. As rivals strive to catch the current runaway global leader on EV sales, Tesla’s undoubted advantages will become fewer and fewer.