Tesla CEO Elon Musk has upped the pressure on his rivals by setting a new goal of halving manufacturing costs.
Musk announced his cost-cutting objective during his appearance at the Morgan Stanley conference on March 7 in San Francisco.
“There is a clear path to making a vehicle, a smaller vehicle, that is roughly half the production cost of our Model 3,” Musk said, per CarScoops. Alongside having full self-driving capacities, the model will sell for around $25,000.
How Musk intends to meet this ambitious pricing goal was not discussed during the interview, but Tesla executives have previously reported their aims to cut costs by vertically integrating the manufacturing process, automating factories, and reducing the number of parts in a given model, per The Wall Street Journal.
This new goal of 50% has put other car makers, who have invested heavily in their technology to close the gap on Tesla and transition to EVs, in a tight spot. This investment has cost a total of $526 billion, according to estimates by AlixPartners, a consulting firm.
While its competitors have been slowly whittling at its dominance, Tesla continued to hold 63.5% of the market in 2022, according to S&P Global Mobility.
Some Tesla models have significant cost advantages over competitors, especially after Musk slashed prices earlier this month, as The Dallas Express reported.
Tesla’s Model Y compact SUVs have a minimum $3,000 cost advantage over rivals’ equivalent offers, excluding batteries, reported Mathew Vachaparampil, CEO of consulting firm Caresoft Global, per the WSJ.
At an investor and analyst meeting of Volkswagen AG (VW) last week, executives referenced Musk’s goal and questioned how they could scale down the next-generation models to match it.
UBS analyst Patrick Hummel noted that the VW ID. 3’s $40,000 price tag in Europe is only “slightly above break-even levels” for the company, per the WSJ.
“I really struggle to see how VW is going to have an affordable EV that’s profitable to you in a couple of years’ time,” Hummel continued.
VW’s CFO Arno Antlitz was nonetheless optimistic about the car maker’s ability to produce their new EV model, which will cost around €25,000, for European customers in 2025.
Tesla has double-digit percentage margins, which are among the highest in the industry. The company’s revenue grew 51% year-on-year to $81.4 billion in 2022.
Tesla has made ongoing attempts to reduce costs, claiming to have improved in a variety of ways since 2018, per the WSJ. These ways have included productivity, technical upgrades, and supplier scale, resulting in 30% gains.
Whether or not the company can achieve Musk’s declared goal of a smaller, simpler model that would cut costs in half, the concept may have raised the threshold for investors when assessing other automakers’ capacity to compete with Tesla.
“This is them challenging the industry,” Mark Fields, a former chief executive of Ford Motor Co., told the WSJ. “Is the rest of the industry going to stand up and notice? I think they will.”