The $25.000 EV: Tesla Model 3’s possible path to affordability

The affordability benchmark: $25.000

The $25.000 price tag has emerged as a symbolic benchmark in the automotive industry. It represents a tipping point where EVs could become accessible to a much larger segment of the population. The CAR paper highlights that affordability is not just about reducing the sticker price but involves a multifaceted approach that includes supply chain optimisation, technological advancements, and favourable policy frameworks.

Tesla, a pioneer in the EV market, has hinted at plans to introduce a $25.000 model, often referred to as the “Model 2” by enthusiasts. However, the focus here is on how the existing Model 3, one of Tesla’s most popular vehicles, could be brought down to this price level through a combination of engineering innovation, manufacturing efficiencies, and government incentives.

Engineering and manufacturing innovations

One of the key strategies identified in the CAR report is the implementation of advanced manufacturing processes. Tesla’s use of gigacasting—a process that allows for the production of large, complex parts with fewer individual components—has already significantly reduced production costs. According to CAR’s analysis, gigacasting alone could reduce the cost of the Model 3 by approximately $2.800.

Another major innovation is Tesla’s “unboxed” manufacturing approach, which further simplifies the assembly process. By eliminating several traditional manufacturing steps and integrating more components into single modules, Tesla could reduce the cost by an additional $1.300. These advancements not only lower the production costs but also accelerate the manufacturing process, allowing Tesla to produce more vehicles at a lower cost.

Battery cost reduction

Battery costs remain the most significant factor in the overall cost of EVs. The CAR paper notes that battery prices have been declining steadily, with lithium-ion battery costs dropping by 90% since 2010. For the Tesla Model 3 to hit the $25.000 mark, further reductions in battery costs are essential. The study estimates that with continued advancements in battery technology and economies of scale, the cost of the battery could be reduced by around $2.400 for the Model 3.

Additionally, the potential shift from lithium-ion to alternative battery chemistries, such as solid-state or sodium-ion batteries, could offer further cost reductions. These new technologies promise not only lower costs but also improved energy density, which could extend vehicle range while maintaining affordability.

Government incentives and policy support

While technological advancements are crucial, the role of government policy cannot be overstated. The Inflation Reduction Act (IRA) of 2022 introduced significant incentives for EV buyers, including a tax credit of up to $7.500 for qualifying vehicles. According to the CAR, these incentives could be a game-changer in making the Model 3 more affordable. By applying the full $7.500 tax credit, the effective price of the Model 3 could be brought down to approximately $25.000, assuming other cost reductions are realised.

However, the paper also warns of potential challenges. The strict sourcing requirements for critical minerals and components mandated by the IRA could limit the number of vehicles eligible for these credits. As such, Tesla and other automakers must navigate these regulatory hurdles carefully to ensure their vehicles remain eligible for the incentives.

The competitive landscape

Tesla is not alone in the race to produce a $25.000 EV. Other automakers, including Ford, Stellantis, and General Motors, are also working on affordable EV models. The competitive pressure is likely to drive innovation and cost reductions across the industry, ultimately benefiting consumers.

However, CRA also highlights the looming threat of low-cost Chinese EVs, which could disrupt the market. Chinese automaker BYD, for example, has already introduced the Seagull, a sub-$10.000 EV in China. If such vehicles were to enter the U.S. market, they could significantly alter the competitive landscape, making it even more critical for U.S. automakers to achieve cost reductions swiftly.

Conclusion

The path to a $25.000 Tesla Model 3 is not without its challenges, but it is within reach. Through a combination of innovative manufacturing techniques, continued reductions in battery costs, and strategic use of government incentives, Tesla could make the Model 3 affordable for a much broader audience. Achieving this price point would not only accelerate EV adoption but also help Tesla maintain its leadership in the increasingly competitive EV market.

The CAR paper underscores that while the $25.000 EV is an ambitious goal, it is one that is crucial for the future of the automotive industry and the broader effort to combat climate change. The next few years will be pivotal in determining whether this vision can become a reality.

Source: The Center for Automotive Research