Tesla Inc. (NASDAQ: TSLA) released their first car nearly 12 years ago, the Tesla Roadster. This was revolutionary technology for its time and had people around the globe flocking to their nearest Tesla dealership to witness this history. Since the beginning of the empire the co-founder and CEO, Elon Musk, made it evident that he wanted to be the forerunner in taking the initiative to change electric cars as we know it, making it a feasible choice for all consumers.
Although consumers are likely still baffled by Tesla’s recent announcement of a bullet-proof stainless steel pick-up truck, there is one distinct underlying factor in the announcement; the price. Being listed at $53,009 CDN it is less than half of the price of the Model X, released in 2015 for $116,090 CDN.
How can Tesla further lower their costs?
When reviewing an interview with Elon Musk and Marques Brownlee back in August of 2018 Elon spoke on the implications and measures that needed to persist in the future development of Tesla in order for a cheaper, more affordable Tesla to be put into production. Elon set the bar quite high saying that it might be possible to see a $25,000USD Tesla by the year 2021. In the interview, he focused on two main components to assist in being a catalyst; economy of scale and technological improvements.
Speaking on Elon’s point of economy of scale; he made it evidently clear that it is a very challenging thing to do in a corporation, particularly in the automotive industry where you are competing on an international level with many alternatives. His ideology on this is that with a higher demand for his car, the company will have more capital to reinvest into research and development, one of the more prominent aspects that separates Tesla amongst the competitors. Touching on this; he said that one of the current internal goals of the company is to develop an entire product line that would subsequently expedite the research and development process in developing cheaper alternative technology.
The main barrier in cheaper Tesla cars is the technology and the costs associated with developing and building it. Although Tesla has some of the best technological entrepreneurial minds embedded in the veins of the company, it takes an exceptional amount of time and capital to develop the technology cheaply and ensure its safety for consumers. And although Elon has neglected to speak immensely on the process of this development, we can track the process simply by breaking down the main cost components of what makes up a Tesla.
What is Tesla doing?
The first being the plant in which they are made. Originally when Tesla released its first car they were manufactured in the “Tesla Factory”, a used manufacturing plant originally opened by General Motors in 1962. The batteries however were outsourced to Panasonic and shipped into the United States. Since then Tesla has announced that they would be building the world’s first Gigafactory in partnership with Panasonic. This would decrease the cost to make their batteries by 30% through automation, in-house production and the entirety of the building being dependent on self-sufficient energy such as solar and geothermal energy.
The next cost diver for Teslas is the production. According to a study done by German engineers, the labour portion of production is accountable for nearly 36% of the total cost. However, we have seen major improvements in the cut-backs of these expenses via automation and we can only expect more in the coming future. This has particularly become evident through the production of Tesla’s Model 3 where 95% of the body was completed using robots. During the beginning of the hyper-automation system for the Model 3, Elon admittedly said that there were lots of issues regarding the robot’s capabilities with small parts such as nuts, bolts and screws. However, through future development, these issues were fixed allowing the automation to be instrumental in lowering the costs of production. Going forward, it is presumably obvious that we can expect the Tesla company to include more automation in their production line to make their cost-efficient goals attainable.
The last deterrent to a lower costing car is the battery. Previous to 2015 Tesla outsourced the manufacturing of their batteries to Panasonic, this translated into high costs for these batteries. Eventually, this changed when Elon announced the Gigafactory and was capable of producing his own batteries at a fraction of the cost. However, even with this fundamental cost-cutting measure, it still costs Tesla $6,600 to manufacture one single battery for their cars.
This is where Dalhousie’s own Jeff Dahn plays a fundamental role. In 2015, Tesla signed an exclusive five-year contract with Dalhousie University to develop a battery that has high energy density and is low costing. Two things that have always been bipolar opposites in the economy. Since the original commencement of that contract, Jeff has made progress on those two factors. As being Dalhousie’s lithium-ion expert he’s created a battery that can potentially last a million miles whilst taking cost-efficient measures in doing this. One of the main measures taken is the implementation of locally sourced resources incorporated in the production of the battery, ultimately allowing a deduction of shipping costs and foreign tariffs. This being intertwined with new technology allows the Tesla battery cost to drop significantly.
So what does this mean going forward?
This is Tesla’s biggest task yet, making a cost-efficient car whilst improving their technology in the cars offered and maintaining the same expectations that consumers hold. However, Tesla has begun developing numerous ways to cut down on their production spending through its innovative technology. This has been evident in the recent prices of cars that Tesla has produced compared to the first fleet of cars Tesla invented. Ultimately the fate of low costing electric vehicles from Tesla lies in the hands and mind of Elon Musk.
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Piers Elms is in his second year of studies at Dalhousie University in the BComm program looking to major in finance. He currently holds a chair position for the cases and conference’s team in the Dalhousie Commerce Society and an active member in the international equities team in the Dalhousie Investment Society.