Tesla's 'game of pennies' is all of us (in cleantech)
This article is drawn from the Transport Weekly newsletter from GreenBiz, running Tuesdays.
For Tesla stock watchers and fans, the last couple of weeks have been difficult. Maybe not as cringe-inducing as Elon Musk's "$420 funding secured" tweet of 2018, but this time it's facing challenges much more core to Tesla's business.
On one hand, Tesla announced that it's finally selling a $35,000 version of its electric Model 3 (a long-promised target). Yet on the other hand, Musk simultaneously revealed that Tesla will close many of its brick-and-mortar stores and move all of its sales online. The company's stock dropped 13 percent over the days following the news.
But wait — there's more. In true-Musk style, on Sunday (12 days after the store closures were announced), Tesla announced it would only close half of its retail stores (although still move all sales online) and would instead meet its cost targets by raising prices on its cars by 3 percent. Except for the price of the $35,000 Model 3, which will stay the same.
Rollercoaster theatrics aside, Tesla finally has made it to the exact position that Musk and crew have been pushing it toward since the company's founding: making an electric car that mainstream consumers can afford and generating a profit, or just continuing to operate, as a company. That means it's now all about costs.
In that respect, Tesla is now like many other companies in the burgeoning clean economy — trying to churn out solar panels and wind turbines to charge up the grid, fuel cells to power forklifts or LEDs to light up office buildings. As clean technology becomes more mainstream, it's ultimately about eking out a margin that can enable a company to operate sustainably (in the economic sense).
To make a $35,000 electric car (with the range and features that Tesla customers have become accustomed to), Tesla has to hack out costs from each individual part of the car, as well as the way that the car arrives in customers hands. Chop, chop, chop is the sound of an independent automaker struggling to make a (still) futuristic vision fit with the economic realities of the market and current technology.
As Musk described it on the media call, and I'm paraphrasing: say a $35,000 Model 3 has 10,000 individual parts, each part costs $3.50. We need to get each part closer to $3.
It's a "game of pennies," said Musk, "like Game of Thrones, but with pennies."
Why is this "game of pennies" so hard? Tesla is in the unique position of trying to deliver a mainstream electric car while we're still on the cusp of batteries prices coming down. Bloomberg New Energy Finance says it'll be 2024 (five years away) before EVs are the same price as traditional cars.
So in the meantime, Tesla is actively trying to force down electric car battery prices. The entire reason the company built the Gigafactory — the massive battery factory in the Nevada desert — was to lower their battery costs. In contrast, much of the auto industry is more passively riding the battery cost curve out and making business decisions accordingly.
At the same time, Tesla has trained its customers — with its luxury roots, whizz-bang doors and handles and industry-leading battery range — to expect only the very best from its cars' features. The Model 3 is indeed luxury-like, compared to, say, Nissan's first mainstream EV entrant, the LEAF. Tesla can't cut out too much from the Model 3, or those long-awaited customers would revolt.
So what to do? Musk will do what he's always done, lean into the risk, take more big gambles and try to hold it together until the economics start looking better. Tesla doesn't expect to make a profit in the first quarter. In the meantime, there could be more capital raises ahead, and no doubt lots of glitter and Muskian distractions (the Model Y launch was last week).