Tesla (TSLA) is the brainchild of entrepreneur Elon Musk. The company made waves by challenging the auto industry and producing its own all-electric car. Initially, Tesla's main competitors remained faithful to the internal combustion engine or introduced models that blended gasoline with batteries by way of hybrid vehicles.
Traditional car companies have been hesitant to undertake electric vehicle (EV) production because the costs were so high that the cars would end up being prohibitively expensive. But some of these companies, including Toyota (TM), Ford (F), and General Motors (GM), launched or have plans to launch all-electric cars that they hope will rival Tesla's models. But not all of them will be ultra-luxury rides. Even Tesla has models that are relatively affordable.
The earliest Tesla cars rolled out at high price points. Tesla still produces its flagship 2020 Model S sedan at a base price of $74,990, while the Model X starts at $79,990. But the 2021 Model 3 starts at under $40,000.
- Tesla's all-electric cars are more expensive if you compare them to traditional or hybrid vehicles.
- Teslas range in price from around $80,000 for a Model X to about $40,000 for a Model 3.
- Demand for Tesla's cars is spurred by modern design, innovative technology, and high performance that makes the cars a green energy favorite.
- High demand has led to a problem keeping up with production, leading to a waitlist of vehicles.
- The high price for Tesla cars is also related to the high cost of the electric battery packs that supply the vehicles with power.
Supply and Demand
There is clearly a demand for Tesla cars. Every month the company seems to set new sales records. But despite the demand, there is a bottleneck in production, creating a waitlist for back-ordered vehicles that is growing steadily.
Unlike established car companies, Tesla does not have the manufacturing capacity to meet the current demand all at once. Because demand exceeds the current supply, basic economics suggests that the price would be bid up. Tesla seems to be constrained by production, not demand.
The demand is fueled in part by the green energy movement. Because Tesla cars are all-electric, they do not consume greenhouse gas-emitting gasoline and do not directly create carbon dioxide. It remains true, however, that CO2 is a by-product of the electrical generation needed to charge the car's batteries. Demand is also driven by Tesla's sleek, modern design and its high-tech driver interface and dashboard that features an impressive all-digital, touch-sensitive display.
The fact that electric cars are virtually silent when they drive is something many drivers consider a truly desirable feature. But Tesla cars are also high-performance vehicles with several great features:
- The Model S can cruise for over 400 miles on a full charge, recharging is a user-friendly task, and it can accelerate from 0 to 60 miles per hour in about under two seconds.
- The Tesla Model X is a more family-friendly SUV that can comfortably fit seven passengers.
By expanding its product line, Tesla is sure to increase demand for its cars. But the question remains as to whether the company can build out enough capacity to produce those vehicles in a short amount of time. To that end, Tesla completed building phase one of its enormous Gigafactory in the Nevada desert, which allows the company to scale up production of both its cars and the battery packs required to power them. About a third of the factory was up and running in early 2021.
Tesla expects its factory to be the biggest building in the world once completed.
Battery Technology Is Expensive
Batteries to store and use electrical power are the most expensive single component of these cars. One of management's main goals has been to reduce the battery costs per kilowatt-hour for its cars, and the company has made some significant headway toward that goal. Estimates show that Tesla's battery costs declined from roughly $230 per kilowatt-hour in 2016 to $127 in 2019. Because of the company's higher volumes, Tesla's battery costs are about 20% lower than the industry average.
A lot of research and development (R&D) is going into battery technology, and the hope is that in a short time the cost of battery power storage will be able to compete with the cost of gasoline or other fossil fuels.
President Joe Biden signed the Infrastructure Investment and Jobs Act on Nov. 15, 2021, which allocates $1.2 trillion to fund various projects. This includes an investment of $7.5 billion to build a network of electric vehicle charging stations along highways and in communities across the United States. The bill aims to focus on areas with rural communities that are disadvantaged and hard to reach.
The Evolution of Tesla and the Electric Vehicle Market
The electric vehicle market is changing fast and Tesla is among those leading the way. In mid-2020, the average sticker price for an electric vehicle was a hefty $19,000 higher than the average for a gasoline-powered car. Small-scale production simply costs more.
But the gap is beginning to close. The 2021 Tesla Model 3 starts at $37,900, while the Model S base price is $69,420 and the Model X is $79,900. This reflects Musk's initial assertion that his company started out with a luxury offering in order to get established before ramping up to include (relatively) more affordable models.
For the sake of comparison, a gas-powered Mini Cooper starts at about $22,400 while the electric model starts at $29,900. If you qualify for the $7,500 tax credit for electric vehicles, it's pretty much a wash.
The federal tax credit of up to $7,500 for electric and hybrid vehicles may help some buyers of electric vehicles but this credit is being phased out model by model as sales increase. Tesla buyers no longer qualify. A federal government website lists credits by year, make, and model for electric and hybrid vehicles.
The Bottom Line
Tesla cars are expensive, but that hasn't stopped people from lining up to buy them. One reason the price is so high is that, at the moment, demand is outstripping supply. Expanding production capacity and building new factories is sure to help moderate prices.
The other main reason for Tesla cars' high sticker price is the very high cost of the electric battery packs that supply these vehicles with power. While the cost of battery technology and its energy efficiency has improved over the past few years, more research and development is needed to create a truly affordable electric car.