How Tesla Lost The Race For Affordable EVs To An Unexpected Rival

IN August 2006, before Tesla had built its first electric car, Elon Musk published his first “ Master Plan ” for the company with a singular goal: transform the environmentally unfriendly auto industry into a friendly one by selling pricey electric cars that would underwrite the development of affordable ones. “When someone buys the Tesla Roadster sports car, they are actually helping pay for development of the low-cost family car,” Musk wrote. Tesla has since rolled out four models cheaper than the $98,000 Roadster it started with in 2008, but none have been priced affordably or achieved Musk’s often-repeated goal of becoming a true mass-market brand.

Instead, the company has remained focused on cars with luxury prices: Teslas start at about $50,000 and their average selling price is $68,000, according to Kelley Blue Book. That’s well above the $30,000 to $45,000 price range most industry observers think is the sweet spot for “the low-cost family car” Musk envisioned—a sweet spot that one of Tesla’s unlikeliest rivals just hit. Tesla has now lost the affordable EV race to General Motors, which spurred Tesla’s creation after quitting the electric vehicle business 20 years ago.

The Detroit-based automaker will offer its 2023 Bolt hatchback for only $26,600, slashing the previous sticker price by $6,300. The slightly bigger Bolt EUV loaded up with a high-end audio system, camera-based rearview mirror, sunroof and Super Cruise for hands-free highway driving costs just over $34,000. And GM is offering another cheap EV next year: An electric Equinox crossover that gets 300 miles per charge priced from $30,000, which is in line with gasoline-fueled rivals like Honda’s CR-V and Toyota’s RAV4.

“GM was the first full-line manufacturer to bring a long-range, affordable EV to market with the Bolt EV when it launched back in 2017, and that remains a priority,” GM President Mark Reuss tells Forbes , without commenting on Tesla. Ruess says GM decided to reintroduce Bolt at the “lowest price point in market” to “help drive EV sales and adoption. ” And they could soon get even cheaper.

A proposed extension of federal EV tax credits is making its way through Congress in the so-called Inflation Reduction Act of 2022 . The bill, if passed, could cut the effective base price for a five-passenger Bolt to less than $20,000 through a new $7,500 tax credit, available at the time of purchase. Making electric vehicles cheaper is vital as rising greenhouse emissions spur heatwaves, drought and increasingly intense storms.

That’s because petroleum-powered cars and trucks are the top source of U. S. carbon emissions, accounting for more than a third last year .

To dramatically cut them, EVs have to go mainstream—and making them affordable to the average American is a first necessary step. There are also potential bragging rights for companies that do. “To have a ‘most affordable EV’ moniker behind you right now is not a bad marketing move,” says Jeffrey Schuster, president of researcher LMC Automotive’s global forecasting unit.

“I suspect they’re not making anything on Bolt at that price, but they’re not doing it for margin. They’re doing it for awareness and market share, and to get vehicles out there. Same thing with a $30,000 Equinox.

It’s about trying to bring EVs into the mainstream and also, obviously, erode Tesla’s dominance in that segment. ” The Detroit-based automaker’s pricing moves look particularly aggressive given that the run-up in costs for batteries, semiconductors, raw materials and other components needed to build vehicles has pushed up overall automotive prices, particularly for EVs. The average new electric vehicle cost over $66,000 in June, according to KBB, mainly because of Tesla’s high U.

S. sales volume. It jacked up prices substantially this year, citing inflation pressure, and isn’t saying when or if they’ll come down.

“We’ve raised our prices … quite a few times. They’re frankly at embarrassing levels,” Musk said during Tesla’s second-quarter earnings call. “But we’ve also had a lot of supply chain and production challenges and we’ve got crazy inflation.

I’m hopeful, this is not a promise or anything, but I’m hopeful that at some point, we can reduce the prices a little bit. ” Neither he nor Tesla responded to requests for comment on GM’s pricing moves. IT ’s worth noting that Tesla doesn’t seem to care that it has lost the race for affordably priced EVs—and for now it doesn’t matter financially.

Musk’s Austin, Texas-based company hauled in $2. 3 billion of net income in the year’s second quarter despite big production losses due to Covid-related shutdowns in China, Tesla’s main profit source. With its high prices, the company enjoys profit margins that are the envy of bigger, traditional automakers.

“The focus of Tesla has evolved over time and it has evolved into more of a luxury brand,” says Jeffrey Osborne, an equity analyst who covers Tesla for Cowen. “The decision two earnings calls ago to focus on the humanoid robot Optimus Prime and not the mass market vehicle suggests that’s a pivot that Tesla is content with. ” In the first half of the year, Tesla reported a gross margin on its automotive business of 30.

6%. By comparison, GM’s EBIT-adjusted margin for its overall operations was 8. 9%.

And because the company continues to see high demand globally, especially for its $66,000 Model Y crossover, it’s using most of its current factory capacity to meet it; there’s little pressure to add cheaper models. “Selling too many cars at too high or too profitable a price is not a problem for an automaker,” says ex-Tesla battery engineer Gene Berdichevsky, CEO of Sila, a battery anode maker. “That’s creating something that people genuinely want.

It’s like the way people buy an iPhone versus any other phone. They want it even though it costs more. ” Since the arrival of Tesla’s Model S sedan a decade ago, Musk has worked to make the brand synonymous with high-performance, speed and cutting-edge tech, like over-the-air wireless updates that let existing vehicles gain new types of features and an Autopilot driver-assist feature (which doesn’t do what the name implies and has run into regulatory problems).

These are the kinds of things that differentiate Tesla vehicles, boost their desirability and help them command premium prices. But luxury prices won’t lead to the kind of mass adoption of EVs Musk has always cited as Tesla’s goal. And according to Fisker Inc.

CEO Henrik Fisker, a veteran designer who styled premium cars for BMW, Aston Martin and, briefly, Tesla, Musk’s company may now be a victim of its success. “It’s very hard for a luxury car company to make a cheap car,” he says. “It’s easier to start from the other way around.

” C ertainly, GM’s Bolt won’t be mistaken for a luxury car. Introduced in late 2016, it’s built in Orion, Michigan, using a small vehicle platform created by GM’s South Korean unit. In terms of styling, it’s cute at best, rather than sexy, and reeks of practicality.

Acceleration is peppy and merging onto the highway is a breeze, if lacking the raw centrifugal force of a Tesla. Though classified as a subcompact, the cabin is roomy, particularly for backseat passengers, and can carry copious amounts of stuff when the rear seats are folded down. It was named North American Car of the Year in 2017, selling about 23,300 units in the U.

S. that year, making it the third-best-selling EV behind Tesla’s Model S and Model X SUV. It was retooled and freshened in late 2020, including with the addition of the slightly bigger Bolt EUV, and got off to a strong start before faulty batteries supplied by LG triggered recalls in 2021.

The electronics company agreed to pay GM about $2 billion over the matter and, after a months-long sales and production halt, a new pack was introduced this year. As a result, GM’s price cut looks as much mea culpa for the battery headaches as a shrewd marketing move. And while Bolt’s size and versatility make it an appealing vehicle for city dwellers, it lacks the bulk and power of larger crossovers and pickups Americans can’t stop buying (at least when the gas was cheap).

“It would have worked better in Europe than it did here because the marketplace in North America is always looking for an SUV,” said Michael Simcoe, a GM design executive who oversaw the styling of the Bolt EUV. But Bolt is only the opening salvo in the battle to win sales away from Tesla and expand the battery-car market. The larger Equinox and Blazer models coming in 2023, while a bit more expensive than Bolt, fall squarely into the highly popular mass market for compact and midsize crossover vehicles.

They’ll have a driving range of 300 miles or more per charge using the company’s lower-cost batteries and lighter, cheaper EV architecture. An electric Silverado pickup arrives soon, priced from the low $40,000s, to compete with Ford’s $40,000 F-150 Lightning and Tesla’s long-delayed Cybertruck. At the high end, GM’s got luxury electric Cadillacs and Hummers selling for over $100,000 hitting the market.

These vehicles all use GM’s new Ultium system, which combines a higher-powered, lower-cost battery pack, motor and lighter body architecture created specifically for electric models. Ultimately, they’re part of CEO Mary Barra’s goal of selling 1 million EVs a year by 2025. “Recent advances in lithium-ion battery technology and development work help make high-mileage, affordable EVs with great design and performance a reality,” says Reuss.

“When more customers are able to experience the benefits of EVs—from home-charging to instantaneous acceleration, excellent ride and handling and zero emissions—they won’t go back. ” GM’s obviously not alone in targeting a broader swath of the U. S.

market. Prices for numerous models, including Ford’s F-150 Lightning and Mustang Mach-E crossover and small electric SUVs from Volkswagen, Hyundai, Kia, Toyota, Subaru and startup Fisker Inc. all start in the high-$30,000s to mid-$40,000s.

Berdichevsky, who worked on Tesla’s first battery packs before starting his own company, thinks big automakers are trying to get to low prices too quickly given increasingly high demand for and tight supplies of batteries. “If what you’re trying to do is create a sustainable, accelerating business, you need to reach for profitability on every car that you ship and for every battery that you’re able to get your hands on,” he said. “It’s a mistake to go down market before the supply chain is ready.

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