Op-Ed: Tesla's Demand Ceiling

Back in early 2019, there was a lot of banter about Tesla reaching a demand cliff. Detractors were saying that demand for electric vehicles, and more specifically for Tesla vehicles, had peaked and was about to fall off into the abyss.

At the time I said; “It’s true. Tesla has reached a demand cliff. Hopefully, they’ll be able to climb it.” Time has shown that my assessment, along with other Tesla believers, has proven to be true. Tesla auto sales have risen beyond what even some Tesla bulls were saying at the time.

It seems clear to me now though that if nothing changes, in a few years Tesla will be facing a demand ceiling. Given free market forces, Tesla could fall very short of Elon Musk's 2030 goal of 20 million auto sales per year. If things don’t change, I see Tesla's auto sales not ranking even in the top 10 companies for auto sales. (1) I don’t have available current marketing data so I can’t quote a definitive number. All I can offer is a wild guess. But I would not be surprised if Tesla maxes out at two to three million vehicle sales per year. Let me explain why.

Price/Range Mix

There is a very simple truth in the auto market. Range sells, at least in North America. Aptera’s (aptera.us) principles Steve Fambro and Chris Anthony discovered this in their market research. That was a huge motivation for them to push to make their flagship vehicle travel up to 1,000 miles on a single charge. It was also a very good reason for them to make solar-never-charge a possible reality.

The truth is that in the free market, the mix of a vehicle's cost and range make up two important components in a vehicle's marketability. Very simply, there are a limited number of people, at least in North America, who are willing to pay $37,000 for a vehicle that will travel only 260 miles on a single charge (rated range). I don’t have good current data, so I can’t pin an exact number, but I do guess the number to be in the millions. However, I do not think the number is in the tens of millions.

There are many people who will be satisfied with the currently available mixes of EV cost and range. That number could exceed 5% of the population. However, there are an-order-of-magnitude more buyers who want greater range and/or a lower price. In a way, it is a bit of a paradox. How do you increase the vehicle range without increasing the price?

Every step change which increases a vehicle’s range or lowers the price expands the number of attractable buyers. A $25,000 vehicle with 200 miles of range would add an entirely new set of potential EV buyers. But they are a small subset of buyers when compared to what a $25,000 vehicle with 450 miles of range could attract. The largest portion of the auto market is not addressable with a $25,000/200-mile range vehicle. To grasp this we need only look at the 25 best-selling IC vehicles for 2020. (2)

Again, I do believe that even without any changes being made we could see over 5% of North Americans adopt EVs. But that still leaves most of the market as non-adopters. Ultimately what is needed are vehicles at every price point with 390 - 460 miles of rated range.

Bring On The Competition

Add to the price/range paradox the fact that (thankfully, at long last) competition in the EV space seems to be ramping up. This ramp will put pressure on Tesla’s lower range product offerings. Without improvements, Tesla may slam into a demand ceiling. There will soon be many new EV models competing in the $30,000 - $45,000 price bracket with ranges of 200 - 350 miles.

Thankfully there are going to be many new, first-time EV buyers entering the market. They will, however, have a broader selection of brands to choose from. As long as other manufacturers and their networks are willing to sell these new EVs in great numbers (hundreds of thousands), Tesla may, at last, face a limit on how many sub-300-mile range buyers it can attract.

If Nothing Changes?

Now note that in the beginning, I said, “if nothing changes." The key here is that things are changing and will change. Tesla’s “batry day” gave us a glimpse of the future to come. Tesla may be able to greatly reduce installed battery costs over the next few years.

I have long forecast that Tesla will eventually offer a $35,000 vehicle with 300 miles of range. I still stand by that forecast. However, perhaps it can possibly do one better. The host of The Limiting Factor Jordan Giesige believes that Tesla’s high nickel batteries could cost under $50 per kWh as early as 2025. Given that his analysis is correct, we may see a 390 - 460 mile range Tesla vehicle for $35,000 (or less). Check out the details on Jordan’s recent video Tesla’s Three Cathode Choices. (3) Check out his excellent YouTube channel, great stuff.

As the changes roll out, they should keep Tesla competitive and relevant in the EV market.

However, more importantly, the coming changes will not only keep Tesla competitive with other EVs but the changes should make Tesla competitive against its true competition, IC vehicles. Tesla’s real battle is with 390 - 500 mile range IC vehicles, not other EVs. If automakers were to settle on EVs with only 250 miles of range, would stall. In order to maximize potential sales, Tesla must increase vehicle ranges.

Will Things Change Enough?

The real question to me is, will things change enough? If Tesla can offer a $25,000 vehicle with 200 miles of range that should expand its addressable market. But even with such a vehicle, Tesla may find it difficult to reach 20 million sales per year in a free market. Even within this low-budget category, a greater number of buyers prefer vehicles with ranges above 200 miles.

A low-range vehicle is not inclusive enough to entice all potential auto buyers. It’s just not attractive to the greater number of them. Again, consider the 25 best-selling IC vehicles for 2020. (2) To properly compete with IC cars, what is needed is a “budget” vehicle with 390 - 460 miles of range. Even if it means raising the price a little it would be worth it in order to compete head-to-head with IC vehicles.

Running A Few Numbers

Will Tesla ever be able to offer a $25,000 vehicle with 390 - 460 miles of range? Let’s do some math. If the vehicle can get 40 miles per ten kWh (40 MPX (kWh) ), then a 110 kWh battery pack would yield about 440 miles of range. If Tesla’s battery costs eventually fall as low as $20 - $30 per kWh, the battery pack would cost $2,200 - $3,300. Will that be low enough to make a $25,000 440-mile range vehicle possible? I think that is uncertain without more information.

I’m still waiting on a promised video from Sandy Munro analyzing the cost of EV powertrains, sans batteries, vs ICE powertrains. This analysis should give us a good idea of how many dollars are available to be spent on EV energy storage. If EV powertrains (not counting batteries) are $3,000+ cheaper (my father would insist I say less expensive), then a 400-mile range EV may be doable even for a $25,000 vehicle.

I question, though, whether $30 or less per kWh at the pack level will be possible. That seems like an awfully long tail.

Government mandates?!

I know some will say, “Well, government mandates will make EV range a moot point.” “Combustion engines will be outlawed.” Consumers will have no other choice but to either pay a premium price for 390 - 460 miles of battery range or settle for an affordable limited-range vehicle. Personally, I strongly hope it doesn’t come to that. I hope solutions will be created that drastically slash our dependence on dirty fuels and still give customers the features we want.

What do you think? How can or how will Tesla address the price/range paradox? Will Tesla’s (and others) improvements in battery tech and costs go far enough to attract the broader auto buying public?

P.S.

Auto Sales In A Robo-Taxi Market

I want to acknowledge that my assessments here may be entirely wrong if/when robo-taxis become a reality. To me, it is impractical to even guess what kind of impact robo-taxis may or may not have on personal auto sales. It truly is uncharted territory. I don’t think anyone is able to correctly say what will happen. We’ll just have to wait until we get there.

25 Best Selling IC Vehicles of 2020