Why I Think Tesla’s Most Affordable Model Will Be A Big Success, For Reasons Nobody Is Talking About

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Historical Context on Model Y Pricing You May Or May Not Care About

I’ve been writing about the more affordable Tesla models for a long time. I wrote this article in 2019 talking about how to cut costs and referenced Elon Musk talking to Marques Brownlee in August 2018 about making a car that sells for $25,000 in about 3 years (that would be 2021). When 2021 came, electric cars were selling well and the pandemic caused a lot of supply disruptions, so Tesla prices went up instead of down. They (like most other manufactures) were selling everything they could make. Other manufacturers made good money too, but their dealers really did well, frequently adding a $10,000 or more “Market Adjustment” charge to the most popular models. Tesla gradually raised their prices and had a long waiting list at the time.

Then we remember 2023, when we had a HUGE reduction in the price of the Model Y. In December 2022 (see this google sheet), the least expensive Model Y (Standard Range All Wheel Drive) was $61,990 and had 279 miles of EPA range. Most of the reduction was in early 2023, when in 4 short months the Standard Range All Wheel Drive was down to $46,990 and it was eligible for a $3,750 tax credit — so a net price of $43,240, or a 31% decrease!

Then, by April 2024, the Standard Range Rear Wheel Drive (only 260 miles range) was reduced to $43,990 and eligible for a $7,500 tax credit — for a net price of $36,490, or a 41% reduction (not an apples to apples comparison as stated, but comparing the least expensive models). My daughter bought this Model Y at that time and they were offering pretty large inventory discounts of about $4,000, and $1,000 off with a referral code, so really aggressive pricing. A year later, we had aggressive discounting of the old Model Y RWD to about that same price (with more range of 320 miles). My daughter’s Model Y can unlock an extra 50 miles of range for $1,600 if she wants.

The new Model Y Long Range All Wheel Drive is now $48,990, just $1,000 more than the old model, and since it is available with no waiting, it is expected to drop in price throughout the quarter — either in price, with inventory discounts, or with zero percent financing. So I would expect it to be down to about $45,000 soon ($37,500 after tax credit). This will be enough to improve sales a bit, but not enough to open new markets.

Ideas To Make The Car More Affordable

For the sake of this article, I’m going to assume Tesla doesn’t make a true new Model with a different length and width in the next couple months. I do think the company will do something so that it looks different enough that they can call it a new model. I think this is really tricky because they could really hurt sales of the existing Model Y if people just downgrade, but if they don’t make it appealing, why bother? They want to sell a lot, but not hurt existing sales of the other model.

Let’s look at a Toyota example to see what they do. Toyota seems to be able to make many sizes of cars (where Tesla seems to be really optimized to just make VERY few). So, Toyota sells the Corolla for about $22,000 and the Camry for about $30,000. But the Corolla doesn’t cut too much into Camry sales because not only is the Camry bigger, I think the bigger factor is the Camry has more power, more luxurious features, and just an image of a more premium vehicle. Basically, if you tell your friends you bought a new Corolla, they think that is fine if you are of average income, but if you told them you bought a Camry, it would be more of a flex. Nobody really “needs” the extra features of the Camry over the Corolla (I’ve owned 1 Corolla and 3 Camrys), but it is really more of a want. That said, I would not have been satisfied buying 3 Corollas instead of my 3 Camrys. They just weren’t that class of vehicle that I wanted for my family and financial situation. It would have felt too cheap, even for a miser like myself. I spend all this time on Toyota (this is from about 1985 to 2010 in my life) just to see what it would take for Tesla to make a Corolla class vehicle from the Model Y.

List Of Changes I Expect From The More Affordable New Entry Model

Now, I realize there will likely be several new models, but I’m talking about the least expensive of the new models. It could be based on the Model 3 or the Model Y. The costs to make the two aren’t that different, but since the Model 3 is a bit smaller, that might be what they use as the base. On the other hand, they make the Model Y at all 4 factories, so they may want to use that.

1. Clearly, they will only have 1 motor in the new model. Typically, when Tesla removes a motor from their all wheel drive models, they cut the price by about $3,000 to $5,000. But this isn’t because that motor costs that much. They frequently also reduce a few other trim features like the number of speakers or the heated seats, rear screen, double pane glass, etc.
2. Tesla announced 2 years ago that it was working on a $1,000 motor. We haven’t heard much since, but this would be the car to use it in. On the conference call last week, they confirmed they were working on motors with ferrite magnets instead of more expensive rare earth magnets. This is likely the same project. This car will likely have less power than existing motors. We don’t know the cost of their existing motors, but I’ll guess $2,000 from some reading I’ve done, so there’s potentially a savings of $1,000.
3. Many have mentioned that the model would have textile seats instead of the vegan leather in the Model 3 and Y. The textile seats in the Mexican Model 3 and the new Cybertruck support this idea. This might save $500 per vehicle.
4. A metal roof was planned for the original $35,000 Model 3, but dropped when it came out. The explanation at the time is they didn’t want the complexity of doing two roofs. Grok estimated this could save $500 to $1,500 a vehicle with both cheaper materials and a less expensive processes. Since the Cybercab has a simple metal roof, this is a hint they are moving in this direction.
5. It might have steel wheels and smaller tires. This could easily save $500 a vehicle.
6. It could use a smaller lithium-iron-phosphate (LFP) battery. This is tricky because of the requirements to get the tax credit and the threat of tariffs — they need to try to make them domestically. Luckily, Tesla has been thinking of this for years for cost and environmental reasons, so they have several options. They can now use the prismatic cells produced in Sparks, Nevada, with CATL equipment or they could put make 4680 LFP cells in Austin. They could even do both. I don’t know which they will do, but with LFP batteries being about $30 cheaper per kWh, Tesla needs the $1,500 savings if they can do it. Reducing the size of the 82 kWh pack by 25 kWh to something like 57 kWh at something like $60 kWh would provide another $1,500 in saving. That’s a total of $3,000 in savings for a car with only 220 to 260 miles of range. I don’t know if they want to go that small, but this is where the original Standard Range Model 3 was.
7. Tesla has a positive margin and it is common for auto manufactures to reduce the margin a bit on their entry level products. This can be justified in two ways. Since Tesla’s factories are running significantly below capacity, they would have few capital costs to expand production. So, they don’t have to allocate the fixed depreciation to these models. Tesla also believes a high percentage of these cars will use Full Self Driving (FSD). They may or may not be correct, since so far FSD take rates are disappointing, but they can use the razor-razorblade model and underprice the car expecting to make up the profit later on the purchase or subscription of FSD. This discretionary action could reduce prices by up to $4,000.

If you add all this up, it suggests a price reduction of $12,500 to $15,500! The lowest priced Tesla is currently the $42,490 Model 3 Long Range RWD. We can’t include any savings from a front motor or speakers, but they are offering 0% financing worth about $4,000, so a net of $13,500 to $16,500 would take it down to about $26,000 to $29,000 before the US tax credit and $18,500 to $21,500 after the tax credit! Starting with the New Model Y instead, I said above that the price of the Long Range All Wheel Drive cost would soon be down to $45,000. Reduce that by $12,500 to $15,500 and we get a price of $29,500 to $32,500 before tax credits and $22,000 to $25,000 after tax credits.

I don’t think Tesla wants to go anywhere near that low and I don’t think they will offer anywhere close to that low of a price, but that is what they could do if they felt they needed to.

Average Price Of A Vehicle In The US Over The Last 10 Years Up About 50%

In this recent article from Cox Automotive, you will notice that Tesla has been targeting the base price of its entry level vehicle at about the same price as the average transaction price in the US. When they announced the $35,000 Model 3 in 2016, you can see the average price was about the same. Today, Tesla Model 3 and Y prices are very close to the average transaction prices (even before the tax credit). That means that with the tax credit, the prices are about $8,000 lower and a better deal. This makes sense because a lot more people buy Tesla (and other brands of electric cars) today. Of course, there are many other advantages of electric cars, but that isn’t what this article is about.

A Lot Of Entry-Level Cars Have Been Discontinued Over The Last 10 Years

Why is that? I think it is because both buyers and sellers would rather have a 3-year-old slightly better car (like a Honda Civic or Toyota Corolla) than a brand new car from this list. The advantage to the seller is the dealer might pay $18,000 for a used Civic, spend $1000 reconditioning it, and then sell it for $22,000. That $3,000 margin is probably more than they make on a new car. Buyers like getting known models and slightly larger and possibly more reliable cars. Their friends might not even realize it is a used car and may think they got a new Civic (if the body style hasn’t changed).

So, that means the 5 most affordable cars next year are likely to be the following. (It is important that they be made in North America both to reduce shipping costs and because the risk of tariffs is high right now.)

You can see the lowest price car you can buy in the US has gone up by more than 50%. Instead of buying Nissan Versa sedan that was available in 2015 for $11,990 (I actually rented this car about 7 years ago in California for a few days, and although it wasn’t great, I was impressed with it for the price), you would end up spending at least $21,500 on a car, a whopping 79% increase over 10 years!

Conclusion

In March 2016, the prospect of a $35,000 Tesla Model 3 with at least 215 miles of range caused a stampede of buyers (about 400,000 reservations) even though you could buy a Nissan Versa for about the third of the price! The Model 3 was $23,000 more. Today, Tesla offers the Model 3 and Model Y for about $35,000 to $38,000 after the tax credit (only about $12,000 more than the most affordable models you can buy in the US). I think Tesla needs to match the price of the Sentra to greatly increase sales. If the company can reduce its costs and prices by about $7,000 and price the car under $30,000 after the tax credit, it should generate a lot of sales. The total cost of ownership will be less than the Corolla and Civic, but the purchase price will still be significantly higher. This new model will have the same purchase price (but much lower costs of ownership) as a Toyota Camry or Honda Accord (both start at $30,000).

But what will keep existing Model 3 and Y buyers from buying this model?

1. It will have a different styling that, while appealing, will not be as upscale as the current Model 3 and Y. The dorky wheels and tires will be key.
2. It will be be the slowest Tesla ever sold. The zero-to-sixty time will be about 7 seconds (comparable to the Camry and Accord, but of course better with instant torque). The top speed will be reduced to 112 mph to allow S speed rating tires to reduce costs.
3. It will have a decent range of around 250 miles (it won’t be 150 miles), but most people who can afford a 330 mile range car won’t go for this to save a few bucks.
4. The interior will look cheap and be a bit noisy. If you want a better interior, it’s only $7,000 more for the Model 3 or Y.

You see, this is actually a great chance to get new customers to look at Tesla (that would never consider a car over $30,000). They can then advertise a really low price on something to get you in the store, and then can upsell some percentage of the customers on the improved features at only a bit more money — many people will go for the improved model. People will hear that you can get a Tesla for under $30,000 or a $199 month lease, but when they come in and test drive the Model Q and the Model 3 or Y, perhaps half the people will think it is worth a bit more for the better car. So, instead of only cannibalizing Model 3 and Y sales, it may actually increase them! It will clearly cannibalize some sales, too.

If you want to take advantage of my Tesla referral link to get up to $1000 off a new Tesla vehicle, here’s the link: https://ts.la/paul92237 — but as I have said before, if another owner helped you more, please use their link instead of mine. If you want to learn more about Tesla’s new referral program (August 2024) — Chris Boylan has written an excellent article on it.

Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], XPeng [XPEV], NextEra Energy [NEP], and several ARK ETFs. But I offer no investment advice of any sort here.