Photo: Tesla
Tesla is working on its third-generation automotive platform, which will spawn a $25,000 compact EV. Initially announced as the first product of upcoming Giga Mexico, the affordable EV was also rumored to start production in India and, recently, Germany. Although Europe is the right market for a compact EV, Germany might be the worst place for producing such a vehicle at cost.
Tesla and Elon Musk have been cozying with the idea of an affordable EV ever since the original Master Plan was published in 2006. Building more affordable electric vehicles is basically Tesla's mission, although the end goal must've been somehow overlooked in the post-pandemic years. Prices skyrocketed as the economy thawed and the supply chain snapped under stress.
All carmakers were affected, although Tesla was better sheltered than others, thanks to its vertical-integration strategy. However, the production glitches throughout the industry and the piles of money potential customers accumulated during 2020 made car prices go through the roof. Everyone wanted to buy a car, while the carmakers could barely keep the production lines rolling. The long waiting times made the customers willing to pay a lot over the MSRP just to get their cars delivered.
This was the context in which Tesla followed the rest of the market and raised prices significantly during 2021 and 2022. Last summer, the Model Y LR AWD's price reached $65,990 after repeated price hikes that started in February 2021. Prior to that, the same model was a stable $49,990 for much of 2020. It's easy to forget that your mission is to build an affordable EV when even your most expensive models fly off the shelves like hot bread, and you can't produce enough to quench the demand.
Those were the times when Elon Musk talked about production problems, with demand being virtually infinite. It was also when Tesla's CEO shelved the plans for what had become known as "the $25,000 EV." The market changed significantly since then, as the supply chains were rebuilt and the car market swung from a low-production, high-demand situation to the exact opposite. That's also when Tesla began cutting the prices of its vehicles.
That's how the $25,000 EV plans have been put back on the menu, with Elon Musk making an official announcement during the March 1 Investor Day. As revealed by Walter Isaacson in his book about Elon Musk, Tesla's CEO had to be persuaded that the affordable compact EV was the only way Tesla could maintain its 50% annual growth and make the robotaxi dream possible. Musk loves the robotaxi idea, so we're seeing renewed efforts poured into the Gen-3 vehicle platform development.
Based on the plans announced in March, the new platform would get its own custom-designed factory where a revolutionary manufacturing process would be implemented. Giga Mexico was set to become Tesla's most efficient gigafactory as a result, with a smaller footprint and higher production pace than even the crown's jewel, Giga Shanghai. The Mexican gigafactory should've already broken ground by now and start producing the first Gen-3 vehicles next year.
The plans have changed again as Giga Mexico construction is limping instead of going full speed. Tesla put it on the backburner as Elon Musk predicted an economic downturn. His "doom and gloom" speech during the third-quarter earnings call conveys this sentiment perfectly. Instead of starting next-gen EV production at Giga Mexico, Tesla is considering doing it at Giga Texas.
New plans claim that the development of the new models could be significantly sped up in Austin, where there's still room for additional production lines. The unboxed vehicle manufacturing process is also perfected in Texas before being transplanted to other gigafactories. This tells us that Giga Mexico construction is not going to start soon. Giga Texas could produce the $25,000 EV in the first stages, at least until the demand is high enough to require new production lines.
Tesla's affordable EVs need the cost savings afforded by low-income locations for its factories, and this is a strong argument in favor of Giga Mexico and Giga India. The Giga Texas is a bit of a stretch, but the elephant in the room is Giga Berlin. This is the latest gigafactory rumored to produce Tesla's compact EV. Sure, Europe is probably the best market for a compact EV, but it's also the worst place for cost-efficient manufacturing.
The rumor claims Elon Musk told the Giga Berlin employees during a recent visit that the $25,000 Tesla compact EV will be built in Gruenheide. Apparently, Musk made the announcement at the same time he promised significant wage increases from February 2024, which makes the affordable EV even more expensive to build in Germany.
While producing high-margin advanced vehicles in Germany makes sense, trying to build affordable EVs is a whole different thing. It's not just the labor costs that are among the highest in the world. It's everything: water, electricity, services, that would make the next-gen EV impossible to build at cost. Tesla currently imports the Model 3 from China, and it's for a good reason.
Giga Shanghai is probably the best existing production facility Tesla has for an affordable EV. Its production lines are the most efficient of any car factory in the world, and everything is in place to allow the building of affordable EVs. What Giga Shanghai lacks is the capacity for another vehicle. For now, its production lines are busy with the Model 3 and Model Y, and there's no room for another model without affecting current production.
If Tesla really wants to produce its upcoming affordable EV in Europe, it should seek a lower-income country from Eastern Europe. After all, German carmakers have done the same, with production facilities in Hungary, Slovakia, and the Czech Republic. Regardless of the location, the fact that Tesla changes plans so often shows the lack of a clear strategy beyond "build an affordable EV." Hopefully, this will change.
All carmakers were affected, although Tesla was better sheltered than others, thanks to its vertical-integration strategy. However, the production glitches throughout the industry and the piles of money potential customers accumulated during 2020 made car prices go through the roof. Everyone wanted to buy a car, while the carmakers could barely keep the production lines rolling. The long waiting times made the customers willing to pay a lot over the MSRP just to get their cars delivered.
This was the context in which Tesla followed the rest of the market and raised prices significantly during 2021 and 2022. Last summer, the Model Y LR AWD's price reached $65,990 after repeated price hikes that started in February 2021. Prior to that, the same model was a stable $49,990 for much of 2020. It's easy to forget that your mission is to build an affordable EV when even your most expensive models fly off the shelves like hot bread, and you can't produce enough to quench the demand.
Those were the times when Elon Musk talked about production problems, with demand being virtually infinite. It was also when Tesla's CEO shelved the plans for what had become known as "the $25,000 EV." The market changed significantly since then, as the supply chains were rebuilt and the car market swung from a low-production, high-demand situation to the exact opposite. That's also when Tesla began cutting the prices of its vehicles.
From infinite demand to price cuts in less than a year
The night of January 12, 2023, will always be remembered by Tesla followers, customers, and competitors. Tesla announced some of the deepest price cuts in the history of the car market. The same Model Y LR AWD dropped its price from $65,990 to just $52,990, a 20% cut. Tesla made some upward adjustments in the coming months, but the cost-cutting spree continued. The same model starts now at $48,990, while Tesla delivery numbers have basically plateaued. That's a sure sign that prices might go even lower as Tesla is trying to grow sales.That's how the $25,000 EV plans have been put back on the menu, with Elon Musk making an official announcement during the March 1 Investor Day. As revealed by Walter Isaacson in his book about Elon Musk, Tesla's CEO had to be persuaded that the affordable compact EV was the only way Tesla could maintain its 50% annual growth and make the robotaxi dream possible. Musk loves the robotaxi idea, so we're seeing renewed efforts poured into the Gen-3 vehicle platform development.
Based on the plans announced in March, the new platform would get its own custom-designed factory where a revolutionary manufacturing process would be implemented. Giga Mexico was set to become Tesla's most efficient gigafactory as a result, with a smaller footprint and higher production pace than even the crown's jewel, Giga Shanghai. The Mexican gigafactory should've already broken ground by now and start producing the first Gen-3 vehicles next year.
The plans have changed again as Giga Mexico construction is limping instead of going full speed. Tesla put it on the backburner as Elon Musk predicted an economic downturn. His "doom and gloom" speech during the third-quarter earnings call conveys this sentiment perfectly. Instead of starting next-gen EV production at Giga Mexico, Tesla is considering doing it at Giga Texas.
New plans claim that the development of the new models could be significantly sped up in Austin, where there's still room for additional production lines. The unboxed vehicle manufacturing process is also perfected in Texas before being transplanted to other gigafactories. This tells us that Giga Mexico construction is not going to start soon. Giga Texas could produce the $25,000 EV in the first stages, at least until the demand is high enough to require new production lines.
The most significant danger to the idea of an affordable Tesla model
This is also the most significant danger to the idea of an affordable Tesla model. Giga Texas might be one of the most efficient Tesla factories in the world, but the cost structure would be much lighter with the cheaper workforce in Mexico. I'm not saying Tesla could not produce a $25,000 EV in Texas. It could, but the margins would be razor-thin, and that is something Tesla investors hate the most.Tesla's affordable EVs need the cost savings afforded by low-income locations for its factories, and this is a strong argument in favor of Giga Mexico and Giga India. The Giga Texas is a bit of a stretch, but the elephant in the room is Giga Berlin. This is the latest gigafactory rumored to produce Tesla's compact EV. Sure, Europe is probably the best market for a compact EV, but it's also the worst place for cost-efficient manufacturing.
The rumor claims Elon Musk told the Giga Berlin employees during a recent visit that the $25,000 Tesla compact EV will be built in Gruenheide. Apparently, Musk made the announcement at the same time he promised significant wage increases from February 2024, which makes the affordable EV even more expensive to build in Germany.
While producing high-margin advanced vehicles in Germany makes sense, trying to build affordable EVs is a whole different thing. It's not just the labor costs that are among the highest in the world. It's everything: water, electricity, services, that would make the next-gen EV impossible to build at cost. Tesla currently imports the Model 3 from China, and it's for a good reason.
Giga Shanghai is probably the best existing production facility Tesla has for an affordable EV. Its production lines are the most efficient of any car factory in the world, and everything is in place to allow the building of affordable EVs. What Giga Shanghai lacks is the capacity for another vehicle. For now, its production lines are busy with the Model 3 and Model Y, and there's no room for another model without affecting current production.
If Tesla really wants to produce its upcoming affordable EV in Europe, it should seek a lower-income country from Eastern Europe. After all, German carmakers have done the same, with production facilities in Hungary, Slovakia, and the Czech Republic. Regardless of the location, the fact that Tesla changes plans so often shows the lack of a clear strategy beyond "build an affordable EV." Hopefully, this will change.
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