Tesla steers back towards cheaper cars

Facing one of the worst stock slumps in Tesla’s 14-year history, Elon Musk was under pressure this week to deliver a reassuring message to investors about its next generation of electric vehicles and a persuasive vision for an AI-driven, automated future.

Instead, what the chief executive offered — alongside even worse than expected first-quarter profits and the company’s first cash outflow since the start of the pandemic — was a classic Muskian fudge. 

Tesla would “accelerate the launch of new models”, he said on Tuesday, including a promised “affordable” car better priced to compete with an impending influx of ultra-cheap Chinese rivals in the US market.

However, Musk was deliberately vague about whether he was talking about a new so-called “Model 2”, the mass-market car he announced in January with a rumoured $25,000 price tag.

After years as the world’s only serious electric vehicle maker, Tesla is finally facing real competition, both from established carmakers such as Hyundai and from rapidly growing Chinese brands that have a lead in battery technology and lower manufacturing costs. And Musk’s outspoken posts on his social media platform X risk denting his car company’s brand.

He testily refused to comment this week on reports that the ambitious Model 2 project — which called for a new “revolutionary manufacturing system” at factories in Texas and Mexico — had been scrapped so the company could focus on a self-driving “robotaxi”.

Instead, investors were given a “Plan B” for cheaper cars that will be made on existing production lines and systems to help cut Tesla’s spiralling costs as it shifts billions of dollars worth of investment to AI and the tens of thousands of GPU chips required to train the models. Musk promised an update alongside its robotaxi launch in August.

Some analysts probed Musk on whether he was now talking about building a budget version of the carmaker’s recently re-engineered Model 3. He did not engage.

“Elon is hedging his bets,” said Christopher Tsai, chief investment officer at Tsai Capital, a Tesla investor. “He’s using the same production line for a human-driven vehicle and a robotaxi, with the ability to pivot between the two depending upon the market demand at the time.”

While the share price recovered 13 per cent after the presentation, it is still down 35 per cent this year and trading at less than half its late-2021 peak valuation of $1.2tn. 

Shareholders and analysts have become increasingly concerned that the company, which had already warned this year that it was “between two growth phases”, would be competing against new Chinese brands but with increasingly stale models. 

The Model 2 “appears to have morphed into something less radical than previously indicated, but there was confirmation that more models are coming,” wrote Mike Tyndall, analyst at HSBC. 

Philippe Houchois, an auto analyst at Jefferies, said Musk was “appeasing the market” by pushing faster, but with a “risk of compromises on product to accelerate launches”. 

The decision to move faster comes as Tesla’s Chinese rivals push further into mass-market vehicles.

Hours after Musk’s call with investors, BYD, Tesla’s largest rival, announced that it planned to bring its ultra-cheap Seagull EV to Europe and the UK from next year. 

The vehicle, which sells for less than $10,000 in China, has caused near-panic among western carmakers, who argue they simply cannot compete with such prices. 

“It will be a European-market Seagull, a new Seagull,” BYD senior executive Stella Li told reporters, including the UK’s Auto Express, in Shenzhen.

Tesla’s investors remain aware that manufacturers in China, rather than established western carmakers, are likely to be the biggest competitors. 

“China has built an industry that can produce excellent cars at truly remarkable price points almost all through the range of products,” said James Anderson, a managing partner at Lingotto Investment Management, which holds Tesla shares. “A sub-$10,000 BYD Seagull domestically is a clarion call.” 

He told the FT that Tesla “is acknowledging the reality of the challenge of Chinese pricing”.

The Model 2 — or whatever version of a cheaper car takes its place in the line-up — accounts for about half of analysts’ projections for Tesla’s long-term sales.

If the plans had been shelved or pared back in ambition, Tesla — which once aimed to grow to the size of Toyota and Volkswagen combined by 2030 — would for now remain a more modest manufacturer than expected. 

The idea that the company would kill the model “doesn’t make any sense”, said one former executive, noting that Musk used to “school” those around him on the ever-urgent need to reduce costs. 

“The whole premise of the gigafactory, the whole point of getting the [battery] pack price down, was to get cheaper cars,” the former executive added. “If he really wants mass adoption, he must know from the turmoil of the last year that affordability is the big issue”. 

Tesla has cut prices several times — including this week — to buoy sales, although this has led to a collapse in the re-sale value of its cars.

“We believe that our awareness activities paired with attractive financing will go a long way in expanding our reach and driving demand for our products,” Tesla finance chief Vaibhav Taneja said on Tuesday. 

Tom Narayan, an analyst at RBC Capital Markets, said the decision to release vehicles earlier meant “fears of ‘no growth for years’ have largely been put to bed”, although he said it was still unclear whether there would be a $20,000 “bill of materials” for the car, something Tesla had targeted for the Model 2.

Lars Moravey, head of engineering at Tesla, said many of the developments for the “next-generation” model were “transferable” to the new models, including the battery system, heating and a reduction in the number of components.

“We’re not trying to just throw it away,” he said. “What we’re doing is trying to get it in . . . products as fast as possible.”

Yet the never-ending quest to drive prices lower is only part of Tesla’s strategy. 

Musk remains convinced that the company’s bet on self-driving technology, which has led to several fatalities, will be its key differentiator in the future.

Facing investors this week, he remained typically uncompromising and defiant.

“If you value Tesla just as an auto company, you fundamentally have the wrong framework. If you ask the wrong question, the right answer is impossible,” he said on Tuesday. “If somebody doesn’t believe Tesla is going to solve autonomy, they should not be an investor in the company.”