As is customary with Tesla’s investor events, Tesla stock dipped 5% following the company’s announcements. Sometimes it feels like Elon Musk and his team could announce they’d patented the cure to cancer and Tesla stock would still suffer from failing to meet expectations.
This time it wasn’t completely unfounded though, one of the problems with hosting an event every half a decade is that expectations often build to unreachable levels – which with it being Tesla and Musk – is likely by design. The event was widely expected to bring some significant information to investors as to where the company is going, with many expecting the announcement of a new budget-oriented vehicle to bring Tesla’s offerings into competition with the Volkswagen ID.3. Much to the disappointment of onlookers, what was announced instead was a new EV platform that promises new horizons for the company.
While it isn’t as flashy or showy as a new vehicle, new vehicle platforms are a big deal in the automotive industry, especially for EVs and the progress being made to this technology in its infancy. We wrote about Toyota finally righting the ship when it was leaked that it would be moving away from its hybrid e-TNGA production line towards a dedicated EV platform, as it indicated at least some recognition of the company’s prior mistakes. Tesla’s new platform isn’t as massive a shift, but it is an iterative improvement in the company that is already world-leading in terms of production costs and achievable profit margins.
Musk is claiming that the new platform could lead to cost-savings of around 50% on previous vehicles, and that the new vehicles produced on this platform will be produced in greater quantities than the company’s previous vehicles combined. Tesla has announced significant improvements to its production processes, including the Giga-press which can cast full chassis components, simplifying production massively. We still find it difficult to believe that new vehicles coming from this platform will achieve a full 50% cost saving, especially as Tesla will want to maintain a healthy profit margin while its competition lags behind its innovations.
The new platform is geared around cost and using abundant materials, with the company announcing it would forego rare earth metals in the production of magnets for next-generation vehicles. The announcement led to stocks in Chinese rare earth metal miners JL Mag Rare-Earth and Jiangsu Huahong Technologies to slide almost 10%. The company will probably use ferrite-based magnets instead, but these can be similarly environmentally problematic, more information is needed as to exactly what Tesla will be using as a replacement before the decision can be fully evaluated.
One of the major benefits to this new platform is that it will be battery chemistry agnostic, meaning both nickel manganese cobalt (NMC) and lithium iron phosphate (LFP) batteries could be used in the production of the same model vehicle. This is a big deal for Tesla since it produces both LFP batteries and NMC batteries for use in different vehicles. It’s also a big deal for consumers, meaning new vehicle models can be further customized to suit individual needs. If a customer lives in a cold climate where LFP may not be optimal for them, they could then opt for the NMC model rather than seeking alternatives at a competitor.
Tesla’s 4680 batteries will be central to the new platform, with production at the end of last year reaching enough cells for 1,000 vehicles a week and is set to continue increasing as gigafactories continue to ramp up output. It’s quite clear that this platform will eventually be the bearer of Tesla’s goal to produce its $25,000 mass-market vehicle.
While we can’t expect vehicles produced on this platform much before 2025, it’s lining up to be a bumper year for automotive OEMs launching new EV models. Tesla has the near-unassailable advantage of this being its 3rd major platform debut.
Following on the theme of cost competition, Tesla has cut the costs of its Model S and Model X vehicles by 4% and 9% respectively, but this may not have the effect Tesla wants for a few reasons. The Model S and X vehicles remain premium offerings despite the price-cuts and sit above the everyday consumer market, the customer-base taking these vehicles into consideration often aren’t going to be swayed into purchasing them because of the difference of a few thousand dollars. In economic terms demand can be considered price-inelastic due to the demand demographics for these vehicles not valuing cost as a primary factor in their decision-making.
Tesla also announced that as part of its goal to produce 20 million vehicles a year, it would be opening a plant in Monterrey, Mexico, complete with its very own border agreement between the two countries to have its own dedicated import lane. It’s quite amusing when Musk complains about a lack of government support. Just 7 hours across the border from the Monterrey factory, customers in Texas will be able to charge their vehicles for a set $30 per month from July due to the abundance of wind power in the state. We like that Tesla is implementing regional pricing, but we’ll have to see how well this holds up during Texas’ next winter blackout season.
Tesla also announced its intent to produce heat pumps, continuing the company’s expansion into related industries. Heat pumps make a lot of sense for Tesla, especially since the industry is still suffering from extremely high prices that can be partially addressed through ramping up production volume, something Tesla excels at. The company is quite rapidly becoming a one-stop-shop for home energy needs with its vehicle, battery systems, solar, and now heat pump offerings.