The EV Price War Is About To Change Everything!

It happened folks, Tesla has raised their prices yet again. This continues on well over a year of relentless price hikes across the entire vehicle lineup, some models are getting it worse than others, but that fact is that the prospect of becoming a Tesla owner has only gotten richer - and all signs point to the fact that this trend will continue.

And we know that this is a controversial subject around Tesla fans and those who are aspirational Tesla buyers. For one, it’s obviously frustrating to see the goal post being moved farther and farther away. And for two, this is the opposite of what we had been told would happen - the original pitch was that as Tesla optimized their manufacturing process for maximum efficiency, the price of the vehicles would actually come down, there would be a deflationary effect. And for a short and beautiful time that was actually the case, don’t forget the price of a Model Y Long Range actually dipped significantly in 2020, reaching just $49,990 in mid July. That exact same vehicle is currently sitting at a starting price of $65,990 today.

Now, I’m going to go out on a limb here and say that this is actually a very smart move on Tesla’s part. It’s good that they did this. And before you rage quit off the video, I totally understand why you might not agree, but I am going to present a thorough argument as to why Tesla is doing the right thing.

By choosing not to fight an electric vehicle price war, Elon Musk is doing the smartest thing to ensure that he is the last man standing after the dust clears in the period of economic downturn - we’re not going to use the R word, but… you know what’s coming.

There’s a lot of ground to cover here, and it’s actually pretty interesting stuff to think about, at the very least this might lessen the blow from watching the price of your dream car steadily ratchet up to infinity. So let’s get into it.

Selling Themselves into Bankruptcy

Let’s first look at the new Chevy Bolt as the poster child for the race to the bottom and eventual bankruptcy of the auto industry. This is the 25 thousand dollar compact EV, it happened, it just wasn’t Tesla who made it - General Motors did.

But did they though? Is this actually a $25,000 EV? No. Of course it’s not. So, everyone is familiar with the Chevy Bolt, it’s the EV best known for spontaneously combusting. And this whole, bursting into flames, situation got so out of hand that GM had to specifically instruct owners to never park the car in their garage, or anywhere near their house, or anywhere near other vehicles - basically keep this car away from anything that you don’t want to catch on fire.

Then they went about the task of replacing every single battery pack in every single Bolt ever made. And now, after taking over half a year off to deal with that fiasco, the Bolt is ready to return to the marketplace at a reduced starting price of just around 25 thousand US dollars.

Now there’s a reason that it was such a big deal when Elon Musk teased a 25K Tesla vehicle, because Elon was talking about a compelling, sustainable electric vehicle with all of the autonomous, self driving features that Tesla is known for - packaged into something that is both affordable for the mass market consumer and profitable for the company to produce. Elon said that Tesla would leverage next generation battery technologies and advanced manufacturing techniques to make this happen. Something that only Tesla could accomplish.

Anyone can just sell a car at a loss. That’s easy. And that’s exactly what GM is doing right now with the Bolt. At some point, the top brass at General Motors all got together and made a calculation of two choices - one would be to design an entirely new compact electric vehicle that is not the Bolt and bears little or no resemblance to the Bolt and therefore does not come with any of the spontaneously combusting baggage of the Bolt. Or Two, just sell the Bolt at a ridiculously cheap new price point that loses the company money with every sale, but will flood the market with product - and as long as thousands of new Bolts can hit the streets without bursting into flames, then eventually the vehicle’s reputation will turn around and the company can return the price point to a number that actually makes sense.

The GM leaders would have calculated two numbers based on the projected outcomes of these decisions - and they would have chosen whichever number was lowest. So clearly it was determined that just selling the Bolt at a loss was cheaper than designing a whole new car. So they’re going to build and sell a ton of these cars and they will not make a single penny for their efforts.

But at least GM is losing money on the Bolt on purpose. Over at Ford, things are looking bleak as they just recently announced that they are now losing money on the sale of every single Mustang Mach E. And this is particularly sad because the Mach E is actually a pretty decent product, it’s not amazing, but probably the closest thing to a Tesla from any legacy automaker. And it’s an incredibly popular product, there are a ton of Mach E’s on the road and the demand for new products far outstrips the rate that Ford is able to build them.

So they have a good product that people like, and they still can’t make any money? Ford’s Chief Financial Officer, John Lawler, recently told Bloomberg that the company actually was making a profit on the Mach E when it first launched - which is impressive, usually the bottom line on a new product takes some time to turn positive. So Ford had the formula worked out - they just weren’t smart enough to recalculate often as the market conditions shifted. Ford did increase the price of the Mach E in 2021, but they didn't go far enough, adding just $1000-$3000 depending on the version. 

Now they’re selling a car in the red and the only way to fix that is going to be a very abrupt and drastic price hike. Which begs the question - are Ford’s customers loyal enough to swallow that pill? Is the product compelling enough to stand up to a higher price point?

Over at Tesla they have managed to increase the price of a Model Y by a staggering, $16,000. And yet, people still love Tesla, the demand for Model Y remains astronomical. And most importantly, Tesla is still making money every time they sell one. A lot of money. In Q1 2022, Tesla reported an automotive gross profit of 32.9%, which is an increase from 26.5% in Q1 2021. So Ford profits going down, Tesla profits going up.

For whatever reason, Tesla seems to be the only automaker that is genuinely good at price forecasting. Instead of waiting around for their numbers to turn red and then reactively pushing prices up, Tesla has just been slowly and steadily ratcheting up the sale price of their vehicles. It’s like boiling a frog, as long as you increase the temperature gradually over a long period, the frog won’t get upset or even really notice that it’s being cooked - Or at least that’s what I’ve heard, I’ve never actually done that to a frog because I’m not sick. Maybe someone can attest to how accurate that analogy actually is.

Either way, this is very important because when it comes to electric vehicles and the associated long wait times for delivery, companies need to be very conscious of the fact that a sale made today will not convert to money in the bank until sometime next year. The Model Y Long Range delivery window is currently sitting between April and July of 2023. So when Tesla sets the price for today, they know that they are actually determining the price that they will receive for that car a year from now.

So if Ford is losing money on the cars they are delivering today, and they’re not immediately jacking up the price by 10 or 15 percent, then they are just going to continue losing more and more money at a faster pace as the cost of making the vehicle increases more and more over the time period between order and delivery.

And we know perfectly well from the experience over at Rivian Motors that trying to pull a price hike on orders that have already been made is not going to work. Earlier this year Rivian made the decision to abruptly increase the selling price of their R1T electric truck by 12 grand over the initial price that it was offered for at its launch in 2018. And of course, it makes sense that the price would have to increase between 2018 and 2022 - even in the best case scenario there would be some degree of inflation over 4 years, but we are unfortunately in the worst case scenario right now and Rivian did not price that in - which is fine, how could they have possibly known?

But where they really went wrong was trying to make that price increase retroactive to all R1 sales, including pre-orders that were already locked in at the 2018 price. This caused a large number of order holders to cancel and dealt a pretty significant blow to the company’s image, even many of their earliest and strongest supporters felt burned.

So this proves that it is critical to constantly be re-evaluating the price of an electric vehicle and making sure to remember that you’re not setting the price for today’s market - you are setting the price for where you think the market will be at when the order converts and the vehicle is delivered. In Tesla’s case this lead time is now one year out, and considering that they’ve just increased prices by a large number, yet again, it shows that they do not forecast the market getting any better, any time soon. If we use the Model Y Long Range as our barometer, we can reason that Tesla expects their costs to rise by at least 4 point 7 percent in a year.

This is dangerous for a company like Rivian, because they’ve just made a drastic price increase on the R1T from 67,500 to 79,500 - and it’s still not enough. In just the last couple of weeks, we’ve heard multiple industry leading voices saying that Rivian is in bad trouble if they do not start making money on their product or at the least cut their losses. Elon Musk just said that the company is headed straight for bankruptcy if they don’t get their costs under control. The well respected automotive engineering consultant Sandy Munro said that Rivian’s R1T is drastically under priced and pointed out multiple opportunities to reduce manufacturing cost. Even Peter Rawlinson, the CEO of Lucid Motors chimed in to say that he thinks Rivian should actually be selling the truck at 95 grand right now.

And this trend of under pricing is especially dangerous for legacy auto makers like Ford and GM. They’re plan for the foreseeable future is to subsidize their electric vehicle losses by selling their core products, which are internal combustion engine vehicles. Except given the current market circumstances, no one wants gasoline powered vehicles anymore. And it’s not like everyone just woke up and realized that electric cars are better and healthier - they woke up and saw that the price of gasoline has more than doubled year over year with no signs of slowing down or ever returning to what they might consider normal and acceptable. So the global market for ICE vehicles has already begun a violent contraction that has rapidly shifted a massive amount of demand over to electric vehicles. And if no one is buying their cash cow gasoline powered SUVs anymore, then companies like Ford and GM will have absolutely no choice but to massively inflate the cost of their electric cars to the point where they can actually make money from selling them because the only other option will be to just keep taking losses all the way to a bankruptcy filing.

If you have any hope of ever purchasing a $25,000electric car, then buy a Chevy Bolt and do it right now - because in 6 months, that price is going to be right back up to 35, maybe even 40 thousand dollars. There is literally no other possible outcome.

Meanwhile Tesla is making money. A lot of money. And they’ll continue to make money. And the gradual, strategic price increases are the reason for that success. So while people would be fully within their rights to be upset about the constant rise - the fact of the matter is, that if Tesla hadn’t made the choice a year ago to start proactively adjusting their price structure, then they could have quickly found themselves in the same boat as the rest of the industry, just bleeding money with no hope of salvation. And that’s not how we accelerate the transition to sustainable energy. Tesla can not accomplish their mission statement if they are broke, and if Tesla’s mission is not accomplished, then we are all doomed.

So, believe me, Tesla’s gradual ramp up in price is going to look tame compared to epic spikes that are coming across the EV industry as a whole.