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Tesla cost-cutting a sign of EV revolution

The company is working on a smaller low-cost car. If successful, it could transform the market

8 minute read

Tesla made Elon Musk the wealthiest man on earth, but recently his attention has often appeared to be focused elsewhere. Twitter, the social network he bought for US$44 billion last October, has seemed to take up a lot of his time and energy. This week, however, Musk was back as the face of Tesla, fronting its 3½ hour Investor Day presentation. 

As usual with Musk, there was a wildly ambitous vision, some of which is not going to be translated into reality any time soon. But for the immediate future there were significant indications of where Telsa is going.

The presentation began with the hype: the announcement of what Tesla is calling its Master Plan 3, following previous plans launched in 2006 and 2016.

This is a vision of an energy system without fossil fuels, using renewables for power generation, EVs for transport, and heat pumps for heating. Much of it based around Telsa products.

As Egor Prokhodtsev, Wood Mackenzie’s senior analyst for transportation, puts it: “They are saying that this is the future for global energy sustainability. The vision is an entire ecosystem: in 20 years’ time, you will take your Tesla Robotaxi to your Tesla home, where your Tesla car is plugged into your Tesla Powerwall and is connected through your Starlink internet service.”

While some of the components of this integrated ecosystem are already available, others remain extremely challenging technically. Tesla’s Master Plan talks about “powering everything with renewable generation & stationary storage.” Wood Mackenzie’s projections of a possible world with net zero emissions include significant contributions from other technologies, including fossil fuels with carbon capture, advanced biofuels and nuclear power.

However, you do not have to buy in fully to Musk’s vision of the future to appreciate that his decisions are changing the world. Probably the most important line in the presentation was that Tesla expects to be able to cut manufacturing costs for its next generation of vehicles by 50%. 

Lars Moravy, Tesla’s vice-president of vehicle engineering, said reconfiguring manufacturing processes would make it possible to “do more at the same time”, enabling a 40% reduction in factory floor space, and along with other efficiency gains meaning that “we can reduce costs by as much as 50%”.

The new processes are not going to be used for Tesla’s current model line, but for a new car that company currently refers to only as “the next-gen vehicle”. It is widely expected to be a small car: a mass-market entry-level EV that would sell for significantly less than the US$43,490 price of a basic Model 3, excluding taxes, credits, etc.

Underlining Tesla’s focus on cost reduction, the company this week announced its first investment in Mexico: a new “gigafactory” to be built near Monterrey in northeast Mexico, about 180 miles from the border with the US. The plant, which has been reported as a US$5 billion investment, is expected to build the new “next-gen” small car. 

If Tesla can achieve its goals for cost reduction, it will have a huge impact on sales of EVs. “If Tesla can sell its new model for $25,000, that will be revolutionary,” says Ram Chandrasekaran, Wood Mackenzie’s head of road transportation. “It will break the car market.” 

With about US$22 billion cash on the balance sheet at the end of last year, Tesla is well positioned to make the investments it needs to achieve the next phase of its growth.

Chandrasekaran cautions that Tesla’s ambitions still present it with daunting challenges. “It has grown to a company selling one million-plus cars a year, but it is looking at an enormous step beyond that. Now it wants to get to four or five million, and more, and only a handful of companies have ever done that. Elon Musk’s goal of 20 million vehicles a year would give Tesla twice the production of Toyota or VW at their respective peaks.”

Musk’s record as an entrepreneur is undeniably hit-and-miss. But given the scale of his hits, it would seem rash to bet that he will fail.

Iron-based batteries displacing nickel and cobalt for EVs

Tesla is also making progress on another cost reduction strategy: shifting away from the lithium nickel-cobalt-aluminium oxide (NCA) batteries that have until recently been the EV industry standard, and using more lithium ferrophosphate (LFP) batteries. The LFP technology is safer and lower-cost, and avoids the human rights issues raised by cobalt. It has traditionally delivered lowered range than NCA batteries, but technical improvements have made it increasingly competitive. 

Tesla said in 2021 that it was moving to LFP batteries for all standard range vehicles, and in the first quarter of 2022, nearly half the vehicles it sold had them. Other manufacturers are going down the same route. Ford, for example, plans to invest US$3.5 billion to build an LFP battery plant in Michigan, and will start offering them as options on its EVs.

Elon Musk observed at Tesla’s Investor Day: “You only need nickel [batteries] for basically aircraft, long-range boats, and very long-range cars or trucks. The vast majority of the heavy lifting for electrification will be iron-based [LFP and similar] cells. And iron is actually the most common element on earth.”

In brief

EU leaders and the European Parliament have reached an agreement to establish a quality standard for green bonds. The new voluntary standard is intended to allow investors “to more easily assess, compare and trust that their investments are sustainable, thereby reducing the risks posed by greenwashing.” To qualify as “green” under the standard, at least 85% of the funds raised by the bond sale must be allocated to activities classified as sustainable under the EU’s Taxonomy Regulation. 

France is working to build a “nuclear alliance” of EU member states to make the case for “the contribution of nuclear power to our climate objectives and to energy security in Europe”. 

A group of US cities has voted to continue to support the development of NuScale power’s innovative Small Modular Reactor project in Idaho, despite a steep increase in projected costs. 

Japan intends to promote investment in gas production and LNG, as well as in low-carbon fuels such as hydrogen and ammonia, during its presidency of the Group of Seven developed nations this year, Reuters reported. 

John Kerry, President Joe Biden’s climate envoy, has said the impact of wind turbines on wildlife in the US is “not a crisis”. He told Newsweek: "Can a bird wind up becoming the victim of that [turbine] blade? Yes, I think we know that that can happen. But on the other hand, birds are also highly receptive in flight…. Cars hit birds. I don't hear anybody complaining about that, or trains or airplanes. It's a balance.” 

Other views

Endri Lico — The wind energy industry paradox: short-term headwinds and long-term optimism 

Robin Griffin and Nick Pickens — The role of African mining in the energy transition 

Nick Esch — US grid edge deal flow surges 

David Pilling — Scandal at South Africa’s Eskom: the CEO and the cyanide-laced coffee 

Gautam Jain and Luisa Palacios — Investing in oil and gas transition assets en route to net zero 

Laura Cozzi and others — As their sales continue to rise, SUVs’ global CO2 emissions are nearing 1 billion tonnes 

Graham Hutchings and others — UK net zero aviation ambitions must resolve resource and research questions around alternatives to jet fuel (A very interesting report from the UK’s Royal Society on the challenges facing the growth of Sustainable Aviation Fuel) 

Gavin Maguire — China widens renewable energy supply lead with wind power push 

M R O’Connor — How climate change plagues ordinary Americans 

Will Wade, Jonathan Tirone and David Baker — How two approaches to nuclear fusion could create endless clean energy

Quote of the week

“I would not say perturbed, but we are feeling little challenged with the announcement of CBAM [the EU’s Carbon Border Adjustment Mechanism] recently… It is going to cover five to six sectors which are key to Indian industry and supply chains.” —  Nidhi Mani Tripathi, Joint Secretary in India’s Department of Commerce, raised concerns over the EU’s new “carbon tariff”, the Carbon Border Adjustment Mechanism, which is scheduled to begin to be phased in from October 1. The CBAM will cover the cement, iron and steel, aluminium, fertiliser, electricity and hydrogen sectors. It is intended to level the playing field between production in the EU, where a price has been paid for carbon emissions, and imports from other economies that may have paid lower prices or nothing at all for their emissions. 

Chart of the week 

Wood Mackenzie this week announced its Research Excellence Awards, which we use to celebrate and highlight what we think were particularly outstanding pieces of work from the past year. This chart comes from one of the winners, looking at the question of how LNG demand in Asia would respond to high prices. It’s written by Wood Mackenzie’s Lucy Cullen, Miaoru Huang, Valery Chow, Asti Asra and Raghav Mathur.

This chart is a schematic showing the expected demand response for the key Asian economies, based on their exposure to the spot LNG market and the availability of substitutes. China and India are up in the top right quadrant, because they had both high exposure to the spot market, and a ready availability of substitutes for imported LNG. We characterised them as having an “extreme risk of demand response”, and so it proved. China’s LNG imports dropped by 17 million tonnes last year. For more detail, read the full report here. 

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