A $25,000 EV: “Tesla Tore Down a Honda Civic to Study How to Make Cheaper Cars”

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Tesla bulls, such as Future Fund’s Gary Black, have repeatedly called on the EV giant to launch a cheaper model to better compete with the likes of BYD, which has now zoomed past Tesla to become the world’s largest producer of electric vehicles. This call now appears closer than ever to being answered if the latest scoop from Reuters pans out.

To wit, as per a Reuters report, Tesla has informed its suppliers that it wants to begin production of an entry-level $25,000 EV, dubbed “Redwood” internally, by June 2025. The company has already sent requests for price quotes to certain suppliers of key components based on a volume production level of 10,000 units per week, equating to around 520,000 units per year.

While details are still sketchy at the moment, Redwood is likely to be a compact crossover, with initial production taking place at Tesla’s sprawling facility in Texas, unlike a previous report that claimed Shanghai as the site of initial production. In what constitutes a striking anecdote, Tesla employees apparently “tore down a Honda Civic to study how to make cheap cars.”

Bear in mind that Elon Musk had announced at Tesla’s annual shareholders’ meeting (AGM) back in May 2023 that the EV giant would soon launch two new products, entailing a cumulative increase in sales of around 5 million units per annum. Musk had gone on to add:

“Both the design of the products and manufacturing techniques are head and shoulders above anything else that is present in the industry.”

It is widely believed that a robotaxi and a $25,000 entry-level EV are the two products that Musk referred to at the 2023 AGM. While we still do not know anything substantial about the former, Tesla has now begun to elaborate certain key details regarding the latter.

Yet, challenges abound. Even though Tesla has been touting advances in its production techniques as critical levers for preventing a substantial hit to its gross margins, there are limits to what production efficiencies alone can contribute, given the significant proportion of overall costs that go toward battery packs. According to the rough calculations by Mark B. Spiegel of Stanphyl Capital, the $25,000 Tesla EV will eke out a margin of just around 4 percent.

Of course, much depends on Tesla’s ability to extract significant economies of scale through automation and its “unboxed” production process, where ultra-high pressure presses are used to die-cast almost the entire vehicle in one go. Also, the EV giant will have to ramp up the production of its 4680 battery packs by orders of magnitude to meet the 2025 deadline for the new EV.

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