By Tim Higgins
Car makers trying to catch up to Tesla Inc.'s electric vehicles were thrown a curveball recently with Elon Musk's latest goal: slashing the cost of building next-generation cars by 50% in coming years.
Analysts already estimate Tesla's bestselling vehicles enjoy thousands of dollars in cost advantages over rivals in producing EVs, and those competitors have been trying to close the gap.
"There is a clear path to making a...smaller vehicle that is roughly half the production cost and difficulty of our Model 3," Mr. Musk said earlier this month during a Morgan Stanley conference.
His comments reiterated a target highlighted during the auto maker's investor day. Tesla executives aim to achieve the cost reductions through a combination of vertical integration, factory automation, part reductions and other steps.
Mr. Musk, who has a history of missing ambitious pricing goals, hasn't detailed specific figures or when the vehicles will debut. But those savings are seen by analysts as helping allow Tesla to offer a long-promised $25,000 electric car without destroying the company's industry-leading, double-digit-percentage margins.
Tesla didn't respond to a request for comment.
Since the earliest days of the automotive industry, executives have been obsessed with cutting costs, an endeavor that has fueled the development of the assembly line, messy mergers, global alliances, and design and engineering overhauls -- all aimed at finding ways to save dollars, if not pennies, on each car.
But their efforts have taken on new urgency as auto executives are squeezed fighting a twin battle of having to navigate inflationary cost increases, while also investing heavily in electric vehicles as investors and regulators give priority to this technology.
"This sort of ratchets up the pressure" on traditional auto makers, said Mark Wakefield, a managing director for consulting firm AlixPartners LLP, which estimates that the auto industry has committed a combined $526 billion to convert lineups to electric vehicles through 2026.
That funding is occurring ahead of most companies seeing any real benefits from economies of scale from EV sales, which have been growing strongly yet account for a small portion of overall global deliveries.
The new pressure brought by Mr. Musk was evident Tuesday when Volkswagen AG met with analysts and investors.
UBS analyst Patrick Hummel referred to Tesla's cost-cutting plans in asking Volkswagen officials about its EV dubbed the ID. 3, which he said starts at about $40,000 in Europe and is "slightly above break-even levels" for the company.
"I really struggle to see how VW is going to have an affordable EV that's profitable to you in a couple of years' time," he told executives.
"We are very aware that competition will become tougher," Arno Antlitz, VW's chief financial officer, said. "So we try to stay as fixed as possible on the overhead cost side."
Ultimately, Volkswagen is betting its newest generation of EVs, built with common parts, will give it scale over time to reduce costs. And Mr. Antlitz reiterated that the company plans an EV priced below EUR25,000, or around $27,000. The company showed a concept version of the forthcoming model last week and said it would arrive in 2025 in Europe.
"We will have significant scale by then," he said.
Tesla's evolution to mainstream auto maker came with the Model 3 sedan, which starts at around $45,000 in the U.S., and was supposed to be a $35,000 car when it was revealed in 2016. But it wasn't offered at that price when production began in 2017 as the company couldn't produce it without losing money, Mr. Musk has said.
Instead, Tesla has engaged in continuous efforts to whittle away cost, saying it has achieved 30% improvements since 2018 through a whole host of areas, including productivity, engineering changes and supplier scale. Executives say these actions foreshadow how they will achieve more reductions for the next-generation vehicles.
Caresoft Global, which tears apart vehicles to compare costs between competitors, estimates Tesla's Model Y compact sport-utility vehicles have at least a $3,000 cost advantage to competitors' comparable offerings, excluding batteries, said the consulting firm's chief executive, Mathew Vachaparampil.
Even if Mr. Musk is unsuccessful at reaching 50% reductions, industry observers say any significant effort toward that goal would be meaningful. In effect, Mr. Musk's claims set a new bar with investors in which to judge car companies' ability to compete with Tesla.
"This is them challenging the industry," said Mark Fields, a former chief executive of Ford Motor Co. "Is the rest of the industry going to stand up and notice? I think they will."
Investors have already been skeptical of traditional auto makers' ability to compete with Tesla.
At a conference in February, Rod Lache, an analyst for Wolfe Research, told Ford Chief Executive Executive Jim Farley that in his firm's survey of 100 investors, 92% said they didn't think traditional auto makers could match Tesla on cost.
Mr. Farley wasn't surprised. He often cites Tesla's more than $10,000-per-vehicle cost advantage when talking about the need to make changes. To break internal resistance, he has taken steps to split the company into new groups -- including one working on future EVs -- in an effort to encourage new thinking.
Ford's EV effort is benchmarking against Tesla's margins, Lisa Drake, Ford's vice president of EV industrialization, has said. Last year, she said the company will reach the kinds of volumes of EV sales in 2026 that give them scale.
"That's going to help us unlock some of that cost efficiency that we need," she said.
Similarly, Mr. Lache asked General Motors Co. Chief Executive Mary Barra about matching Tesla's cost structure and margins.
"Our aim is to have industry-leading margins as we invest," Ms. Barra said.
After attending the company's investor day, Morgan Stanley analyst Adam Jonas, a longtime Tesla bull, came away convinced traditional auto makers will face a hard time matching in EV profitability.
"In a race to the bottom, we seriously question how the competition can keep up," he wrote in a research note.
Write to Tim Higgins at tim.higgins@wsj.com
(END) Dow Jones Newswires
March 20, 2023 05:30 ET (09:30 GMT)
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