Would You Buy an Electric Car?
Tesla has recently shown a change in direction — one for the best. The earnings report posted on October 23 was even more positive than expected, with earnings of 78 cents per share. This marked just the fifth quarterly profit since the company went public in 2010, with losses totaling over $6 billion, which is particularly noteworthy given that the federal tax credit on electric vehicles is set to expire at the end of 2019. Tesla stock reflected the strong earnings report through an 18% spike in price on Thursday October 24, the highest one-day gain since May 9, 2013’s 24%. The stock spiked even higher on October 25, reaching levels not seen since January 2019. The future will tell if Tesla can maintain its high level of production. The company needs to be even more aggressive in its fourth quarter production in order to meet its 2019 forecast of 360,000 to 400,000 vehicles. With just 255,200 vehicles produced at the end of the third quarter, Tesla no doubt recognizes the challenge that lays ahead — for its fourth quarter and beyond.
Most Americans are not interested in owning an electric vehicle. But, what about a Tesla?
Tesla was not the first plug-in electric vehicle, mass-produced or otherwise, but it has still made its mark on the electric car market. Tesla first brought to market its Model S in 2012 at a price of $57,400 (or just under $50,000 after federal tax credits). The Model X, a slightly larger vehicle with a seven-seat option, came five years later, at a slightly higher price than the Model S. Tesla CEO Elon Musk promised that the Model 3 would start at just $35,000. After initially only selling a premium version — at a cost of $50,000 — a stripped-down version at the $35,000 mark was available for a short period of time, before being removed from the website. Musk has repeatedly mentioned his push towards lower production costs in order to meet the promised lower price. However, the current consumers are not opting for the cheapest, bare-bones option; according to analysts at the Wall Street Journal, the average selling price of the Model 3 last year was $57,000. So why is Musk so insistent on pushing down the base price, when consumers seem to be paying nearly 50% more than the current cheapest option? A price of $35,000 puts the Model 3 just in range of the widely shared plug-in price of $30,000. Consumers of any electric car are paying a big premium — an amount higher than mere gas savings. At $35,000, Tesla is offering a luxury car at essentially base electric car prices. But is this necessary? Tesla’s Model S makes up 29% of the EV market, and its Model X another 16%. Chevrolet’s Bolt and Nissan’s Leaf make up another 16 and 15 percent of the market, respectively, but no other vehicle has a significant market share.
That begs another question: why are so many car companies coming out with their own electric vehicles?
Tesla is not the only “luxury” brand; along with the more affordable options like Toyota, Chevrolet, and Nissan, companies such as Audi, BMW, and Jaguar have released electric models as well. Porsche recently announced their 2020 all-electric Taycan model. With a horsepower up to 750, it is set to rival Tesla’s Model X’s 518. And with the Taycan’s starting price of nearly $151,000, Porsche will also challenge Tesla’s luxury identity.
California is by far the country’s largest EV market. In 2019, sales of new electric vehicles are up over 63%, mostly due to sales of Tesla’s Model 3. However, purely electric vehicles make up just 5.5% of total car sales in California. Hybrids and plugin hybrids make up another 8%. Tesla is mostly responsible for the first figure. In the first half of 2019 in California, roughly 33,000 Model 3s were sold. Chevrolet’s Bolt sold the second most number of units, at just under 4,500. Tesla’s Model X and Model S each sold around 3,500 units, and Nissan’s Leaf, just over 2,000. As Jessica Caldwell, market analyst at Edmunds, notes, electric car consumers, “don’t seem to be EV fans, they seem to be Tesla fans.”
Why are sales of other electric cars so low?
Mainly, this is due to cost. Simply purchasing an electric car is expensive relative to non-electric prices. For example, Hyundai’s Kona starts at $20,000, while its all-electric version starts at over $36,000. Even ignoring electricity costs, gas savings do not come close to closing the gap between the gas engine and electric version of the same car. Another factor that is deterring consumers from the EV market is short driving range.
Generally, an electric car will have a range in the low to mid 200 miles; Tesla’s Model 3 stands on the high end with a range over 300 miles. Many consumers are still wary of switching over to EV, even if they do show interest. This makes it much more difficult for car companies to continue investing resources into making their EVs more affordable and generally better vehicles.
What is the outlook for the EV market?
While consumers are generally slow to make the switch to electric cars, once they switch, they are likely to stay in the EV market. Electric car drivers get used to being able to charge at home, skip trips to the gas station, and enjoy a smooth, quiet ride. Electric cars also on a whole require less maintenance, disincentivizing car dealerships from moving electric vehicles. As with all new technology, as advancement continues, prices eventually fall. Deloitte, for one, expects 2022 to be a tipping point for the EV market, projecting that at this time, the cost of electric cars will meet that of gas engine cars. However, as competition grows in the relatively newly forming EV market, an “expectation gap” — the difference between what producers think consumer demand is and what is really is — will emerge. As of now, there is not enough demand to support the current number of EV manufacturers. Considering the high technological start-up costs of producing EVs, it is more efficient if fewer firms produce these cars. Lower production costs for these fewer firms will in turn push down the price for consumers. Therefore, it is expected that within the next few years, the market will normalize the high number of suppliers relative to the demand. This means that some car companies will be pushed out of the EV market if they do not first decide that their resources are better employed elsewhere.
Ultimately, the EV market should continue to grow, due to high retention rates for consumers and increasingly innovative technology that will push EV prices down and quantity up. Deloitte estimates that by 2030, accounting for changes in total vehicles sales, the EV market share will near 20%. While it is hard to predict with certainty, it is clear that in the near future, the EV market on a whole is looking up.
Sources
Crothers, Brooke. “Why Americans Don’t Buy EVs.” Forbes. Forbes Magazine, September 25, 2019. https://www.forbes.com/sites/brookecrothers/2019/09/22/ why-americans-dont-buy-electric-cars-hey-the-tesla-model-3-isnt-that-popular/#4ea176c537fd. 1 2 3
“Electric Vehicle Sales Are up Sharply in California, Mostly Due to Tesla.” Los Angeles Times. Los Angeles Times, September 11, 2019. https://www.latimes.com/business/story/2019-09-10/ev-electric-car-sales-california-tesla.
McCarthy, Niall. “Tesla Dominates The U.S. Electric Vehicle Market [Infographic].” Forbes. Forbes Magazine, August 14, 2017. https://www.forbes.com/sites/niallmccarthy/2017/08/14/tesla-dominates-the-u-s-electric-vehicle-market-infographic/#7880005b7be4.
Vigna, Paul. “Tesla Turns a Corner. It May Not Be the Last One.” The Wall Street Journal. Dow Jones & Company, October 24, 2019. https://www.wsj.com/articles/tesla-turns-a-corner-it-may-not-be-the-last-one-11571939500.
Wu, Hao, Genevive Alberts, James Hooper, and Bryn Walton. “New Market. New Entrants. New Challenges. Battery Electric Vehicles.” New Market. New Entrants. New Challenges. Battery Electric Vehicles. Deloitte UK, 2019. https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/manufacturing/ deloitte-uk-battery-electric-vehicles.pdf.