This week may have been the most exciting week in the short electric vehicle (EV) history. The Tesla Model 3 was finally announced... and much more was shown than I would have expected from the first of three Model 3 launch events. The promises that were made are exciting: Autopilot standard, 215+ miles range and <6sec acceleration to 60mph... for $35,000. When taking Tesla's quality and brand perception into account, the Model 3 has the potential to become the best car you can buy for $35,000. Well, taking into account that you have already reserved one. With >200,000 orders lined up, you would be waiting over a year after start of production for your Model 3 to arrive if ordered now.
The are three points I want to make today, to prove that other car manufacturers need to start producing competitive vehicles now (maybe with a newly positioned brand). First, current product supply in the full electric car market is so poor that it leaves customers basically with a single option to buy. Second, demand for full electric vehicles is high and will only increase in future. And finally, the decision tree for car manufacturers has changed with the Model 3 introduction.
For true economists, the plug-in market must have been an industry to wonder about. Traditional economic theory would suggest that, in a mature market, sales volumes should be decreasing with increased product prices. That is only true in industries in which products are comparable and competitive to each other, meaning in industries where the provided customer value is similar. However, looking at the 5 best selling plug-ins in 2015 in the US, the highest priced vehicle is the best selling one. I am not talking about a 10% price difference, this is a >100% price increase compared to competition. It seems that a many full electric vehicles have yet to reach a minimum customer value threshold . The highest priced model leading sales is an indication that the plug-in market is immature, with too few products that truly satisfy customer needs. The 180,000 pre-orders for the Model 3 also confirm this hypothesis. How large this number actually is, gets even clearer when understanding how many plug-ins have been sold in the whole year 2015 by all manufacturers in the US: 116,099!!! In short, product supply is unsatisfactory.
What about the demand side? The best way to describe how much customers want battery electric vehicles (BEVs) to become mainstream products is certainly the pre-order number for Model 3s. At the same time, it is a refundable deposit of $1,000, which relates to depositing $20 for a new iPhone... a very manageable price to pay. CleanTechnica is claiming that "Tesla has moved electric cars into a new category. They are not only selling to early adopters anymore but the Model 3 is being scooped up by the early majority. People are flocking to this car not because it’s electric, not because of Elon Musk, but because it’s the best car for their money. It’s a superior product across the board and that’s what sells."
While I generally feel that the BEV industry is starting to reach the early majority, announcing that the Model 3 is a superior product might be a stretch. With the Chevrolet Bolt coming up end of the year, we will see a comparable product being launched a year before the Model 3. Is owning a Chevi as cool as owning a Tesla? Probably not! However, is owning a BMW? Probably not either... In the end, all that matters is that there are now over 200,000 preorders for a vehicle that most future owners have not seen or driven at the point of pre-order and are willing to wait for 1,5 to 3 years. This is the ultimate prove that demand for BEVs which can compete with internal combustion engine vehicles (ICE) is significantly higher than most car manufacturers would like it to be.
Finally, lets shortly analyze a car manufacturers decision making process now that Tesla has created such a strong brand and value proposition. Chevy has reached industry leading cost of $145 per KwH for Bolt's battery pack. At 60 kWh for the Bolt that still means a battery pack cost of $8,700. Chevrolet has little control over these costs, as the cells are provided by a Tier 1 supplier. Battery cells, in particular, are produced in large volumes and achieve significant economies of scale. As such, even large OEMs have little influence on battery pricing. For a mass market electric vehicle, I estimate that an electric powertrain and battery represent approximately 50-60% of material cost. Why, should OEMs add these costs to any vehicle, reduce their profit margins and increase warranty risk and chances of bad press?
There was no need to decrease profits by introducing BEVs until now! We have prove that product supply in the EV market is currently underwhelming, we have prove that demand for comparable BEVs is high, and ultimately we have prove that a manufacturers brand value is defined by the ability to produce technological advancements, which is impossible without an electric powertrain. But, will car manufacturers be able to make a comeback? Can they raise their brand value again? Will they need to create new brands to market effectively in the BEV industry or are there current brands flexible?
A lot of food for thought for car producers in the next months to adjust the course of action. I wonder how many Tesla Model 3 buyers would have otherwise ordered a BMW 3 series, Mercedes C-class or Audi A4...
Sini Ninkovic analyzes the EV market and its customers since 2012. He helped bringing BMW's i3 and i8 to market and currently works as Product Planner for Lucid Motors.