Will Tesla ever make a cheap version of the Model 3?
Building cars is hard. Building an affordable electric car is exceedingly hard.
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Can Tesla sell enough cars until the Model 3 arrives?
Two years before the release of Tesla’s long-awaited $35,000 Model 3, Tesla finds itself at another crossroads that may threaten the company’s welfare.
Festivus for the best of us: Our top 10 grievances about fuel
The United States has been observing Festivus for 18 years now, and this antidote to holiday crassness is vital as ever. As Frank Costanza so aptly described one of its central pillars (in “The Strike,” the episode of “Seinfeld” that originally aired on Dec. 18, 1997):
“The tradition of Festivus begins with the Airing of Grievances. I got a lotta problems with you people! Now you’re gonna hear about ’em!”
China emerges as a global leader in EVs
It’s an ill wind that doesn’t blow somebody some good, and it’s an ill pollution day that doesn’t have an upside somewhere.
Will Tesla lose the battle but win the war?
Things are not looking too good for Tesla these days. One of the most painful developments was Consumer Reports’ decision to remove its “recommended” rating and downgrade it to “worse than expected.” The magazine had once rated Tesla the best ever tested.
Tesla continues to walk the tightrope
One simple slide in a PowerPoint presentation by a Tesla official at an auto convention in Washington this month did almost as much damage as Elon Musk’s rocket blowing up soon after liftoff.
JB Straubel, chief technological officer and co-founder of Tesla Motors, put up a slide on June 15 indicating that Tesla’s Model 3 would not “begin production until 2018.” This apparent delay set the new vehicle back from the previously announced deadline of 2017 and almost knocked the company for a loop. The website Inside EVs broke the story, as it were, and word of the PPT slide was repeated in countless news stories. The interpretation was clear: Once again, Tesla had been forced to postpone key product rollout.
Within hours, Tesla had assured investors and analysts that it was not changing its schedule. The $35,000 Model 3 will be available in 2017, as previously planned. “Contrary to speculative blogger reports, we still plan to show Model 3 in 2016 and begin production in 2017,” Ricardo Reyes, vice president of communications, tweeted. The statement about production in 2018 was said to refer to “full production,” an attempt at back-filling that many analysts viewed with a grain of salt.
Whether the reference to 2018 was just a typographical error or an inadvertent peek under the kimono, the controversy showed how delicately balanced Tesla’s position is, both in terms of meeting customer expectations and in raising money to continue its projects.
Missing deadlines would certainly be nothing new for Tesla. In February 2012 the company said its crossover Model X would be available by the end of 2013. In February 2013, it said it would be late 2014. In November 2013 the company announced that a small number would be available by the end of 2014, but actual deliveries would not begin until the third quarter of 2015. Everyone is waiting to see if this deadline will be kept. Meanwhile, speculation has increased that any delay in the debut of the Model 3 may be due to the resources that have been spent trying to get the Model X out the door.
The Model 3 is Tesla’s bid for the big time. The car is projected to have a range of 500 miles and would be priced at the aforementioned $35K, less than half of the $79,570 MSRP of the 2015 Tesla Model S. The Model 3 is intended to be a mass-market sedan that’s well within the reach of the average car buyer. Musk, Tesla’s flamboyant co-founder and CEO, hopes to sell 500,000 versions of the Model 3 by 2020, a feat that could put Tesla on a firm financial footing.
But there are pending obstacles. One is the Chevrolet Bolt, a plug-in all-electric that is the successor to the Volt, a plug-in hybrid. GM demonstrated the Bolt in a sample model this month and will also be priced in the $35,000 range. GM promised to have the Bolt on the market by early 2017, which would beat Tesla’s Model 3 out of the gate.
Whether electric-car buyers will be attracted to the Bolt – or whether they will wait for what will almost certainly be a superior product from Tesla – is a hotly debated question. “GM is ramping up to make 20,000 Bolts. Tesla is ramping up to make 500,000,” said one commenter to a Wall Street Journal story. “When a company names its new car the ‘Bolt,’ Tesla has little to worry about,” said another. But other readers cited GM’s superior service network, and the company’s long history of making money, while Tesla has only lost money.
One thing is certain: Tesla is building brand loyalty. A survey of 145 Tesla owners by automotive analyst Dan Dolev of Jeffries found that 85 percent said their next car would also be a Tesla, and 25 percent wouldn’t even consider another brand. Eighty-three percent said they would recommend Tesla to their friends, and a remarkable 89 percent said they would still buy a Tesla without the $7,500 federal government tax break. The owners also turned out to be not nearly as rich as expected. Almost 70 percent had previously owned cars that cost less than $60,000, including ones as modest as a $15,000 Toyota Highlander. They paid an average premium of 80 percent over their previous car when they bought a Tesla. As a result of the survey, Jeffries raised its target price for Tesla stock to $350 from its current $265.
The battery-producing Gigafactory outside Reno is moving ahead on schedule, with the first phase of the structure near completion and machinery is about to be moved in. The current phase represents only 14 percent of the planned layout. Once completed, the Gigafactory will be the largest building in the world, with a footprint of 5.8 million square feet and two stories of manufacturing totaling 10 million square feet. Panasonic, Tesla’s battery partner, is expected to send hundreds of workers to the site this fall to prepare for full-scale production. The factory will also employ hundreds of local workers.
Wall Street Journal columnist Charley Grant threw a wrench into the works recently when he wrote that Tesla is still burning through cash and probably will run out of money if the Model X does not sell as expected. He says the company should sell another issue of stock while the price is still high. He suggested that a price of $200, 25 percent below the current market rate, could raise $750 million and carry the company over to the introduction of the Model 3.
Whether the company will dilute ownership or take a chance that Model X sales will reverse its cash flow is just one of the many decisions Musk will be facing in the near future. One thing is certain: He will be balancing atop that high wire for several years to come.
Is Elon Musk a welfare king?
Elon Musk is a darling of libertarians and free-market advocates because he is proposing to change the way Americans drive their cars through purely private effort. But he is now coming under fire for accepting gobs of government assistance in the process.
Critics charge that he has already accepted $4.9 billion in federal and state assistance and is angling for more. One article even asks if Musk has not become a “welfare king.”
Well, let’s take a look at the charges and see how they stack up:
The original article appeared in Mother Jones and was not entirely unfavorable. Staff reporter Josh Harkinson thinks the Tesla is a marvelous car and quotes all the accolades from Consumer Reports and Motor Trend. He even thinks Musk may be the next Steve Jobs and quotes New York Times blogger Jim Motavalli to that effect: “Individuals come along very rarely that are both as creative and driven as that. Musk is not going to settle for a product that is good enough for the marketplace. He wants something that is insanely great.”
What Harkinson objects to is simply that Musk hasn’t given the government enough credit for helping him on his way. He quotes Fred Turner, a Stanford professor and author of From Counterculture to Cyberculture, as saying: “It is not quite self-delusion, but there is a habit of thinking of oneself as a free-standing, independent agent, and of not acknowledging the subsidies that one received. And this goes on all the time in the Valley (i.e., Silicon Valley).”
It’s important to note that Harkinson is not just talking about Tesla. Musk’s other enterprise, SolarCity, which is installing rooftop panels on private homes, actually gets more federal and state subsidies than Tesla. And SpaceX, Musk’s venture into space travel, has a $4.2 billion contract with NASA to build a launching pad in Texas, which does not count as a subsidy but still comes from the government.
As far as Tesla is concerned, here’s what Harkinson counts as government assistance:
• Everyone who buys a Tesla gets a $7,500 tax credit from the federal government. Buyers in California get an additional $2,500 tax credit. Tesla buyers have an average income of $320,000. The federal tax credit will go to the first 200,000 customers. So far, Tesla has sold only one-quarter of that.
• The state of Nevada gave Tesla $1.2 billion in tax benefits to build its Gigafactory outside Reno. The offer came as Nevada was in competition with seven other states for the siting. The factory is expected to produce 6,000 jobs.
• Tesla’s principal source of income in recent years has come from selling Zero Emission Vehicles credits to other manufacturers in a program particular to the state of California. All auto manufacturers are required to produce ZEVs. When they can’t meet their quota, they can buy credits from other manufacturers. Tesla has pocketed $517 million in recent years. Harkinson counts this as a government subsidy, although Musk points out that the money comes from other car companies, not the government.
Musk has been quick to fire back: “If I cared about subsidies, I would have entered the oil and gas industry,” he told the media after The Los Angeles Times ran a story repeating the Mother Jones charges.
He points out that the$1.2 billion from Nevada will be spaced out over a period of two decades. It will also be contingent on the factory having an output of $5 billion every year for the 20-year period. He notes that hiring and other aspects of the Gigafactory will make it a profitable venture for the state of Nevada. And of course he notes that the fossil-fuel industry has received huge subsidies over the decades.
It really isn’t fair to say that Musk is “living off welfare.” His original entrepreneurial success, PayPal, rose to a valuation of $1.5 billion without the slightest assistance from the government. Tesla did receive a $465 million loan guarantee from the Department of Energy under the same program that funded the ill-fated Solyndra. But Musk made a grand gesture by paying back the loan ahead of time.
The fact is, it’s almost impossible to start a business these days without becoming involved at some level with the government. If Nevada hadn’t offered tax abatements, some other state would have – and did in fact. Many other factors were involved in the selection of Nevada, and states obviously benefit from such facilities.
Musk is a unique visionary whose reach extends far beyond making money. His ambition is to completely remake America’s automobile system and end the dominance of fossil fuels. He also wants to see America succeed at space travel. He plans to build a colony on Mars and has said he hopes to die on the Red Planet.
“Just not on impact, he added.
(Photo credit: J.D. Lasica, posted to Flickr)
Is this golf cart more ‘disruptive’ than Teslas?
In the May issue of the Harvard Business Review, Clayton Christensen and Tom Bartman tackle the question, “Is the Tesla a truly disruptive innovation?” The answer they come up with is “no,” but they have some interesting things to say in the process.
Christensen is the author of The Innovator’s Dilemma, one of the most highly regarded business books in recent memory. It originated as an article in the HBR exactly twenty years ago, and was published as a book in 1997. Christensen pointed out that established companies were often beaten at their own game by cheaper imitations that performed the same service at a much better price. He cited steel mini-mills and personal computers as examples of innovations that created whole new markets and ended up displacing previous technologies. The “innovator’s dilemma” is that established companies cannot compete at first without undercutting their own products. By the time they make the shift, however, they might be left behind.
An investor challenged Christensen as to whether Tesla was truly disruptive. (“Game-changer” is another popular term for the electric-car company.) Christensen has been feeling defensive about his work recently after a critical 2014 article in The New Yorker, and so he decided to take up the challenge. He assigned the task to Bartman, one of his assistants.
Bartman posed five questions: 1) Does the product target overserved customers by offering lower service at a lower price? 2) Does it create “asymmetric motivation” in that existing competitors aren’t motivated to initiate change? 3) Can it improve performance fast enough to keep pace with customers’ expectations? 4) Does it create new value networks, including sale channels? And 5) Does it disrupt all incumbents, or can an existing player exploit the opportunity?
“As Bartman worked through the questions,” says the article on HBR’s website, “it became clear that Tesla is not a disrupter. It’s a classic ‘sustaining innovation’—a product that, according to Christensen’s definition, offers incrementally better performance at a higher price. There’s nothing rudimentary about Teslas, which compete on price against cars by BMW and Mercedes.”
Truly disruptive technologies, so Christensen’s theory goes, start from the bottom up. They offer a cheap substitute, then grab a market and gradually improve until they have become a full competitor to the existing players. At that point, it might be too late for established companies to adopt the innovations.
Tesla is doing the opposite: It is starting at the high end of the market, competing only with luxury cars, and working its way down. The Model X, a family SUV scheduled to sell for $60,000, is due out this year; and the Model 3, which has a target price of $35,000 is scheduled to be showcased next year for 2018 sale.
It makes a big difference. “If Tesla is following a disruptive innovation strategy, theory predicts that it will continue to see no strong competitive response,” Bartman told HBR. “However, because it’s a sustaining innovation, theory predicts that competitors will emerge. Our analysis concludes that a competitive response won’t happen until Tesla expands outside its current niche of people who prefer electric vehicles to gas-powered cars—but if it expands by creating more variety (such as SUVs) and more-affordable vehicles, competition will be fierce.”
This seems like a pretty good assessment. Right now, Tesla is welcoming competitors. Musk even invited Apple to join him in the automobile business last week. There have been persistent rumors of Apple and Tesla joining forces in automobile manufacture, although Apple seems content to stick with personal electronic devices. But if Tesla succeeds in selling a $35,000 electric vehicle, it is certain it will face competition from GM, Nissan, BMW Volkswagen and the entire established industry.
So is there a vehicle out there that would be truly disruptive to the auto industry? In fact, there is. Bateman and Christensen identify it as the “neighborhood electric vehicle” – the NEV – and say there are already signs of it bubbling up from the bottom.
“In 2011, Polaris, the Minnesota-based manufacturer of snowmobiles and all-terrain vehicles, bought Global Electric Motorcars, a small division of Chrysler that makes battery-powered neighborhood electric vehicles,” writes the HBR. “Although NEVs cannot exceed 35 miles per hour and lack many features of cars, they could eventually steal enough market share to disrupt the automobile industry.”
Polaris CEO Scott Wine told HBR that his company has tightened up the braking system and added heaters and stereos in an attempt to upgrade toward regular automobiles. But the modified golf carts remain extraordinarily cheap –$2,000 to $12,000 — and are now being used in retirement communities. Bateman also points out that 200,000 of these vehicles are being sold in China each year. “When we launch our new model, in the not-too-distant future, it will be an opportunity to do exactly what Clay Christensen’s work says,” Wine says. “It’s going to be a significant disruption.”
So will the modified electric golf cart turn out to be the truly disruptive innovation that upends the internal combustion engine? We’ll soon see.
(Photo credit: Polaris.com)
Can energy storage assure Tesla’s survival?
Elon Musk’s bet that he can sell 50,000 versions of the Model 3, the $35,000 version of the Tesla, due out in 2017, still seems like a long shot, given the somewhat limited market for electric cars.
But he might have one more card up his sleeve. The development of solar energy for home use offers an alternative market for his batteries that could be enough to save Tesla from a market collapse.
Musk is unveiling a new home storage unit that will allow homeowners to move their electrical consumption from expensive peak rates to the rock-bottom rates of overnight power. If nothing else, this will create a secondary market for the millions of lithium-ion batteries that Tesla will be cranking out from its $5 billion Gigafactory in Nevada, which is scheduled to be operational in 2017.
Early indications are that the demand for batteries to power the mid-priced roadster might be thinner than anticipated. Musk was counting on big demand from China, and already there are indications that it’s a much tougher market than he realized. As reported here last week, China already has 100 manufacturers turning out 400,000 undersized vehicles a year that can reach 48 miles an hour. They certainly wouldn’t sell in the United States, but for a million Chinese, it’s just what they need to putter around their small villages and cities. China also has 90 million electric scooters on the road and 120 million electric bicycles — an entire electric-vehicle market that doesn’t exist in this country. Making a dent in this market with a $35,000 scaled-down version of a luxury vehicle is not going to be easy, which is why Musk cut his China effort in half only a few weeks ago.
But there’s an out here in the burgeoning market for home electric storage that is taking shape in the United States, particularly in California. The Golden State has established a goal of getting 33 percent of its electricity from renewable resources by 2020, and 50 percent by 2030. Now powering with renewables isn’t just a matter of putting up solar collectors and windmills. You have to store that electricity for a time when it’s needed. Otherwise, most of it is wasted. And that’s where Musk’s plan to power electric vehicles with large complements of relatively small lithium-ion batteries enters in, because such a system also will be ideal for storing electricity in household-sized units.
Without any fanfare, Tesla already has installed such a system in more than 100 homes in California. It also has a deal with Walmart to install it on a commercial scale. “Tesla has been able to install more than 100 projects, really without anyone noticing,” Andrea James, a Dougherty & Co. analyst, told Bloomberg. She also estimated that the home-storage business could add $70 to Tesla’s stock, about one-third of its current value.
The effort already has paid off for Tesla in that it has collected $65 million in state incentives under the advanced storage technology portion of California’s Self-Generation Incentive Program (SGIP), which rewards users for coming up with ways of generating their own power. With household units running anywhere from $2,000 to $10,000, they’re going to need plenty of help from the government.
Tesla is not the only company working on battery storage. Bosch, General Electric and Samsung all have experimental systems going. There are also research projects being conducted at Harvard, MIT and other universities.
In Notrees, Texas, Duke Energy Renewables, with the help of the Department of Energy, has built a project that is using thousands of lead-acid batteries to store the electricity from a large wind farm. The lead-acid batteries are more expensive, however, and require frequent repair. Also, Duke has found that there is not as much of a market for their product as it had anticipated, mainly due to the costs. “There was little interest from customers willing to pay for that,” said Greg Wolf, president of Duke Energy Renewables, according to The New York Times. “That has not evolved as much as some folks, including ourselves, thought.”
But there are other opportunities that could enhance Tesla’s overall business model. One is that when lithium-ion batteries begin to lose their power so that they are no longer capable of driving a car, they still remain strong enough to power a home storage system. That could mean there will be a secondary market for Tesla’s car batteries.
Another dream that has always been in the back of people’s minds is that the electric vehicles themselves could serve as storage for utility power, drawing on cheap nighttime power and then reselling it to utilities during the day. This would involve an elaborate infrastructure, however, and this would mean the cars would not be available for a good part of the day if their stored power was being fed to the grid.
Altogether, however, the storage potential of the batteries means that Tesla will have an alternative means of income in addition to the electric cars. This means the company could diversify enough so that it will not depend entirely on the success of the Model 3. In the long run, this might mean that the company can survive long enough to make the electric vehicle a standard item for the American consumer.
Alternative fuels and vehicles: Good news on all fronts
If we’re going to replace the gasoline in our tanks, we’re going to need help from all kinds of directions. None of the alternatives is likely to do the whole job by itself, but every little bit helps.
That’s why it’s so encouraging that there was good news on all fronts this week, and why each little success gets us closer to having legitimate alternatives to take the place of gasoline.
Here’s a sampling of some of the news:
Batteries. A team at Stanford University announced it had developed a high-performance battery out of aluminum. This is important because aluminum is much cheaper than lithium, the current favorite among battery-makers. Aluminum has been used to make batteries, but the problem has always been keeping the voltage high after repeated charging and recharging. Now the Stanford team believes is has found the answer.
“We have developed a rechargeable aluminum battery that may replace existing storage devices, such as alkaline batteries, which are bad for the environment, and lithium-ion batteries, which occasionally burst into flames,” said Hongjie Dai, professor of chemistry who headed the team. “People have tried different kinds of materials for the cathode. We accidentally discovered that a simple solution is to use graphite, which is basically carbon. In our study, we identified a few types of graphite material that give us very good performance.”
This raises the question of whether Elon Musk can substitute aluminum batteries in his Gigafactory, a work in progress that is set to build lithium batteries for the new Tesla.
Hydrogen. Hydrogen cars are clean, producing only warm water for exhaust. But the problem is getting the hydrogen. The only known methods to date have been electrolysis of water, which is expensive and energy intensive, and “reforming” natural gas, which produces carbon dioxide and makes hydrogen just another fossil fuel. But now a team of scientists at Virginia Tech has come up with a catalyst the can make hydrogen quickly and cheaply from biomass.
“Researchers from Virginia Tech have developed a way to drastically cut the time and money necessary to produce hydrogen fuel,” reports The Christian Science Monitor. “By using discarded corn cobs, stalks, and husks, they have improved on previous methods deemed too inefficient by energy experts. Their research, which was funded in part by Shell, was published today in Proceedings of the National Academy of Sciences.”
Using genetic algorithms, Percival Zhang and Joe Rollin developed an “enzymatic pathway” that speeds up the reduction of hydrogen from biomass. By including two simple plant sugars, glucose and xylose, they were able to increase the rate of hydrogen production while emitting an “extremely low amount” of carbon dioxide.
“Cost effective and productive in volume, this method could breathe new life into the hydrogen car,” says the CSM.
Biofuels. And speaking of enzymes, another team of researchers working for the Department of Energy has come up with a bacterium that efficiently breaks down biomass without pretreatment. The team has been using the system to extract ethanol from switchgrass, a fast-growing weed that has long been a favorite of biofuels enthusiasts. The strategy, called consolidated bioprocessing, uses the Caldicullulosiruptor beseii bacteria to split cellulose and then ferments it into ethanol. The strategy eliminates the very expensive pretreatment that requires heat and more enzymes. Several facilities are now trying to break down cellulose and convert it into ethanol, but this one-stop process would be a huge saving.
EVs. A study at the Stockholm Environment Institute says that electric vehicles may be coming into their own much faster than everyone thought. This is because the price of batteries is coming down faster than anticipated. EV batteries now cost approximately $300 per kilowatt-hour. They weren’t expected to fall much lower than that over the next five years. But the authors Bjorn Nykvist and Mans Nilsson say that recent developments have brought the price down as low as $150 per kilowatt-hour, which could make electric vehicles appealing for a much wider range of customers. Since the batteries normally make up at least half the price of the vehicle, it could reduce costs significantly. Or manufacturers might use the new low price to load up on batteries, increasing the range of the electric vehicle. Either way, the package becomes more attractive.
And that doesn’t even include the possibility that the aluminum battery developed at Stanford could be making batteries more efficient and lowering prices even further.
There’s a tremendous synergy going on in these fields, as researchers pursue numerous pathways in exploring alternative vehicles. One way or another, it means that alternatives to foreign oil are soon going to be making their way into the customer’s field of vision very soon.
