Long-awaited price war a sign of rapid transformation in electric vehicle sector
Cutthroat pricing by Tesla may signal death blow to internal combustion vehicles
Splashy headlines about Tesla slashing prices for its entry-level electric SUVs below the average cost of new U.S. cars and trucks — including gasoline burners — may be a little less dramatic than they appear, considering the average cost of a new vehicle is close to $50,000 US.
But people who watch the industry say the Tesla move is just one indicator of a global transformation in the automotive sector, as legacy car makers learn how to make electric vehicles (EVs) as efficiently as the internal combustion vehicles that still provide most of their income.
They say the breakneck transition that few foresaw only two or three years ago will have effects throughout the economy, not just in things like battery production and the oil and gas sector, but, potentially, in the value of your home.
"People shouldn't underestimate how fast this market is moving," said Rachel Doran, director of policy and strategy at Clean Energy Canada, a think-tank based at Simon Fraser University.
Starting a price war
Doran and others I spoke to said that some automakers may be dragging their feet to profit — while they still can — from selling fossil fuel cars and trucks that have been cheaper to build using old technology. But once manufacturing costs equalize, the justification for producing internal combustion cars and trucks begins to disappear.
"No carmaker has made such a dramatic reduction to a high-volume vehicle in the modern age of the automobile," wrote Bloomberg transportation specialist Tom Randall this week, referring to the latest announcement from Tesla boss Elon Musk that he was dropping the price of Tesla's Model Y, one of the top-selling SUVs of any type.
"While Musk has denied that Tesla is starting a price war, his peers see it differently."
Tesla is now charging less for the base Model Y SUV than what the average new vehicle sells for in the US. 🧵 <a href="https://t.co/th3d7lJOCa">pic.twitter.com/th3d7lJOCa</a>—@tsrandall
In fact, Tesla's move to slash prices is not necessarily a sign of strength but may be an effort to grab market share before legacy auto companies eat the billionaire automaker's lunch, said Dimitry Anastakis, a professor and historian of the car business at the University of Toronto's Rotman School of Business.
"There's going to be dozens of new vehicles that are going to compete directly with Tesla," said Anastakis. He said that by using its early-mover advantage, Tesla will force competitors to squeeze out more efficiency. "Musk is really trying to lower costs."
"Tesla is ruthlessly efficient in terms of its production processes," said the automotive historian. "And they're really pushing their suppliers to be even more price conscious."
Brutal cost cutting
Neither the car-making majors nor their many smaller suppliers like that kind of price pressure. But both Toyota's notorious pressure on suppliers and Compaq's personal computer push in the '90s showed it is possible to drive industry-wide prices down through brutal cost-cutting while reaping an advantage in higher sales at the new price.
But while Tesla has an advantage in its supply of EVs to satisfy new demand, Anastakis said price alone may not be enough to compete with global industry players like Volkswagen, Ford and Toyota once they gear up EV production. In fact, he sees Tesla as being a possible future takeover target.
He said the North American market's love of trucks could hurt Musk's company as it struggles to produce its Cybertruck. And this week, GM announced it was stopping production of its entry-level EV the Bolt to concentrate on larger vehicles.
Also, said Anastakis, despite its efficiency and leadership in the EV space, Tesla has never learned the complicated process of model development that always offers the next new thing, such a large part of the legacy automotive industry. Tesla vehicles, while a radical departure from pre-Tesla cars, are still very much like the original Teslas from 10 years ago, he said.
Shakeout in the auto sector
But the price war is not just a North American phenomenon. The current fight to push down costs and prices in the EV sector is a global battle for survival, according to executive Brian Gu at XPeng, one of Tesla's international competitors.
"In five to 10 years, it's going to be a much more concentrated market," Gu told the Financial Times.
Dominated by electric vehicles, China's car makers are now exporting to the world, having overtaken Germany and hot on the tail of Japan. Forced by Tesla's price-cutting to slash their own costs, some of the many Chinese car companies will likely go broke, leaving only 10 manufacturers in the world, said Gu.
That kind of price pressure, combined with government requirements to sell an increasing percentage of EVs, is putting automotive and battery innovation into overdrive, said Doran.
In a report just a year ago from Clean Energy Canada, a careful tally of the costs of buying and running an EV showed they were already substantially lower than the cost of internal combustion cars, and recent surveys show Canadians know it. As price competition heats up and prices begin to equalize, she said, the cost advantage of electrics will drive explosive innovation.
On the path to 2026? <a href="https://t.co/UKMgezeRJE">https://t.co/UKMgezeRJE</a> <a href="https://t.co/2Tdcpqx8Qj">pic.twitter.com/2Tdcpqx8Qj</a>—@bcshaffer
"Humans are amazing; innovation is amazing," said Doran, whose family drives two electric vehicles in a rural area of Quebec not far from Ottawa. She said that people who looked at buying two or three years ago will be astounded how much things have changed. "As the market grows, it's amazing what kind of innovation will happen."
And according to automotive electrification entrepreneur Nino di Cara, that process of innovation is reaching out to disrupt everyone's lives.
His company, Electric Autonomy, is hosting an EV and Charging Expo in Toronto in May to help Canadian businesses cope with one of those disruptions — namely, the switch from fuelling at the gas pumps to finding enough electricity to keep commercial vehicles on the road.
Possible effects on housing
While the May event is targeted at companies such as property developers and fleet vehicle charging, di Cara said an expected surge in sales of EVs will have a big impact on Canadians, including on the price of their property.
On Wednesday, the Canadian Infrastructure Bank announced it was installing thousands of new public chargers, something the car industry has been calling for. But di Cara said that the vast majority Canadians expect to save money by charging at home.
Due to a lack of forward thinking by municipalities, di Cara said that even in recently constructed high-end housing, many builders did not plan ahead for parking space charging. Some new owners are discovering that the issue is not just a lack of charging devices or roughed-in wiring. In some cases, there simply is not enough power available in their neighbourhood, especially in the case of multi-family housing.
"We're going to need to figure these things out," said di Cara on the phone this week. "Because, you know, ultimately, at some point, it's going to affect property prices."
"If you're looking to buy a condo and you can't charge your EV there, then you're choosing another building and another apartment where you've got that ability."
WATCH | Pilot project shows how to get EV owners charging at off-peak hours: