Following the end of the Chinese government's subsidies for new energy vehicles at the end of 2022, EV giants started to reduce prices in an effort to keep consumers interested. The surprisingly massive price cuts by market leader Tesla prompted not only EV startups but also traditional gasoline car brands to follow suit in order to prevent their market share from shrinking in China. Tesla's price cuts spread to the U.S., the EU and the rest of the world, causing traditional car manufacturers in Europe and the U.S. to lower prices of their electric models as well. All of a sudden, the prices of electric cars and the prices of gasoline cars are approaching a golden cross worldwide. The biggest winners, of course, are consumers who have been waiting with bated breath. As electric cars come closer to their gasoline counterparts in prices, buyers are more likely to choose electric cars.
Moreover, charging piles and supporting facilities have achieved service levels in several major markets. What's more, the U.S. federal government is promoting the widespread availability of charging facilities through subsidies that will allow Tesla to open more than 7,500 superchargers to EVs of other brands by 2024, thereby eliminating the concerns of the average consumer about charging in the vast hinterland of the U.S. Without doubt, it is a policy measure that offers multipronged benefits to Tesla. Not only will Tesla be able to charge EV owners of other brands for charging, but it will also have monetary resources, the federal subsidies, needed to build more charging facilities and in turn, use the increased leading advantage in the entire charging network to mitigate the complaints of Tesla owners about having to wait for charging because the charging resources have to be shared. More importantly, by supporting the U.S. government's policy, Tesla will earn the trust of government officials, demonstrating the bearing of a market leader while gaining a brand reputation among consumers at large.
The global EV market is set to cross the new milestone of 10 million units this year and will, for the first time, account for a record high of 10% of the car market (global car production and sales are in the range of 80 to 90 million units). Having centered its efforts on EVs for more than one decade, Tesla is in the lead. Tesla highlighted in an investor presentation earlier this year that it stands a good chance of surpassing the 2 million unit sales figure by 2023. Currently, Tesla has four gigafactories that produce EVs around the world: the Fremont factory in California (starting production in 2010, with a current annual capacity of 600,000 vehicles), Giga Texas in Texas (starting production in 2022, with a planned annual capacity of 1 million vehicles), Giga Shanghai in Shanghai, China (starting production in 2020, with a production capacity of approximately 750,000 units in 2022), and Giga Berlin in Berlin, Germany (starting production in 2022, with a planned annual production capacity of 500,000 units). The one that stands out is Giga Shanghai, which is currently producing Model 3 and Model Y. The construction of the Shanghai factory officially started on January 7, 2019, and then in less than a year, the first batch of Model 3 produced in the factory was delivered to 15 employees on the morning of December 30, 2019. Giga Shanghai's maximum production volume has already reached 16,000 units or so per week, namely, close to 850,000 units per year.
Why am I going into detail about Tesla's current production factories? The main purpose is to confirm the real meaning behind Tesla price cuts: Tesla, by slashing prices to encourage more consumers to buy Tesla EVs, aims to expand market demand and drive all the four factories mentioned above to full capacity to reduce production costs per unit. If it went Tesla's way, Tesla would not only gain further marginal benefit to offset losses arising from the price cuts, but also gain a larger market share during the growth phase of the EV market to widen the gap with competitors and make sure its overwhelming lead in the EV market remains unshakeable.
At the end of the day, the price cuts Tesla seems to mean business about are in reality a marketing move that kills "several" birds with one stone, a move that is especially appropriate in the post-pandemic era. After the Tesla price cuts, brands lagging behind in sales volumes are forced to follow suit, yet they do not have production capacities as huge as Tesla's to amortize the cost per unit. Players in the EV market, therefore, are bound to battle it out in a new elimination round, and that's what I'm watching closely.
If we still remember, more than 100 years ago at the beginning of the 20th century, when the automobile had been invented more than 10 years previously, production competition was in full swing. Henry Ford adopted assembly-line production and started producing the Model T in 1908. The Ford River Rouge complex, a monumental plant located in Dearborn, Michigan, was built for vertical integration, covering coal, iron, and other raw materials as well as parts and finished cars. The Model T was initially priced at USD 825, and later, thanks to increased production efficiency and expanded capacity, the price had dropped to USD 360 by 1916. Between 1917 and 1923, Ford did not advertise the Model T at all, but the company managed to take advantage of the lowered price and the free publicity to produce more than 15 million units over a span of two decades since 1908. If we compare the two carmakers, doesn't Tesla today somewhat remind you of Ford more than 100 years ago in terms of masked marketing campaigns?
The initial growth of the EV market was primarily driven by government incentives, such as subsidies and tax breaks, and supported by cash proceeds from carbon trading conducted by EV manufacturers. However, the EV growth has changed gear and entered the phase of the P wave. Now EVs appeal to general consumers by lowering prices to the price range of traditional gasoline vehicles (lower cost of using EVs) and offering a wider variety of models for consumers to choose from, and coupled with exclusive, maturing product incentives (e.g., wireless charging, V2G revenue from reverse power feed, etc.), I think a greater wave of EVs will strike like a tsunami. This has been heralded by the Volkswagen Group's recent announcement that it will invest up to 180 billion euros between 2023 and 2027 to propel the transition to EVs. Regarding the response of traditional carmakers to the new wave of EVs, allow me to elaborate when the time is right.
About the author - Kenny Liu
Graduated from Dept. of Aeronautics and Astronautics, Cheng Kung University in 1988, started his auto industry career since July 1990 after two year military service. Starting as a service engineer and a temp technician, product marketing specialist in Peugeot/ Daihatsu, marketing and dealer channel specialist in VW LCV from March 1992, then field manager in GM Taiwan from Feb. 1994, sales and service / parts head in Ford Lio-Ho from Sep. 1998 till retirement in May 2019. Kenny then started to work for JLR Taiwan as sales/service head and consultant/ lecturer. After that, he was invited to work at a Suzuki dealer of Taipei as the general manager until April 2022.