Published on July 25th, 2020 |
by Loren McDonald
July 25th, 2020 by Loren McDonald
Elon Musk was recently at it again on Twitter sharing upcoming plans about the Tesla Model Y as well as Supercharging speeds for the Model S and X. But it was his comment that a range of less than 250 miles would be unacceptably low that got the attention of the EV and business press.
Below is the full Twitter exchange with someone using the Twitter handle of Jason.
Tesla had originally planned to launch a Standard Range Model Y — as it has done with most of the Tesla models over the years. But in this case, Musk argues that the “range would be unacceptably low (< 250 mile EPA).”
Musk didn’t share what the EPA range of a Standard Range Model Y would come in at, but I’m going to pick an arbitrary 235 miles as my assumption for this article. If the Short Range version was actually rated at literally just under 250 — let’s say 245 or 247 miles — I would assume that with software adjustments, battery improvements, and tire combinations, Tesla could easily bump that range up to the magic number of 250 within 3–6 months. And everyone would forget the initial range, just like no one cares about the initial range of the Model S.
So, assuming a range of about 235 miles, why does Musk believe that is unacceptable? And to whom is it unacceptable — himself, company leadership, the brand promise, or customers?
After I drafted and submitted this article, Musk stated on the Q2 earnings call: “The thing that bugs me the most is that our cars are not affordable enough. We need to fix that. We want to be slightly positive and maximize growth, and make the cars as affordable as possible.” On the same call he also stated: “With regard to passenger vehicles, I think the new normal for range is going to be, just in U.S. EPA terms, approximately 300 miles. So I think people will really come to expect that as some number close to 300 miles as normal.”
But is Musk simply wrong? I believe he is both right and wrong, as there are multiple compelling arguments both for and against an under-250 mile Model Y.
Keys To Tesla’s EV Leadership Through the Minds of Consumers
Tesla and Elon Musk have done many things to generate excitement and interest in electric vehicles that have led to the company being the dominant automaker in terms of sales volume of EVs. Three of those keys are:
Aspirational: Prior to the Model S, EVs were often thought of as ugly, overpriced, glorified golf carts. The performance and style of the Model S (and subsequent models) made the company’s EVs aspirational for many buyers.
Range: Anxiety over the battery’s driving range was an issue for many of the early EVs that only had +/- 100 miles of range, and still is. The first versions of the Model S launched in 2012 had an EPA range for the 60 kWh battery pack model of 208 mi, and the 85 kWh battery was rated at 265 miles. Now the Model S Long Range Plus has a range of 402 miles, and most models have a range near or above 300 miles. The exception is the Model 3 Standard Range Plus at 250 miles (more on the off-menu Standard Range version later).
Superchargers and Destination Charging: Tesla is the only automaker that invested in building out its own DC fast charging (Supercharging) and Level 2 charging (Destination Charging) network. (Other OEMs have of course invested in charging networks, just not their own.) While Tesla’s connectors in the US are currently proprietary to Tesla vehicles — similar to the closed model of Apple — owners of Tesla EVs in the US generally have little to no concern (with a few exceptions in some remote or less populous areas) about not having enough range for getting to the next charging station. With the growth in popularity of the Model 3 in markets like California, however, the concern has now switched to “charging anxiety” — wait times and charging speed.
The importance and catch-22 of the above is that the Tesla brand has set the bar on EV range. The Tesla brand in essence is all about more range being better and its lead over competitors in this area continues to be a key bragging right. The 300 miles of range available on variants of all 4 models, combined with its charging networks, means never having range anxiety.
But, does every potential driver of an EV want or need 300–400 miles of range? For many households and use cases, a Tesla may in fact provide more range than actually needed. Of course, buying a car or truck that has more than you need (horsepower, top speed, interior luxury features, range, seating capacity, size, 4-wheel drive, etc.) is nothing new, especially in car- and truck-loving America. Elon Musk understands this and has always focused Tesla on the “wants” rather than “needs” of auto-buying consumers.
But with DC fast chargers getting faster, charging stations getting more available, and many EV-interested consumers becoming more comfortable with the concept of “refueling with electricity,” is Tesla potentially giving up a segment of the market to competitors by not offering a lower-range, lower-priced Model Y?
The Case For A Less Than 250-Mile Range Tesla Model Y
Why does Musk think less than 250 miles of range is unacceptable? The following are several reasons why a Model Y Standard Range would make sense for Tesla:
300–400 miles of range is what most Americans want — but they don’t actually need it: While the average range of fully electric vehicles (BEVs) has increased significantly in the last 10 years, range anxiety remains a concern of mass consumers who have yet to drive an EV or understand how to manage range and charge your vehicle. Of the current 13 BEVs available in the US (note that some, like the Fiat 500e, are only available in 2 states), the average battery range is now 253 miles, while the median range is 254 miles. If weighted by sales volume, the average range would approach 300 miles due to Tesla accounting for about 60% of EV sales in the US.
Many studies, such as the Volvo/Harris Poll below, confirm that range anxiety and fear of not finding a place to charge are top concerns for potential buyers of EVs. And several studies have pegged 300 miles as the magic threshold that a majority of US consumers want before considering an EV.
Price competitiveness without the federal EV tax credit: Tesla and GM are the only OEMs that no longer qualify for the federal EV tax credit, which is $7,500 for BEVs and plugin hybrids (PHEVs) with a battery pack of 16 kWh or more ($6,843 for the Ford Escape PHEV). Since the federal EV tax credit doesn’t actually reduce the price of an EV (unless you lease and it is incorporated into the lease with lower monthly payments), I’ve always been annoyed at the use of EV prices that subtract the federal tax credit. But it is common practice to incorporate the incentive, so I’ve included it in the table below.
As you can see, there are several BEVs and PHEVs that are either available currently or are scheduled to be available by the end of 2021. And all of these electric CUVs/SUVs will have an effective cost lower than the various Model Y variants, except for the Volvo XC40 Recharge and Ford Mustang Mach-E GT. Many of these models will be $5,000 to $10,000 less than the two variants of the Tesla Model Y Long Range.
So, while Elon and lots of EV and Tesla fanatics believe that Tesla vehicles are superior to EVs from other brands (software updates, battery efficiency, performance, Autopilot/FSD, etc.), with as many as 10 EVs available in roughly the same category, many buyers may opt for a brand other than Tesla with a lower price.
Now, Tesla fans love to argue that the company’s BEVs are light years ahead of EVs from the legacy OEMs and that their offerings simply aren’t competitive. For me, access to the Supercharger and Destination Charging network are Tesla’s biggest competitive advantage and likely has a brand value to potential buyers of several thousand dollars. But, for someone who isn’t a Tesla fanatic and is considering, say, the Nissan Ariya, VW ID.4, Ford Mustang Mach-E, Toyota RAV4 Prime, or Ford Escape PHEV, many of Tesla’s advantages simply aren’t that important.
Consumers consider many factors when buying a car, including quality, service, comfort, brand loyalty, and price. If the car with the best specifications was the top consideration, then there would eventually be only one car in each segment, as no one would buy any car without the best specs.
Weak economy/Job insecurity: The COVID-19 pandemic is wreaking havoc on the economy (a recession was likely even before COVID) and millions of Americans are now either unemployed, underemployed, or nervous about their job stability and future paycheck. Under these circumstances, someone considering a new car purchase may look for ways to lower their monthly payments through leasing or opting for a cheaper model, one without all of the extra features. A Model Y Standard Range could potentially be much more attractive to consumers on a tighter budget.
Monthly payments: Tesla just launched a leasing option for the Model Y Long Range for $499 a month, and the Model 3 Standard Range Plus lease option starts at $371 per month. Tesla could potentially offer a $399 per month lease, which would generate lots of publicity and drive a lot of test drive traffic into Tesla galleries and showrooms, all resulting in increased sales volumes of all Model Y variants.
Volume rankings: The Model 3, which is in a category rapidly losing popularity, sedans, was the 26th best selling vehicle in the US in 2019, according to GoodCarBadCar. A Model Y priced at or near $40,000 could be a huge seller in the US, and could likely crack both the top 20 sales chart and possibly rank #1 in a category such as “midsized luxury SUV” — giving Tesla some bragging rights and great press coverage. There is safety in numbers, and the better the Model Y sells, the more people will be comfortable buying it, spurring even more sales. And many people may opt for one of the more expensive variations of the Model Y.
Competitiveness of similar range EVs: Of the non-Tesla BEV small/midsized crossovers/hatchbacks currently available in the US, only the Nissan LEAF offers different range options — 149 or 226 miles of range. But in the coming 12 to 18 months, the Mustang Mach-E and Nissan Ariya — two BEVs expected to go head to head against the Model Y — will be available in two or more battery pack options. There will also be 6 BEVs available with expected EPA ranges of from 210 to 250 miles.
For consumers who place a higher priority on some combination of price, build quality, existing brand preference, or service over longer range, Tesla would be giving up this market segment to competitors.
Shortsighted thinking: Tesla continues to improve energy efficiency of its batteries, and just in the last 12 months or so, the company increased the range on the Model S Long Range from 335 to 370 to now 402 miles. So, I would assume that within 3 to 6 months of launch, Tesla could increase the range of a Model Y Standard Range to 250 miles from ~235, as it has done with every other model recently.
This approach provides more proof of Tesla‘s leadership in batteries, and then also positions its cheapest and shortest range Model Y ahead of the others in the crossover category.
200–225 miles of range meets 99% of most households’ driving needs: For most American households, a range of 225 to 250 miles meets their needs for daily commutes and errands and weekend trips to the beach, the mountains, or to visit relatives and friends. What that range isn’t ideal for are the 2–3 long road trips (1% of trips for most) that they might take each year. (I will cover solutions for the “1% challenge” in an upcoming multi-part series.)
As of 2017, 58% of US households had two or more vehicles. So, roughly 6 out of 10 households potentially have a second vehicle they can use for these few long trips per year if they don’t want to use their shorter-range EV.
Europeans need less range: A lower range Model Y could be a massive hit in European countries where trains and regional flights provide a convenient alternative to long road trips in a car. With access to great train systems, most Europeans clearly can get by with a shorter range BEV. Although, surprisingly, they expect more range than North Americans, according to a recent CleanTechnica survey.
[Editor’s note: Having lived in Europe for more than 10 years, and having listened to many Europeans on this matter, I think there is a bit of a misconception about this. Europeans, on average, drive a lot less than Americans. However, that is mostly because they tend to have shorter commutes, commute more frequently via urban transit systems, and do not have to do so much driving across sprawling suburban areas for shopping and routine activities. When it comes to road trips, Europeans with cars do tend to go on far away road trips in their cars — if they don’t fly or, less commonly, take a train. Those further north like to vacation in the south, for example, which means a very long drive/trip. Additionally, since they have longer vacations — much more vacation time — it is not uncommon to want to have your car with you on vacation, stimulating a drive instead of a flight. So, all in all, I think it is a little bit of a myth that Europeans care less about range. Maybe for daily commutes and errands, yes, but not for those occasional road trips. Lastly, Europe is typically colder than the US, so they also have to think more about the hit the range will take for several months in winter, fall, and even spring.]
Why Is Musk Saying No To A Model Y With Under 250 Miles Of Range Model Y?
The case for a less than 250-mile range Model Y is very compelling in my opinion, but if I wear my brand hat from being in marketing for 36 years, I can also make the case against it. The following are several reasons to not offer a Model Y Standard Range:
Additional production complexity: Producing another variant of the Model Y adds additional complexity to the manufacturing process and has the potential to impact production of other Model Y variants. Musk has often talked of the need to simplify vehicle manufacturing and reduce the number of model variants. A Model Y Standard Range, however, would presumably use the same 50 kWh battery pack as the Model 3 Standard Range Plus, so that would eliminate the need for a different battery pack or the need to limit range via software. And recent rumors are that the Model Y and Model 3 will soon share the same universal battery pack.
Competition/Bragging rights: More range is better. Lots of range is even better. 400 miles is awesome. Tesla has not only led the auto industry in delivering BEVs with more range than competitors, but in so doing, the company and Musk have also promoted the idea that whatever their models achieved at the time (250, 300, and now 400 miles) was the EV range that consumers needed (or wanted).
A Model Y with 235 or so miles of range suddenly becomes ho hum, and would be surpassed by several CUVs, including the Mustang Mach-E, Chevrolet Bolt, Hyundai Kona EV, Nissan Ariya, and Volkswagen ID.4. (My counter, however, is that Tesla would still have Long Range models that would surpass anything the competition offered in the category.)
Undermines the Tesla range advantage: If Tesla now in 2020 released a Model Y with ~235 miles of range, the company by default is validating as acceptable the EV range of competitors in the 200–250 EPA mile range.
By making available a ~235-mile range Model Y, consumers may now start placing less emphasis on the importance of range and place a higher priority on quality, service, comfort, interior luxury, and other factors where Tesla tends to not have either a real or a perceived advantage.
Price competitiveness/Vehicle margins: While I’m not going to delve into estimating margins of the Model Y (I’ll leave that to other CleanTechnica writers), the higher the sales price of a vehicle, the greater opportunity there is for higher margins. So, a lower-street price of a Model Y would likely cut into the margins of the portfolio of Model Y battery pack variations.
And that is okay if there is unlimited demand for the higher end Model Ys, but there is clearly a cap. And the fact that Tesla just added a lease option for both the Long Range and Performance versions of the Model Y suggests that demand could be waning, especially as the economy struggles. [Editor’s note: Musk said on this conference call this week demand is definitely not an issue — they have far more demand than they can supply.] Musk is known to not be a fan of offering the lease option, and holds off on leasing until market demand necessitates it. In 2019, Elon Musk said, “We’ve been reluctant to introduce leasing on Model 3 because of its effect on GAAP Financials… Obviously, leasing is a way to improve demand, but it makes our financials looks worse.”
That said, according to this Forbes article “While Tesla’s leasing program is hurting the company’s revenue growth to an extent, it is helping the company’s margins as its leases appear to be more lucrative to the company.” [Editor’s note: Tesla may be less concerned about how their financials look now that Tesla has shown 4 consecutive quarters of GAAP profit. Perhaps that is one reason it recently started offering Model Y leasing rather than waiting longer.]
Tesla does not want to compete on price: Nordstrom doesn’t want to compete with Walmart on price, and nor does Tesla does want to compete with other automakers on price. It hurts its brand reputation, but also opens the door to brands like Hyundai, Kia, Chevrolet, Nissan, and Ford to aggressively compete with and undercut Tesla. And if potential Tesla buyers begin to place price as a much higher factor in their purchase decision, then Tesla’s real or perceived advantages in range, performance, software, etc. are diminished.
But the counter is that we are in a tough economic period and Tesla also needs to support its growth story and scale volume in the US. A lower price Model Y in the hot CUV segment could put it at the top of the sales charts. Higher production volume should also lead to better margins overall with increased scale.
SUV/CUV perception versus sedans: Musk seems to be okay with a sedan, the Model 3 Standard Range Plus, having just 250 miles of range. And while it isn’t listed on the Tesla website, you can special order from Tesla showrooms the Tesla Standard Range, which has only 220 miles of range.
Perhaps this gives us the most insight into Musk’s thinking. It seems he believes that 300 miles is the standard to be measured by for BEVs, but anything less than 250 miles is an embarrassment, or in his words, “unacceptably low.”
Because the sedan segment is rapidly declining in popularity and primarily being left to Toyota and Honda to compete over, Musk knows that the SUV/CUV segments (and pickup segment) are where automakers will win or lose in the US in the coming years.
And because SUVs/CUVs are thought of as perfect vehicles to take the family on long trips, Musk clearly believes that a range less than 250 miles will not win over customers.
In the end, the right answer is likely a battle between those at Tesla who believe the brand is everything and those in sales and finance who see how many more Model Ys the company might be able to sell.
What do you think — should maintaining the brand superiority outweigh the opportunity to potentially reach a new and much larger market? Let us know in the comments.
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