Tesla shift on low-cost cars throws Mexico, India factory plans into limbo
Business
IEA says electric car sales to rise strongly in 2014, but affordability to remain the key factor
- Elon Musk last week cancelled visit to India, citing 'very heavy Tesla obligations'
SAN FRANCISCO (Reuters/Web Desk) – Tesla said on Tuesday that it will use its existing factories to build new and more affordable vehicles as early as late this year, leaving investments in new factories in Mexico and India unlikely in the near term.
The world's top EV maker said it plans to raise production by 50 per cent from 2023 to its current capacity of close to three million vehicles before investing in new manufacturing lines.
"This update may result in achieving less cost reduction than previously expected but enables us to prudently grow our vehicle volumes in a more capex efficient manner during uncertain times," the company said.
Investors cheered the decision not to take the risks of building new models in new factories, with Tesla shares jumping 12pc in after-hour trading despite the company's quarterly results missing financial targets.
"I think it's a positive that he's not just barrelling ahead with an expansion plan, ignoring the challenges in the market and the fact that he's doing a cheaper vehicle from the existing product line," said Elliot Johnson, chief investment officer at Evolve ETFs, which manages nearly $6 billion in assets, including investments in Tesla and other EV makers.
Reuters exclusively reported on April 5 that Tesla had scrapped plans to launch its cheap vehicle, known as Model 2, which Tesla planned to build in Texas, Mexico and a third country. The Model 2 had been expected to cost $25,000 and drive Tesla's growth into a mass-market automaker.
Musk had responded to the Reuters report with a message on X that "Reuters is lying." He did not give details and on Tuesday he did not directly address the Reuters report.
Instead, Tesla discussed unidentified new models that appeared to be different products.
In January, Musk said Tesla aimed to deliver the cheaper new model in the second half of 2025, adding that the model will have "revolutionary manufacturing technology" and generate the next wave of growth for Tesla.
But Lars Moravy, head of Tesla's engineering, said on Tuesday that new manufacturing processes and production lines come with "some risks”, and the automaker made a "major shift" to utilize its facilities to build low-cost vehicles in a fast and efficient manner for now.
Musk had been expected to meet with Indian Prime Minister Narendra Modi on Monday and announce major investments in an auto factory to produce a small, affordable model. Musk cancelled at the last minute, citing "very heavy Tesla obligations" and said he aimed to reschedule the visit for later this year.
Musk said last year that Tesla will "definitely" build its factory in Mexico, but that the timing of the factory would depend on the economy and interest rates that reduce the affordability of vehicles. He also said that Tesla would start the initial phases of construction last year.
Tesla did not respond to a request for comment on Tuesday on its plans in Mexico and India.
Analysts said it would be hard for Tesla to expand capacity while it braces for slowing sales after years of double-digit growth rates. Tesla on Tuesday reiterated that this year, its vehicle volume growth rate may be notably lower than in 2023. Musk added during a conference call that sales would still grow from last year.
Smaller peer Rivian, known for its R1S SUVs and R1T pickup trucks, said last month it would start producing its smaller, less expensive electric R2 SUVs at its existing US factory to hasten deliveries in the first half of 2026. It had previously planned to build the R2 at a new $5 billion plant.
AFFORDABILITY IN FOCUS
Electric car sales will rise strongly in 2024 and increasingly undercut oil demand, the International Energy Agency (IEA) forecast on Tuesday, adding affordability and charging infrastructure would be key to future growth.
Electric car sales will hit 17 million this year, compared to 14 million in 2023, with more than one in five cars sold globally set to be electric, the IEA said, predicting 10 million of those sales would be in China.
The pace of electric vehicle uptake will mean that oil demand for road transport should peak around 2025, the Paris-based watchdog said in its Global Electric Vehicle Outlook.
If countries carry through on stated energy and climate policies, some six million barrels per day (bpd) will be shaved off oil demand by 2030 and 11 million bpd by 2035 - or over a tenth of current total oil demand, the IEA said.
"Tight margins, volatile battery metal prices, high inflation, and the phase-out of purchase incentives in some countries have sparked concerns about the industry’s pace of growth, but global sales data remain strong," it said of EV demand.
Sales in the first quarter of this year were up 25pc on the same period last year. Though that rate is unchanged from the first quarter of 2023 versus the comparable period in 2022, it comes on top of a larger base of vehicles, the IEA said.
Still, electric cars' share of total purchases will vary widely by region, representing about one in nine vehicle purchases in the United States, one in four in Europe, but nearly half in China, the IEA forecast.
Take up in Europe is being held back by "a generally weak outlook for passenger car sales and the phase-out of subsidies in some countries", it said.
Affordability compared to traditional vehicles remains key to the sector's growth, it added, with prices again varying widely by region.
Internal combustion cars remain more affordable than their electric equivalents in Europe and the United States, while in China nearly two-thirds of electric cars sold last year were cheaper than their traditional equivalents.
"Electric cars are generally getting cheaper as battery prices drop, competition intensifies, and carmakers achieve economies of scale", the IEA said, while noting that in some cases - adjusting for inflation - prices stagnated or even rose slightly between 2018 and 2022.
Meeting the growing demand with charging infrastructure will also pose a key challenge, the IEA added, with charging networks needing to grow six-fold by 2035.
