Tesla Motors (TSLA), the brainchild of entrepreneur Elon Musk, has made waves by challenging the auto industry and producing its own all-electric car. While car companies such as Toyota (TM), Ford (F) and General Motors (GM) have toyed with the idea of electric cars, they have remained faithful to the internal combustion engine, or have tried to blend gasoline with batteries by way of hybrid vehicles.
One reason the traditional auto makers do not undertake electric car production is because the costs would be so high that when passed on to the consumer, the cars would be prohibitively expensive. Tesla cars, therefore, are relatively expensive to buy. The flagship Model S sedan has a base price of $71,000 not including a $10,000 extended battery or other upgrades and options. But just why is a Tesla car so expensive?
Supply and Demand
There is clearly a demand for Tesla cars. Every month the company seems to set new sales records, and there is a waitlist for backordered vehicles that is growing steadily. Unlike established car companies, Tesla motors does not have the manufacturing capacity to meet the current demand all at once. Because demand exceeds current supply, basic economics suggests that the price would be bid up. Tesla seems to be constrained by production, not demand. (For more, see: What Drives Consumer Demand for Tesla.)
The demand is fueled in part by the green energy movement. Because Tesla cars are all electric, they do not consume greenhouse gas-emitting gasoline and do not directly create carbon dioxide. It remains true, however, that CO2 is still a by-product of the electrical generation needed to charge the car’s batteries. Demand is also driven by Tesla’s sleek, modern design and its high-tech driver interface and dashboard that features an impressive all digital touch-sensitive display.
In addition, Tesla cars are high performance. They can cruise for over 200 miles on full charge, and recharging is a user-friendly task. The Tesla S sedan can accelerate from 0-60 miles per hour in an impressive 5.54 seconds, and the Tesla Roadster can do the same in under four seconds. Combined with all of this is the fact that electric cars are virtually silent when they drive, a truly desirable feature for many.
The newly announced Tesla model X is a more family-friendly SUV that can comfortably fit seven passengers. By expanding its product line, Tesla is sure to increase demand for its cars. The question remains as to whether it can build out enough capacity to produce those vehicles in a short amount of time. Tesla is rumored to be building a so-called ‘gigafactory’ in the Nevada desert, which would allow it to scale up production of both its cars and the battery packs required to power them.
Battery Technology is Expensive
Batteries to store and use electrical power are the most expensive single component of these cars, with the current cost of around $500 per kilowatt-hour. A Model S has around 60 kilowatt-hours of capacity, meaning that approximately $30,000, or 42.25%, of the sticker price is due to the battery packs. Since 2008, the cost of Tesla’s battery packs has risen by 50%, and their storage capacity has increased by more than 60%.
The company has indicated that it is already in the process of increasing the energy efficiency of the batteries further causing the price to fall to about $200 per kWh, but this improvement has not yet been released into production. In addition to the fixed costs of the battery packs themselves, it costs the owner of the car approximately 10-12 cents per kWh to buy the electricity when recharging those batteries.
A lot of research and development is going in to battery technology, and the hope is that in a short time the cost of battery power storage will be able to compete with the cost of gasoline or other fossil fuels.
The Bottom Line
Tesla cars are expensive, but that hasn’t stopped people from lining up to buy them. One reasons the price is so high is because, at the moment, demand is outstripping supply. Expanding production capacity and building new factories is sure to help moderate prices.
The other main reason for Tesla cars’ high sticker price is the very high cost of the electric battery packs that supply these vehicles with power. While the cost of battery technology and its energy efficiency has improved over the past few years, more research and development is needed to create a truly affordable electric car.