Last week, at a PR event shamelessly modeled after Steve Jobs’ finest, Tesla announced the arrival of its new Model X sport utility vehicle (pictured above.) The Model X will start at $132,000.
In case you were wondering, here’s what else you can buy for $132,000:
- A Maserati Granturismo Sport Coupe with Bianco Eldorado painted coachwork and a Rosso Corallo leather interior. Bellissimo!
- A Peterbilt 386 Sleeper Truck with an 80” cab, a 10-speeds, 500 horsepower, and 1650 foot pounds of torque. Yeehaw!
- An average home in Greensboro, North Carolina.
Elon Musk and his team are diving into a thin market for $130,000+ SUVs. One of the few models that can reach such nosebleed heights, the Mercedes Benz G63 AMG, only sells about 500 units per year in the U.S.
But perhaps today’s volumes are not indicative of where this market is going and Tesla is correct to go after it. After all, Bentley will be introducing an SUV in 2016. It will be called the “Bentayga.” I’m not kidding.
Anyway, maybe the world is full of more venture capitalists and Russian mobsters than I think. Maybe Tesla will sell as many Model X SUVs as they do Model S cars. That would double Tesla’s annual volume to 100,000 units, or roughly the same number of cars that Toyota, Volkswagen, and General Motors each produce every four days.
Who cares about how many cars Tesla produces? Well, you should. That is if you believe that converting to electric cars is one of the ways we’re going to keep this planet from becoming one large Swedish sauna (a debatable point we’ll table for another time.)
The biggest engineering problem automakers have to overcome to make electric cars compelling is the energy density of today’s battery technology. A gallon of gasoline has an energy density of 33.7 kWH, according to the all-knowing Google. The General Motors EV1, introduced in 1996, used 1300 pounds of lead acid batteries to capture 16.5 kWH. In other words, it required nearly ¾ of a ton of batteries to deliver the same potential energy as a half-gallon of gasoline. You can see why range was a problem for the EV1.
Tesla has tackled this challenge by wiring together nearly 7000 lithium-ion laptop batteries into one big pack. Doing so allows the company to cram up to 90 kWH into its Model S sedans. These batteries are still heavy (1200 pounds) and quite expensive. How expensive? Tesla isn’t revealing that number, but most engineering-types and Internet cranks believe a reasonable estimate is around $25,000 (the base price for a Tesla Model S 85D with the 90 kWH upgrade is $88,000.)
A $25,000 battery pack prohibits the company from delivering a car that normal people can afford. The average price paid for a new vehicle in the United States in 2015 is $33,560. That doesn’t leave a lot of room for such luxuries as brakes and seats.
So the only way Tesla can make a margin on a vehicle with this technology is to move it up market. And it has done that successfully. The Model S is a brilliant sedan that has won an impressive array of awards, even from some of the most hardened electric-car cynics. I am amazed at what Tesla has done.
But even after Donald Trump becomes president and implements massive tax cuts for all, most of us won’t be able to afford $90,000 sedans and $130,000 SUVs. Teslas will remain niche luxury vehicles.
The company says otherwise, promising to introduce a long-talked-about Model 3 in 2017 that will start at $35,000. To do so will require a massive change in the economics of lithium-ion batteries. Tesla suggests that the $5-billion-dollar “Gigafactory” it’s building in the middle of the Nevada desert will do exactly that, churning out 500,000 battery packs every year at a not-so-massive savings of 30% per kWH.
Now I’m no engineer, but getting this all done by 2017 seems a tad aggressive. In fact, I think it’s more likely that we’ll see Bernie Sanders in the White House that year, riding a 90% approval rating after completing the nationalization of Hershey’s and Fruit of the Loom. Kisses and tighty whities for all!
Let me be clear. I am not betting against Elon Musk in the long run. Unlike many Silicon Valley billionaires, this guy isn’t just lucky. He’s the real deal. He makes Thomas Edison look like a piker. Nobody else could do what he’s doing with Tesla; much less also build space rockets in their spare time.
But I have to think there’s an easier and faster way to increase the adoption of fully electric vehicles. Nearly twenty years ago, I wrote a paper in business school predicting the innovation path for electric cars. Almost none of it has come true, which may help explain why I’m such a bitter man. Nonetheless, I continue to hope!
In that paper I suggested that car manufacturers consider adopting Clayton Christensen’s disruptive innovation model. Instead of trying to beat internal combustion at its own game (power and range), I recommended finding new markets where electric vehicles’ limited speed and range would be virtues.
My favorite example was a car aimed at parents with teenage drivers. For this target audience, the limited power and range of electric technology is a benefit!
My pimple-faced Johnny can drive no faster than 65 miles per hour? For about 80 miles on a charge? And he has to come home to recharge it? Where do I sign up?!
Such vehicles could be simple, cheap, and trackable via embedded GPS (an unimaginable feature when I wrote the paper.) To increase their appeal for the teenagers, they could feature a kick-ass stereo, customizable body panels, and Chipotle burrito holders.
With such modest performance requirements, the technology deployed could be simple. More importantly, prices could be cheap–perhaps less than $20,000.
With a low price and a benefit the target audience craves, how many units could be sold? Hundreds of thousands? Millions? And with that kind of volume, wouldn’t it be easier for Musk’s brilliant engineers to extract more efficiency out of this technology, finally making it competitive with internal combustion for the rest of the market?
But alas, I fear this won’t come to pass, so start saving up your nickels. You will need 2.6 million of them for your first Model X.