Why Elon Musk Would Kill Tesla’s $25,000 Model 2

Musk Kills 25k 2
ADVERTISEMENT

Every day I try to thank God for the many blessings he’s given me, specifically my wonderful family and friends. Pretty high up there on the list of things I’m grateful for is that I am not the CEO of a car company. It’s a tough job and I probably love cars too much to be responsible for making decisions at a publically traded automobile-producing entity. It’s much easier to just second-guess their decisions and then borrow their cars.

I say this because I’ve got to talk about Elon Musk due to this this Reuters report that says Tesla killed its affordable car program. You know, the one that CEO Elon Musk said would happen in three years way back in 2020, would be mostly autonomous and would cost under $25,000? Remember that?

Obviously, that didn’t happen and, instead, it seems like a lot of Tesla’s talent has gone into making the Cybertruck. As recently as earlier this year Musk was talking about the cheap car, so the Reuters report is an interesting surprise. Here’s the key part of the article:

Two sources said they learned of Tesla’s decision to scrap the Model 2 in a meeting attended by scores of employees, with one of them saying the gathering happened in late February.
“Elon’s directive is to go all in on robotaxi,” that person said.
The third source confirmed the cancellation and said new plans call for robotaxis to be produced, but in much lower volumes than had been projected for the Model 2.
As the report also notes, this was long a dream of Elon Musk. He was supposed to sell expensive EVs to part of the market to fund the development of a cheaper EV for everyone else, thus making Tesla the biggest carmaker in the world.
Musk has responded to the story by saying Reuters is lying without denying any specific part of the story, which makes this more interesting. I don’t think Reuters is lying and it would be weird for a bunch of sources to suddenly lie to them. It’s possible there’s some confusion or misinterpretation here. I don’t know, but there a few reasons why Tesla might at least delay the $25,000 car and they range from the reasonable to the insane.

The Sensible Reason Why Musk Might Kill The $25,000 Car

Byd Seagull

There aren’t big margins in $25,000 cars. Cheap cars are a good way to earn customers and a bad way to make a lot of money. We all love the cheap Ford Maverick Hybrid XL, but the profits are razor-thin on a product like that. While cheap EVs are the way forward for increasing EV market share, it may not be the best way forward for Tesla.

If the dream was a cheap, nice EV, well… the BYD Seagull is $10k in China and about $20k everywhere else. As Morgan Stanley analyst Adam Jonas wrote in response to the story:

“… [O]ne could argue that there are enough strong players in China (with enough unused capacity) to have already accomplished this objective. What more could Tesla bring? Assuming the Model 2 was the ‘best EV’ money could buy for under $25k… how long would it take before Chinese rivals caught up? A couple years?

It’s a fair point! Mission accomplished. Focus on finishing the Roadster, updating the Model Y, and introducing cars that might actually make money. Ford is already pushing ahead with ex-Tesla folks to build its cheap car, so even with trade barriers to China, the company might end up in a situation where Tesla has real competition.

The Sad Reason Why Musk Might Kill The $25,000 Car

Cybertruck 72
Source: Tesla

Given the known timing of when Musk was hoping to deliver the Model 2, is it possible that Musk shifted too many resources to build the Cybertruck? The Reuters article makes a reference to it:

If Tesla had moved forward with the low-cost car, it wouldn’t have arrived on the market until the latter half of 2025, by the company’s estimate. But the entry-level EV segment is already crowded with compelling models from BYD and many other Chinese brands.

Tesla is late to the segment in part because of a pivotal decision by Musk. In 2020, after releasing its hit crossover, the Model Y, Tesla focused on the highly experimental Cybertruck instead of an affordable car.

Musk unveiled a prototype of the angular, stainless steel-clad truck in 2019 and predicted a starting price of about $40,000. The vehicle finally arrived last year, but the lowest price version of the truck won’t be available until 2025, at a price of about $61,000.

The timing does make sense. It doesn’t mean that the car has to be dead, but similar to the reasoning above, maybe Musk is too late and it’s better to do something else.

The Kinda Insane Reason Why Musk Might Kill The $25,000 Car

Cruise Origin

At some point, there will be more self-driving cars. The tech will get close enough that enough of us will be comfortable with it. Regulators will slowly, begrudgingly create a framework to make it work. I don’t think it’ll be tomorrow. I don’t think it’ll be five years from now. Just… eventually.

There’s another hint in the piece above that what Musk thinks is that he’s so close to self-driving being a thing, and that it’s the thing that makes the company super valuable, that he’s going to just chuck the cheap car part of the platform and focus fully on robotaxis (Ford is, for its part, also going to make its sub-25k the base for a robotaxi).

Tesla’s timeline and business model for robotaxis remain unclear. Musk has publicly predicted a future of mobility in which driverless taxis could eventually become a more common mode of transport than human-driven cars. He has said Tesla, the world’s most valuable automaker, would be “worth basically zero” without achieving full self-driving capability.

It’s possible Musk’s team had a huge breakthrough we don’t know about and it’ll all be here soon and Musk will be the smart one, again. Tesla-watcher/investor Sawyer Merritt has a theory along these lines, that the cheap car isn’t canceled, just that the robotaxi part of it is taking precedence:

Musk responded to the above tweet with the big eyes emoji, so maybe?

The Truly Insane Reason Why Musk Might Kill The $25,000 Car

What if Tesla’s business isn’t really cars? I know this is a wild statement since that’s a big chunk of the company’s value, but Musk is out there working on AI and robots and flamethrowers and tunnels. There are fundamental limitations to the amount of money to be made in the car business and it’s possible that Musk would rather pivot to the next thing rather than focus on the arduous, slow, and kind of boring work of making cars now that he’s got to compete with BYD, and. Xiaomi and a bunch of other companies.
Jonas, the analyst mentioned above, references this in his note:
“While we do not expect Tesla to ‘exit’ the auto business any time soon, we do believe the company’s scientific endeavors can and will, over time, expand far beyond the automotive paradigm. Perhaps the unexpected slowdown in the global EV market has accelerated this change. Many investors may not be prepared for the change.”
What I think Jonas is trying to say here is that it might suck to own Tesla stock for a while as Tesla concedes market share to everyone else while trying to get AI to work, or whatever. Again, it’s a truly insane reason, but Musk has been successful by placing a lot of seemingly dumb bets and pulling most of them off most of the time.

About the Author

View All My Posts

69 thoughts on “Why Elon Musk Would Kill Tesla’s $25,000 Model 2

  1. Tesla’s refusal to make a commuter EV is emblematic of modern corporate dysfunction, and I think it’s reasonable to say it shares a root cause. Tesla’s IPO in 2010 was around $2b. It took them 11 years to make $2b in profits. In 2020, Musk received $0 in salary, but $22b in stock options.

    Fortune 100 companies today do not exist to sell products to customers, they exist to sell securities to investors. It is not a new or controversial fact that the top 5% possess more wealth than the bottom 95% combined, and they make up an enormous market that can only buy so many cars before they start buying car companies. Everything a corporation does is competing for that investment — even after the IPO (and ignoring buybacks), if executives are paid in stocks, they’ll treat the product itself as merely a vessel that moves securities.

    A $25k EV can be profitable. Narrow margins, yes, but you could expect reliable sales and steady dividends. But shareholders (executives included) don’t want steady, they want either fast money or infinite profit margins — and they can usually get the former by promising the latter.

    TL;DR: Car companies are leaning into luxobarges, software, and self-driving, because the investor class believes those can yield infinite profite margins, or at least boost stock prices in the short term. Actual sales of actual product are just set dressing.

  2. Obtuse car company logic on parade:
    Nobody is buying (expensive) EVs right now, so why would they buy a inexpensive EV?

    Traditional car makers thoughts:
    Fine. We’ll make a cheap EV, but we will do it in such a way that people will abandon the idea of EVs and go back to Suburbans and F-150s.

  3. well our Favorite Evil Billionaire needs something to replace the Tesla in the Boring Company tunnels… something that carries a bit more than 4 persons.

    And look at it from an Evil Billionaire owing car company perspective, if he can build the 10 ( or more ) sitter automatic vehicle to populate the Evil Billionaire tunnel boring company, it’s a magic circle, and the money stay in his pocket.

    now in all fairness, unless small city cars go back to the 5k/7k Euro range car contructors will have difficulties selling stuff.

  4. I love the sentiment: “well, the Chinese are already making cheap EVs, and even if they make a really nice cheap EV the Chinese will just catch up in a couple years, so Tesla should just pack it in.” What the hell? Tesla had the most rabid fans of any maker and tons of people would kill to buy a $25k – $35k Tesla over some Chinese car that costs a few grand less. Come on!

    1. They have a rabid fan base in the USA, but I’m not sure it’s the same globally. If no one in China buys a cheap tesla because it costs more, that’s a huge chunk of sales gone.

    2. In Europe, many people will buy the cheapest car that will do the job. 25K Euro for a second car to commute between work, supermarket and home is just too much.

  5. Man, that Sawyer Merritt quote…. “Maybe my husband went to the 4-star restaurant with the hot secretary from his office because he wanted to make sure it was worth taking me there.” Just pathetic self-delusion.

  6. The next Tesla event sounds so fun. It’s a meet and greet with Elon. We are going to meet up in a k-hole during the totality and you’re invited.

  7. The legacy manufacturers and even Tesla are about to have their lunch eaten by, then vomited back up on their shoes by the nascent Chinese EV makers. Simply because they are ignoring an important market segment – EVs that mere mortals can afford.

    There are plenty of people out there that want EVs but can’t afford anything other than the Chinese offerings. I bet there are plenty of people out there like me, that want to keep their big, fossil fuel burning machine for the weekends, to tow and do off road work, but would love an EV for the daily grind.

    A Chinese made EV would not be my first choice. But my options in Australia are limited. I like the Hyundai Ionics but they are about $30000 out of my price range. Moving down the ladder, I could get a Model 3. The touch screen everything bullshit is annoying and the model we get is put together in China anyway, but this would not stop me buying one. Still, $20000 over budget. So here I am cross shopping an ungainly looking BYD Atto 3 and a less ugly but still weird looking MG4. I might not like supporting Chinese companies and I always said I’d be wary buying from an immature car company but here I am!

    1. I was in exactly the same situation as you, I’m keeping my RX7 for the weekend fun times and have a novated lease on a Cupra Born and it honestly was a bitter pill to swallow to pay the extra price of the BYD but I’m glad we did it (especially if you’re getting it on a novated lease with the incentives we get in Aus)

  8. All due expedience, and resource allocation must be focused on the First Ship, for all stable geniuses to lead the great new way forward on mars.

  9. So the thumbnail picture of Elon and the axe gave me a flashback to The Shining.
    And not in a good way. Murder Clown has nothing on this guy.

  10. A lot of it has to do with the batteries Tesla was planning on using and the Inflation Reduction Act. I believe that Tesla was going to use CATL’s M3P batteries that were to be produced in the factory adjacent to Tesla’s Shanghai factory. These batteries are manganese based battery with the same characteristics of a LFP battery, but have 15% more energy at a low nominal cost. Probably about $60/kwh, Cheap.
    The IRA messed that all up for Tesla by not allowing Chinese parts and Battery Materials to be included in the $7500 discount. Elon went all political right after that. We are now seeing all the big’s talk about leasing CATL’s intellectual property and building battery plant in the US.
    It is going to put the $25k car pretty far off for the US and Canada because the North American battery material supply chain is just developing. It will happen eventually, but we will have to wait until North American mining ramps up.

      1. I don’t think Tesla was necessarily factoring in the tax credit. I think it more their $25k cant compete with $32,500 car that receives the credits.

    1. I didn’t hear about this, but it makes sense.

      There are other alternatives to CATL’s tech, which are unfortunately also penalized by the IRA.

      1. There are definitely alternatives, like LG and Panasonic. They produce IRA compliant batteries, but that is why the Ford EV Lightning costs $100k.

        1. The Ford Lightning costs $100k because it is a massive obese aerodynamic brick of a truck with a 131 kWh battery pack.

          If Ford really wanted to, they could make an all-electric version of their aerodynamically slippery Prodigy sedan concept from 25 years ago, and get an honest 200 mile range on a 35 kWh pack, and price it under $30k, made entirely with first world labor. But then, someone who wants an EV, may not buy the $100k F150 Lightning…

          Time to let the Chinese in, and give these bastards NO BAILOUTS.

          1. On bailouts, GM has pretty much made themselves small enough to fail at this point anyway. Since 2010, they’ve dumped Opel, Vauxhall, and Holden, withdrawn from India, closed 16 factories in the US and Canada, massively downsized in South Korea, and lost about another 4 points in domestic market share. And now they’re starting to struggle in China.

    1. Well a lot of people thought there was never gonna be a Cybertruck or a Tesla semi, and those people are at least partly wrong. A lot of people still think there will be no Tesla Roadster. They’re probably right, but only the future will tell.

      Basically, this company and this guy have a rich history of doing things differently than bystanders expect, and betting either way is not a safe bet.

    2. I think inflation is the more important we aren’t going to see a $25k Tesla soon.

      * Tax credits – if gone then for all cars with Chinese parts (or labor) then that makes it $32.5k over night

      * Inflation – everything is getting more expensive, even in China. $25k 5 years ago is $30k today

      * Tension with China – make a full ban on Chinese made cars in the near future ?

      Those $25k Teslas could have been made in China for the US (and rest of the world) market. Lower labor costs, lower plant costs in general ; then $25k is possible and still viable.

      Even if Musk could produce a $23k Tesla, with a $2000 profit, WHY would he do that if he can sell $60-80 Cybertrucks and a ton of other matured products?

      I walked in a Tesla shop (while the gf was shopping for cosmetic stuff next door) today and the 3, X and Y still look good (enough) to sell to a lot of people in a lot of countries.

      Why run the risk? Just to make good on a promise? “I shall return – MacArthur”-esc is not needed ; he is not needing to liberate prisoners of war or something.

      If I was Musk I’d let the Chinese fight in the sub $30k market – with whatever outcome – because it doesn’t really matter to Musk. Even if the Chinese would sell 1 million of these cars then that is at best 2 billion USD profit. That actually is not a lot. But after sales and stuff would be a hell for the Chinese. Especially when halfway the sales process the US decides to close the door on them or increase tariffs and what not.

      1. Even if Musk could produce a $23k Tesla, with a $2000 profit, WHY would he do that if he can sell $60-80 Cybertrucks and a ton of other matured products?

        That is exactly what is going on. The founder, Martin Eberhard, wanted to get an affordable long-range EV for the masses out a lot sooner. I remember when the Roadster was new and they were eyeing a 2009-ish release date for such a thing. It was technically feasible a decade before then. Money for mass production was the issue, and at the time, Tesla stock was $1 a share.

        If I was Musk I’d let the Chinese fight in the sub $30k market – with whatever outcome – because it doesn’t really matter to Musk.

        If Tesla doesn’t have a product in this marketspace and the Chinese come in with a 200 mile range sub-$30k EV, they will have to scramble to catch up. Sales of higher-end EVs may drop off a cliff, because those who want inexpensive new EVs have no available choices, other than to buy the expensive ones available.

        The original point of EVs was to save money over the life of the vehicle. Of the ones available, only the Teslas, the GM Bolt, and perhaps the Hyundai Ioniq 6 and 2nd-gen or later Nissan Leaf have the potential to do so vs comparable ICE cars, and only if you drive enough miles to offset the battery cost and put enough miles on the battery during its shelf-life. The remainder of options available in the USA are for the most part a grift.

        Packs in the Model S and Model 3 are proving they can last 500,000+ miles. You just have to put those miles on them within their limited shelf life. Put 0 miles on the battery and let it sit 20 years, and the car’s pack will still be degraded. There are batteries resistant to degradation, that being said. I’m fond of the CALB LiFePO4 models because of their robustness.

  11. The Chinese competition thing makes no sense, the Model 2 was supposed to have been built in Texas, and its very unlikely that a US-produced car in that price range was ever going to be exported much beyond the US and Canada. And there won’t be any Chinese EV competition here, enough politicians are actively working to shut the borders to any Chinese-brand EV regardless of where its manufactured. Chinese EVs are a problem for Tesla everywhere else, but not here, and this car was mainly aimed at here.

    However, I will say that shutting off the US market to cheap Chinese EVs does basically guarantee that there will be no entry-level EV segment at all, so existing automakers have less pressure to create one themselves. Its probably more the lack of Chinese competition in North America, rather than the threat of it, that’s caused this pullback.

  12. Chinese EVs will never exist in the US marketplace with a competitive price due to protectionism and tariffs. As a result, that was never a threat to Tesla’s long-promised $25K car. If anything, it was a threat to their other, more expensive offerings. Welcome to your bait-and-switch “no, we can’t do that” Late Stage Capitalism hellscape.

  13. Tesla should have released the Model 2 a decade ago.

    If Tesla doesn’t make something of the sort, the Chinese could wipe them out. And rightfully so.

    For all of the legitimate complaints about Musk, I don’t think he’s THAT stupid. Like the other automakers, he’s currently taking advantage of the lack of affordable options on the new car market and milking his products for everything he can get. He has a lot more fat he could trim off of the current lineup, which definitely scares the Big 3 who are used to the massive margins obtained from financing all of those oversized/overpriced trucks/SUVs/CUVs that Americans really can’t afford.

  14. Oooooooor Elon is just a con artist and the sub $25k was never going to exist and he just kept promising it in order to try and drive his stock prices up.

  15. The tech will get close enough that enough of us will be comfortable with it.

    This is very debatable at the least and the odds that it happens with a system based purely on computer vision are extremely unlikely. Tesla fucked up by plowing money into the wrong places which is probably a function of having non-existent governance.

  16. Maybe it’s just cover for a tactical retreat and in a couple years it’ll be “Not robotaxis, we’re doing sentient dildos” or whatever.

  17. Given the recent US adoption of the Tesla charging standard, I think Elon’s big business is gonna be selling watts. Once the infrastructure of a charging station is paid off, each watt of electricity sold is profitable, save for maintenance of the chargers.

  18. I think you basically hit on it – but the entire company, at least from an all-important stock price standpoint, is based on their fraudulent self driving claims. Not exactly sure why potentially killing/downplaying an entry level car would be in service of that, but either way – it’s just an other example of him hyping something up that will never be delivered.

    I allowed myself to buy in on some of the claims about them in recent years, and how everyone else was playing catch up – but so much of it just isn’t panning out:

    -best range/efficiency – nah, just inflated claims
    -revolutionary production processes – maybe, but to what end?
    -tech – ditto
    -self driving – always knew this was BS, but at least that’s becoming understood
    -profit margins – nope
    -supercharger network – ok, sure. But they just turned that from an advantage into a revenue source

    They’ve done some really impressive things and deserve a ton of credit for really creating the EV market, but they just aren’t that special anymore – and this is just the beginning of the way back to the pack.

  19. but Musk has been successful by placing a lot of seemingly dumb bets and pulling most of them off most of the time

    I have a bridge in San Francisco for sale, and you, sir, look like you’d be willing to pay for it!

    The dude is a con man, come on. Read https://niedermeyer.io/ ‘s book.

  20. Is Elon still in charge at Tesla? I thought congress or the board removed him and told him to shut up? I am sure if he wanted he could remove unnecessary options and totally stripped down less than $25,000. But offer the options and people will order $10,000 or more.

      1. Okay and if you had a corporation and were appointing a board you would appoint people who disagree with you? My question about Elon no longer having control was not answered in your vitriolic post. Actually seems you avoided answering it and attacked Elon.

        1. you would appoint people who disagree with you?”

          Hell yes, that’s what they’re there for. To help stop you from doing something stupid or illegal.

          1. Here is why this is wrong. If you appont a board that is designed to disagree you have a recipe for failure. You have GM everyone disagrees until you get a boring vehicle with nothing new or interesting or different. You waste money having smart people design a great vehicle and have a group of idiots fighting until the last 20% of the vehicle gets idiot approval. I’m not a EV FAN I prefer Hybrids but Elon on his own created the EV market. It is still a tiny part of the auto manufacturers market. Getting morons to fight and disagree on a vehicle in a new market is just going to destroy the market and leave us with the same morons in charge.

            1. Elon didn’t create the EV market. It existed before Tesla when the tech got “good enough” in the 1990s, and the existing automakers ignored it. Martin Eberhardt created Tesla, not Elon. And Alan Cocconi developed the technology that made modern high-performance EV drive systems possible. Elon was simply the guy with a bunch of money that was able to take what these men created and mass produce it, to get it available at a relatively affordable cost. To Elon’s credit, he had the foresight to see the value in what these men created.

              1. Well actually the EV market was started in the 1800s. All these people just reintroduced it. Yes EVs were introduced mostly by GM with the bolt and volt but your guys created another EV it was ignored and Elon actually created the demand. Why you pick two dudes who designed a vehicle which wasn’t going anywhere over 100 years after the original and giving them credit for doing nothing new is beyond me.

                1. I meant the EV market in the context of say, AGM lead acid batteries, NiMH batteries, and Neodymium-iron boron magnets in electric motors controlled by either MOSFETs or IGBTs. Post “crap era”, as Torch termed it. Basically, only possible circa 1989 and later.

                  The technology of the 1800s was not very practical for long-distance use. The state of the art was the Baker Torpedo, topping out at 100 mph and getting maybe 50 miles range(a single top speed run would drain the battery though), in 1904. By the 1970s, the tech was perhaps good enough for a production car to get 100 miles range at 55 mph with lead acid golf cart batteries(double with NiFe batteries), but it would have been slower than a Mercedes 240D and probably expensive, except no one with such a vision had the money to put it together as it would have required the sort of streamlining demonstrated in the 1935 Tatra T77A, the 1939 Schlorwagen, or the 1944 Volkhart V2 Sagitta. The best we got in the crap era of the 1970s were the 60-mile range McKee Sundancers and CDA Towncars, both only prototypes never to see mass production, and with aerodynamics nothing near as slippery as the aforementioned cars which limited their range.

                  The GM Impact really showed the world what was possible. 100 miles range, with batteries less than 1/10th the gravimetric energy density of today’s offerings. Alan Cocconi designed the control system and power electronics for that car. Alan Cocconi ventually applied lithium-ion batteries to his TZero prototype to get 300 mils range, and worked out the management systems for such a complex pack, which Martin Eberhardt saw potential in and licensed his tech for the Tesla Roadster.

                  What Tesla did in the 2010s, GM could have been doing in 1990 with inferior tech, except the upper management of GM was generally hostile to the idea.

                  1. Exactly, I couldn’t have put it better myself. Other people created it, not your people, and Elon made it happen. Your opinions of the introduction are not responsible for anything.

            2. “If you appont a board that is designed to disagree you have a recipe for failure.”

              Not a board “designed to disagree” that would be pointless. But a board of people who *can* disagree based on their experience. Since presumably that experience is part of why they were recruited to the board in the first place.

              I don’t think the GM board deals with things at the level of individual model design and engineering decisions. They’re more at the level of “Buick? Still?”

    1. Elon is still the CEO, he’s in charge of operations, he does report to a chairman (Robyn Denholm), but she’s not titled as an “executive chairman”, which means she doesn’t have much of hands-on role in the company’s daily management (eg, Bill Ford) beyond pure governance. Elon and his brother Kimbal are both still members of the board, so that’s 1/4 of the board seats held by the Musks right there. Elon also still personally owns over 20% of Tesla’s stock, Kimbal owns another 1% or so, which doesn’t sound like much, but, still, for a big company with that many shares in circulation, it kind of is (more than any other board member personally does, besides Elon). Elon Musk holds more than double the next largest shareholder, Vanguard Group, at around 7%.

Leave a Reply