I'm Not Surprised Tesla Scrapped It's $25,000 Model 2. Here's Why.
The move makes perfect sense for Musk, not Tesla.
A few days ago, Reuters published a shocking article claiming that Tesla had scrapped its upcoming $25,000 mass-market EV, the Model 2, and is instead focusing on a robotaxi based on the same platform. These claims are far from unsubstantiated, as Reuters has four sources from inside Tesla, two of which were at the February meeting where this decision took place. This revelation worries many Tesla investors and backers, as the Model 2 was meant to be Tesla’s next significant growth phase, and Tesla is far from building a fully autonomous self-driving car. Musk is seemingly aware of the damage this revelation could have and tweeted (Xeeted?) in response to Reuters claiming they are lying. Considering Musk has peddled false conspiracy theories, published misleading videos, been promising self-driving cars are a year away for eight years, and Reuters is statistically the second most reliable source of news in the English-speaking world, I know who I believe. But if this pivot could do so much damage, why do it and try to cover it up? Well, when you understand how Musk views Tesla and the company’s problems, it all becomes crystal clear. Let me explain.
If the Model 3 was Tesla’s Ford Model T moment, then the Model 2 is meant to be their VW Beetle moment. Its cheaper price and far larger production scale should make it accessible to the vast majority of consumers, not just the well-off middle class. This would be the final push of the EV revolution, to leave no corner of the consumer automotive world untouched. If Tesla can be the one to lead that charge, it would further solidify itself as a leader, lock in a vast amount of income, and send its already over-inflated stock price even higher.
Or at least, that was the idea. In reality, Tesla is late to the game.
The market already has plenty of EVs with specs and prices similar to those of the Model 2, and plenty more are coming in the next few years. There is the BYD Dolphin, VW ID2, MG MG4, Peugeot e-308, Citroën E-C3, Kia EV2, and Renault 5, just to name a few. But these EVs aren’t selling anywhere near as well as Musk predicts the Model 2 will. Take the MG MG4, which has won many awards, costs the same as the Model 2 will, is around the same size, charges just as quickly, but has 30 more miles range (WLTP), yet MG can only shift 10,000 units per month internationally (sold in China, Asia, EU and UK). Yet somehow, Musk wants to sell over eight times more Model 2s in a month! Quite simply, Tesla won’t be able to meet these sales figures in such a crowded market, particularly as the Model 2 won’t likely go on sale until at least 2027.
The reason Tesla is late to the market is straightforward: the Cybertruck. Tesla should have spent the funds and time to ensure they were the first major manufacturer to move into the true mass-market affordable EV sector, but they squandered them on the Cybertruck. As such, the Model 2 was dead on arrival.
However, Tesla is also facing a considerable share price problem. Their share price has fallen a whopping 46% since July of last year and a colossal 61% since its peak in November 2021. This has been driven by Tesla sales and profit margin slumping as competitors, both domestic and abroad, entered the market with EVs cheaper and more capable than any Tesla, kick-starting an EV price war.
However, it has also been driven by a waning faith in Tesla’s self-driving program. I have covered this before, but in 2022, Tesla ditched all its ultrasonic and radar sensors, and now its cars only use video feeds to understand the world around them. This was a cost-saving measure to ensure they remained profitable during the EV price war. However, having no redundancy in the automation system (i.e. other ways of sensing the world around the car) renders it incredibly dangerous. In fact, Tesla engineers themselves said the move made their vehicles more dangerous and made the path to full autonomy even more difficult. Musk has said many times that without full self-driving capabilities, Tesla is worth basically zero, and many investment banks and fund managers predict that Tesla could become a trillion-dollar + company thanks to revenues from being the first automaker to crack self-driving. This hype is what has inflated Tesla stock way past its fundamental value. But it is now losing momentum as lawsuits, broken promises, and insider leaks make this promised future look more and more fanciful, and as such, Tesla shares are losing value quickly! In fact, J.P. Morgan has stated that Tesla’s “shares could fall much further still.”
This is a massive problem for Musk, as he uses his Tesla shares as collateral for billion-dollar loans to fund his other businesses, like SpaceX and X/Twitter. Simply put, he can’t afford to let Tesla’s value slip away.
The solution? Double down on self-driving.
If Musk piles on forwards with the Model 2, then Tesla sales will remain dismal as they are swamped by competition. What’s more, the money they could lose by trying to reach the Model 2 sales figures is astronomical. But, by switching this plan to robotaxis, all these problems are resolved. As the profit doesn’t come from the sale of the car, Tesla can negate the EV price war and dramatically bolster its revenue from a relatively small fleet of robotaxis, as a single robotaxi can make more in a year than the sale of an EV. This switch could also bolster the self-driving hype train, sending Tesla stock back up! The fact that Tesla is nowhere near being able to deliver a fully legal robotaxis, and likely won’t be for years to come, doesn’t matter. This pivot would be enough to convince many investment bankers, analysts and fund managers that this massive potential market is about to open up for Tesla, causing them to fight over the shares, at least for the next few years.
In this way, it makes sense for Musk to abandon the Model 2 in favour of a robotaxi, as it ensures his over-valued company stays overvalued for at least a few more years, enabling him to extract as much wealth and utility before the reality of the market and their self-driving efforts crush it. So, why would he deny the Reuters report? Well, for years now, he has been touting the Model 2 and its predicted giant sales numbers as the next significant growth phase of Tesla. It will take a delicate hand and a severe amount of PR work to make this pivot without damaging Tesla’s revenue predictions for the next few years and, in turn, sinking Tesla’s share price even further!
In other words, this all looks like yet more snake oil, and smoke and mirrors from Musk to keep his pockets as deep as possible.
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Sources: Reuters, Autocar, Electrek, PureVPN, Clean Technica, Motley Fool, Bloomberg, CNN, Will Lockett, Will Lockett, Will Lockett