The electric vehicle market is set for a significant shift with the arrival of a $25,000 model, promising to change the way car buyers choose their vehicles.

• Tesla asserts that it will reduce manufacturing expenses for its upcoming models by 50%.
• GM's electric Equinox SUV will come in around $30,000 this fall.
• New EVs from VW and Fisker are priced at least 30% below the average U.S. new-vehicle prices.
• Analysts predict that the new cars will be somewhat bare-bones, despite being comfortable.

The $7,500 tax credit expansion and Tesla's cost-cutting measures are the main factors driving down the cost of electric vehicles, as perceived by car buyers from the headlines.

The work that auto companies are doing to improve EV technology and manufacturing processes is a significant development. This is reflected in the upcoming release of more affordable and mainstream EV models, including Tesla's next-generation car, which is expected to cost between $25,000 and $30,000.

The Biden administration's push for changes to remake the car market in favor of EVs more quickly than anticipated will mark a significant milestone in the rise of mass-market EVs, with implications for the environment, economy, finance, and politics.

Achieving price points significantly below the $48,763 U.S. average new-vehicle price, which has increased by 30% in the past three years according to Kelley Blue Book, will disprove the notion that EVs are only for the wealthy. If these new models gain popularity, electric vehicles will become a widely accepted consumer product, while also solidifying Tesla, a company that has shifted its focus and is still in the process of being whittled down, as a mainstream car manufacturer.

"According to Wedbush analyst Dan Ives, Tesla must produce a cheaper car in order to achieve mass-market success. Ives believes that Tesla's version will be a compact luxury vehicle similar to an Audi A3 gas-powered car, which starts at $35,400. Ives considers mass market to be the ultimate goal."

The Model 3 base MSRP of $41,990 is Tesla's cheapest model today. Despite the availability of three EV models with base MSRPs under $30,000, including the Chevy Bolt, Bolt EUV, and Nissan Leaf, average sales prices in March were still above $30,000, according to Edmunds, and above $34,000 in the case of the Leaf.

New electric vehicles are flooding the market, with over 60 models expected in the next few years. Volkswagen has announced the sub-25,000 euro ID.2 model for the European market, while startups and established automakers plan to launch more affordable EVs in the coming year. These vehicles will compete in the compact sedan market, which is expected to reach 10 million units globally over the next five years, even as automakers shift their focus towards SUVs.

The Inflation Reduction Act extended tax breaks for U.S. buyers, allowing them to take credits of up to $7,500 for most North American-made EVs. However, the rules for eligibility have become more complex, with requirements based on battery production location. Additionally, there are now more financing options available in the auto loan market specifically for environmentally friendly cars.

The big questions for automakers in budget EVs

The emergence of budget electric vehicles poses several challenges for automakers, such as how to reduce production costs, how quickly they must adapt to remain competitive against new entrants in the low-end market, and whether the cost-saving strategies employed by EV-only companies like Tesla and Fisker can be applied to more expensive vehicles, potentially lowering or limiting their prices for consumers.

What kind of EV will consumers be likely to purchase at these prices, and will they buy it?

"According to Stephanie Brinley, associate director of research at S&PGlobal Mobility, when thinking about Toyota's gasoline-powered mainstay Corolla and other entry-level vehicles, it's reasonable to expect a lower feature point."

The PEAR, a vehicle by Fisker, is not expected to compete with Ford's gas-powered Explorer, but rather resemble a smaller version of Honda's CRV or Toyota's RAV4, both of which are the best-selling SUVs in the U.S. last year, according to Goodcarbadcar.net. The RAV4 sells for as low as $27,500, which is four inches longer than the PEAR's expected length, and the CRV just under $30,000 for the larger model.

Tesla's initial low-cost car, referred to as a Model 2, is predicted to be a hatchback, likely manufactured at the company's upcoming factory in Monterrey, Mexico, with some production possible at Tesla's Austin, Texas facility, according to Ives. Comparable models for the next-generation Tesla and other affordable EVs include the Honda Civic and Toyota's Corolla, which retail for base prices of $25,050 and $21,550, respectively, according to Brinley. Their U.S. unit sales rank 9th and 13th among all models, and first among compact sedans, according to Goodcarbadcar. Other similar cars include Hyundai's Kona and Honda's Fit.

Garrett Nelson, a CFRA Research analyst, stated that the lowest-cost EVs may have as little as 250 miles of range between charges, similar to the $28,000 Nissan Leaf and cars like Hyundai's Kona that sell in the mid-$30,000-range now, allowing consumers to save by opting for a smaller, cheaper battery.

Fisker CEO Henrik Fisker stated on the company's Feb. 27 earnings call that consumers may accept a shorter range in exchange for lower cost because they use a PEAR as a second car or use it in cities, where short trips with time to recharge in between are common.

"Fisker stated that they may not need a large and expensive battery if they are using it as a city car, so they will provide various options."

The key to reducing the $41,990 list price of the Model 3 standard range for market leader Tesla lies in new or reimagined factories, increased scale, and further advancements in battery technology, according to Nelson and Ives. Ives predicts that battery costs will decrease by another 30 to 50 percent after years of decline.

Ford anticipates achieving a 20% increase in EV operating profit margins by 2026 through simple scale economies, according to a presentation to analysts on the company webcast on March 23. Additionally, Ford CFO John Lawler stated that an additional 25 points of margin would come from falling battery costs and redesigning vehicles to use smaller batteries. Meanwhile, Fisker has opted to save costs by outsourcing production of the PEAR to Foxconn.

How Tesla plans to lower costs

Tesla's March 1 investor day focused on its next-generation strategy, which aims to reduce unit production costs by another 50%, despite Elon Musk's history of over-promising and under-delivering. However, Tesla has successfully accomplished this before, when transitioning from the Model S and Model X to a lineup primarily consisting of the Model 3 and Model Y.

Tesla's new power train factories have 65% lower costs than their predecessors, and the company's design allows for the large, flat battery to serve as the car's floor, enabling workers to install seats and other interior components without removing doors after painting. This results in less downtime during production, according to Lars Moravy, Tesla's vice president of vehicle engineering.

Tesla claims that its vertical integration, which involves designing its own batteries, manufacturing equipment, and software, will lead to lower costs. The company has successfully driven the cost of drive units, including the electric motor, to $1,000.

According to Colin Campbell, the vice president of drivetrain engineering, no other automaker is close to the number we have, a claim supported by Munro & Associates, which states that suppliers to other automakers charge $2,500 or more for similar systems.

Cory Steuben, Munro president, stated that it's big news.

While Tesla aims to establish itself as a car manufacturer that caters to all market segments with its entry-level car, automakers have historically focused on larger vehicles with higher profit margins, preferring to minimize their presence in the less profitable low-end market. In fact, a spokesperson for Hyundai's U.S. operation stated in an email that the company has no plans to introduce a lower-end EV, and no low-end Fords have been announced. GM will add the Equinox to its existing Bolt sedan, which starts at $26,500, down almost $6,000 for the 2023 model year. The majority of EV sales that enabled GM to surpass Ford as No. 2 behind Tesla were the Bolt, although still far behind.

"Hyundai stated that currently, a $25,000 battery electric vehicle is challenging to produce without compromising driving range. However, the company anticipates that internal combustion engine (ICE) and battery electric vehicle (BEV) models will eventually reach price parity. The exact timing for this is still uncertain."

To address low profits in lower-end electric cars, companies plan to add options, similar to mid-priced cars and trucks, Nelson said. For Tesla, this could include battery upgrades, subscriptions to services, or an autonomous rideshare version that allows drivers to stay home while the vehicle is deployed. Alternatively, automakers can focus on selling buyers of smaller EVs on premium features such as leather seats, more powerful batteries, and premium stereos, relying on the same forces that drive some Civic buyers to pay over $43,000 for the sportier Type R version or push some Model 3s as high as $79,000.

Brinley warned that the automakers may not deliver on their promise of making the new vehicles as affordable as they claim.

"Tesla hasn't hit a price point yet," she said.

The extent to which costs decrease and how aggressively Tesla lowers prices will determine the impact of recent inflation on car prices, as the company's ability to improve supply chains and reduce its own costs allows it to potentially reduce some of the inflationary pressure in the market.

"Ives stated that the market's pricing and competition would be determined by where Tesla is heading, as everyone is observing this closely."