Ukraine War, Raw Material Costs Cloud Elon’s Affordability Dream

Tesla CEO Elon Musk is an entrepreneur with big dreams, ranging from building an electric vehicle (EV) empire to private space flight and even the colonization of Mars. He’s been at the business of dreaming for a while now, and we can even watch them unfold like rose buds on a warm summer day.

But one of those dreams is beginning to wilt under the heat of war, supply chain disruptions and the rising cost of raw materials.

EV industry must be price competitive

The Tesla founder and technology pioneer has spent nearly two decades building his car company into an international juggernaut, changing the world’s expectations for personal transportation. His dream of leading consumers into a future powered by alternative energy depends on Tesla’s ability to offer affordable prices to the masses, but that goal has fallen into jeopardy.

While the cost of lithium-ion battery cells have been on the decline for years, a major cost component of the EV, the trend may reverse in 2022, said industry forecaster Gregory Miller, of Benchmark Mineral Intelligence. That would be the first time ever, he said.

Tesla facing material shortage, price increases

Tesla is facing a wave of rising costs for metals used to manufacture electric vehicles and the batteries that power them. The list includes aluminum used in the bodywork, palladium used in catalytic converters, as well as lithium and nickel for EV batteries. While supply chain disruptions caused by the pandemic have stood in the way of semiconductor chip deliveries, the Russia-Ukraine war has created more bottlenecks, placing additional pressure on product pricing.

Musk’s affordability dream has been slipping since we awoke from the pandemic, but it became alarmingly obvious in March when his company announced multiple price increases. Tesla’s most affordable electric car, the Model 3 RWD (once touted at $35K), jumped by $2,000, from $44,990 in early March to $46,990 one week later. Prices for other Tesla models went up even more. For example, the price of a Model 3 Performance increased by $3,000, and Tesla’s flagship products, the Model S and Model X, also saw steep price hikes. The Model S went up by $5,000 and the Model X SUV rose by $10,000.

However, Tesla isn’t alone. New EV startup Rivian increased prices by 20% just 6 months into production, which resulted in a backlash from preorder customers. Elon empathized with the company, stating, “Our primary challenge is affordability… If it is extremely hard to do for Tesla, despite our much greater economies of scale and better technology, then it is damn near impossible for others.”

Higher costs hurt EV adoption

Some industry watchers believed the recent run-up in oil prices would drive more people to buy EVs, but rising prices have stymied enthusiasm. The average EV sold in the U.S. for nearly $63,000 in January, which was on par with the average luxury car price and about 35% higher than the overall industry average price for all vehicles. Comparatively, the average price for an internal combustion engine (ICE) automobile is about $43,000, or $20,000 less than the average EV. That is quite a premium and difficult to rationalize for the average auto consumer.

“Anything that adds to the cost will impede EV adoption,” Cox Automotive analyst Michelle Krebs told Reuters. Under these pricing challenges, the industry may struggle to meet long-term market expectations. EVs comprised about 9% of global vehicle sales last year, according to the International Energy Agency, and industry consultants have projected EV market share could approach 24% by 2030. But recent price increases are now casting doubt on those expectations and could potentially discourage car buyers from shifting to EVs.

Solution to high EV prices

One way for Tesla and other OEMs to offset rising raw material costs is to develop their own resources, which would significantly lower and lock in commodity prices. Elon started talking about getting into the mining business in 2020, but his interest has been rekindled by skyrocketing mineral and metal prices. On April 8, Elon tweeted, “Price of lithium has gone to insane levels! Tesla might actually have to get into the mining and refining directly at scale, unless costs improve.”

Other OEM’s, such as Ford and GM, also see the upside of investing in mining operations to secure raw materials and hedge prices. Without doing so, EV prices will continue to escalate at an alarming rate, which will essentially kill not only Elon’s dream of achieving EV affordability, but the dream of many who’s goals are to lower carbon emissions and diminish climate change.

Elon’s dream isn’t just good for Tesla and car owners, it benefits us all.