Do EV Battery Costs Truly No Longer Matter?

Welcome back to The Electric!

Coming on Tuesday at noon ET: A mania has erupted in India over electric vehicles—two-wheel scooters that are seemingly everywhere in the country. At the forefront is Hero Electric and its pioneering CEO, Naveen Munjal. I’m delighted to host Munjal for the next Live Chat. Register here to join the conversation.

An article of faith behind the EV industry has long been that EVs must cost the same or less than combustion cars. No longer: A large group of analysts, automakers and investors says the EV age is already here and that the obsession with cost is passé. This week, we scrutinize the claim that the sticker price no longer matters. Spoiler alert: It still does.

For more than a decade, a single axiom drove the lithium-ion battery and electric vehicle industry: If researchers could slash the cost of batteries by an order of magnitude, the price of EVs would drop to parity with combustion vehicles and mass-market motorists would switch to EVs in droves. The axiom was very specific—it sought a battery costing $100 per kilowatt-hour, down from about $1,200 in 2010.

Now a new maxim is gaining influence: The cost of batteries and the price of EVs don’t matter.

This remarkable challenge to the industry’s longtime tenet is the result of a surge in global EV sales, including a 50% jump last year. That’s led to forecasts that demand will remain strong through the end of the decade, regardless of the price of EVs. Traditional automakers like Ford and General Motors still talk about cutting battery costs, but they seem to be in the minority. Many analysts, investors and companies are suggesting that consumers now view EVs more like high-tech devices, purchases in which they prioritize lifestyle choice and personal image over price. Tesla CEO Elon Musk is among the proponents of the new thinking: Asked by an analyst in January whether he stood by his long-stated pledge to build $25,000 EVs for the masses, half the current average price for the company’s vehicles, Musk responded, “If the cost of our cars did not change at all, we would still sell as many as we could possibly make.” Since then, Tesla has twice increased its prices, citing the rising cost of supplies.

But it’s not clear that the new thinking is valid. Musk, for instance, has repeatedly stated that he wants to build 20 million Teslas a year by 2030 or 2032, roughly 20 times the company’s 2021 sales. But total global luxury vehicle sales last year, including by Tesla, amounted to just over 9 million units, 13.5% of the global market. So to reach Musk’s objective, Tesla would alone have to more than double the size of the luxury segment. Assuming that traditional manufacturers like BMW, Mercedes-Benz, Porsche and Lexus—not to mention new EV companies like Rivian and Lucid—are still selling cars at that time, and that the total market stays roughly its current size, Musk is suggesting that the luxury segment will grow from a seventh of global sales to 40% or more.