Tesla, $TSLA, has a plan to fend off cheaper competition from China with a $25,000 electric car

Tesla, $TSLA, has a plan to fend off cheaper competition from China with a $25,000 electric car

The company is shifting to what it terms an “unboxed” approach, likened more to assembling Legos than a traditional production line. Instead of a large, rectangular car moving along a linear conveyer belt, parts are assembled simultaneously in dedicated areas and then the subassemblies are all put together at the end. Tesla believes this change could reduce manufacturing footprints by over 40%, enabling the carmaker to construct future plants much faster and at lower cost.

If the new assembly process proves successful, Tesla claims it can halve production costs. This will be crucial for delivering a car cheap enough to stimulate demand, which has recently slowed and put pressure on the electric-car maker’s stock price. Tesla shares are down 29% so far this year, compared to a 10% increase in the S&P 500 during the same period.

“If we’re going to scale the way we want to, we have to rethink manufacturing again,” said Lars Moravy, Tesla’s vice president of vehicle engineering, during the company’s March 2023 investor day.

However, investors have not received many details about Tesla's progress with the idea since then, even as Chinese automakers have reduced costs and Detroit carmakers have refocused on cheaper models.

During the company’s most recent earnings call in January, CEO Elon Musk stuck to generalities, saying only that Tesla was “very far along” in making a cheaper car, slated to start production at the end of next year. While he mentioned the new “revolutionary manufacturing system,” calling it “far more advanced than any automotive manufacturing system in the world, by a significant margin,” he did not provide further details.

Other U.S. automakers are also working to counter the competitive threat posed by Chinese cars. For example, Ford Motor Co. is exploring a compact EV that would use a cheaper battery.

“The concern is that the lower end of the automotive market isn’t currently being served by electric vehicles, but they will be served by China if U.S. companies can’t cut costs,” said Susan Helper, a professor of economics at Case Western University, who recently served as a senior adviser for industrial strategy at the White House Office of Management and Budget.

Tesla has an advantage over traditional automakers in adapting to novel, potentially cheaper manufacturing techniques. Its factories are newer than most, and some are not even under construction yet, so it can more easily and inexpensively tailor its facilities to operate on cutting-edge manufacturing methods.

However, it's not without challenges. The company has cautioned investors that it’s “between two major growth waves” as demand for the Model 3 and Y — both of which have been available for years — peaks. Tesla delivered 1.8 million cars last year but aims to deliver 20 million cars by 2030, necessitating much cheaper cars.