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Will Tesla Cars Ever Be Affordable? (TSLA)

Author: Daniel Smith

Tesla Motors (TSLA) automobiles are highly sought after. Tesla's high performance, all-electric cars also command a very high price tag.

The Model S sedan was originally unveiled in 2009 with a manufacturer's suggested retail price (MSRP) of $57,400. The new 2015 Model S starts at $71,000 but can run as high as $105,000 as features are added. The Tesla Roadster Sport which was produced from 2008-2012 had a sticker price starting at $101,500.

To put this into perspective, the average price for a new mid-sized sedan in the United States starts at around $18,000. At these high prices are Tesla's electric cars reserved exclusively for the wealthy? Will Tesla cars ever be affordable? The answer is probably yes. (For more, see: Why are Tesla Cars So Expensive?)

Why Teslas are so expensive

Teslas are currently very expensive for a number of reasons. The first is the simple law governing prices: supply and demand. The demand for Teslas is very high, with a waitlist for backordered vehicles that is growing steadily. The company is also breaking sales records every month as it struggles to produce enough new vehicles to meet demand.

This high level of demand is due in part to the green energy movement. Because Teslas are not hybrids, but all-electric, they do not consume gasoline and do not directly pollute the air with carbon dioxide. (It is worth mentioning, however, that CO2 is still a by-product of the electricity generated to charge the car's batteries.) Demand is also driven by Tesla's attractive design, which includes high-tech features and a dashboard that consists of a digital touch display. (For more, see: What Drives Consumer Demand for Tesla?)

At the same time, Tesla does not own a series of factories capable of building enough cars to satisfy the current demand. This is in contrast to traditional automakers which have numerous production facilities spread around the world.

The other major reason for Teslas' high sticker price is the expensive nature of the battery technology that powers the vehicles. Batteries are the most expensive single component of these cars, carrying a current cost of around $500 per kilowatt-hour. A base model Model S has around 60 kilowatt-hours of capacity, meaning that approximately $30,000, or 42.25%, of the sales price is due to the battery packs. (See also: Ways To Indirectly Invest In Tesla's Momentum.)

How Teslas will become affordable

Increasing the capacity to supply new vehicles is already in the works. Tesla has announced construction of a 'gigafactory' in the Nevada desert, allowing it to scale up production to a large degree. Economic theory suggests that this move alone will begin to put some downward pressure on the price, bringing it more in line with its cost of production.

Competition from other companies is also likely to put pressure on the price to fall. The Chevrolet Volt is just one example of traditional car companies entering the electric vehicle fray. While they have a long history of producing hybrid electric cars, the demand for all-electric vehicles can be satisfied by companies other than Tesla. Right now, Tesla has a first mover advantage in that traditional car makers have been reluctant to invest in all-electric lines. With Tesla's success, however, these automobile makers are now anxious to take away some of its market share. (See also: Who Are Tesla's Main Competitors?)

Battery technology is also improving, which will lower the cost of production and pass savings on to the consumer. Since Tesla produced its first cars, the cost of battery packs has fallen by around 50%, and at the same time, storage capacity has increased by more than 60%.

The company is in the process of continuing to increase the energy efficiency of the batteries, further causing the price to fall from $500 per kWh to about $200 per kWh in the future, a 60% increase in efficiency. There is a lot of investment going into research and development to improve battery technology, both inside Tesla and among other researchers worldwide. The hope is that eventually the cost of battery power will be able to compete with the cost of gasoline to fuel cars.

The Bottom Line

Tesla's vehicles are very expensive compared to gasoline-powered cars. This is due to a high level of demand that exceeds its production capacity, the fact that it has very few competitors, and a high cost of production largely attributable to the price of battery power. The prices should drop, however, as each of these three factors is addressed. Tesla is building out its production capacity which will allow it to produce more cars when those factories go online.

Traditional car companies are also signaling that they plan to begin mass production of all-electric vehicles. Finally, research and development in battery technology is bringing down the cost of production, making the single most expensive component of these cars more affordable. In just a few years, electric cars may be just as affordable as their gas guzzling counterparts.

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