The $25,000 electric vehicle is coming, with big implications for the auto market and car buyers

From the headlines, car buyers might think the most important force driving down the cost of electric vehicles is the $7,500 tax credit that was expanded last summer, followed by Tesla's recent aggressive cost-cutting to gain more market share.

Look closer, and the work auto companies are doing themselves to refine EV technology — and, crucially, new manufacturing processes — loom as an even bigger deal. And that's resulting in a series of newly-announced and coming-soon models that will make EVs much cheaper, and more mainstream, highlighted by Tesla's first detailed public explanation of how its next-generation car due next year will come at a lower price tag, expected to start between $25,000 and $30,000.

The rise of the mass-market EV will be a milestone — environmentally, economically, financially and even politically. And as the Biden administration pushes changes that seek to aggressively remake the car market in favor of EVs more quickly than previously anticipated.

Hitting price points well below the $48,763 U.S. average new-vehicle price, which Kelley Blue Book says has risen 30% in the last three years, will make obsolete the shibboleth that EVs are an elite affectation of rich people. If the new models catch on, they will cement electric transportation as a mainstream consumer good, while also making Tesla, a refocused Ford and General Motors — and a still-to-be-winnowed out collection of EV startups — fully mainstream carmakers.

"For Tesla to go mass-market, they have to have a cheaper car," said Wedbush analyst Dan Ives, who thinks Tesla's version will be a compact luxury vehicle akin to an Audi A3 gas-powered car, whose base model starts at $35,400. "And mass market is the holy grail."

Tesla's lowest-priced model today is the Model 3 base MSRP of $41,990. There are currently three EV models with base MSRPs under $30,000, the Chevy Bolt, Bolt EUV, and Nissan Leaf, but average sales prices in March for both were still above $30,000, according to Edmunds, and above $34,000 in the case of the Leaf.

Lower-priced EVs are among a flood of new electric models that have begun to hit the market, with more than 60 new EVs expected in the next few years. Volkswagen on March 15 announced the sub-25,000 euro ID.2 model for the European market. Startup Fisker plans to launch the $29,900 PEAR crossover next year in the U.S., and GM is set to ship a sub-$30,000 Chevrolet Equinox electric sport-utility vehicle by fall. Most will compete in a market for compact sedans that could hit 10 million units over five years globally, even as automakers otherwise deemphasize smaller cars to focus on SUVs, Ives said.

All of these prices are before the tax breaks extended in last year's Inflation Reduction Act, which let U.S. buyers take credits as large as $7,500 for most EVs made in North America, but are getting more complicated, with rules including eligibility based on where batteries are produced. There are also more financing options available in the auto loan market designed specifically for environmentally friendly cars.

The big questions for automakers in budget EVs

The rise of the budget EV raises a host of questions for car makers, including where they achieve the near-term cost savings needed from production lines, how fast they need to move to gain an edge over rivals entering the low end of the market, and whether the cost-saving techniques that EV-only companies Tesla and Fisker are claiming spread to more expensive vehicles, ultimately either lowering or containing their prices to consumers.

But the biggest question of all right now: what kind of EV will consumers be likely to find at these prices, and will they buy it?

"Think [Toyota's gasoline-powered mainstay] Corolla and other entry-level vehicles," said Stephanie Brinley, associate director of research at S&PGlobal Mobility. "There's nothing wrong with having a basic car as a first car. It's a reasonable expectation to have a lower feature point." 

Analysts don't expect a vehicle like Fisker's PEAR – an acronym for Personal Electric Automotive Revolution – to compete with a bigger SUV like Ford's gas-powered Explorer. Instead, the PEAR may look more like a smaller version of Honda's CRV or Toyota's RAV4, the two best-selling SUVs in the U.S. last year, according to Goodcarbadcar.net. They sell for as low as $27,500 for the RAV4, which is four inches longer than the PEAR's expected 177-inch length, and just under $30,000 for the larger CRV.

Tesla's initial low-cost car, known colloquially as a Model 2, is expected to be a hatchback, most likely made at the company's coming factory in Monterrey, Mexico, with some production possible at Tesla's Austin, Texas facility, Ives said. Likely comparable models for the next-generation Tesla and other cheap EVs include the Honda Civic or 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 tops among compact sedans, according to Goodcarbadcar. Other similar cars include Hyundai's Kona and Honda's Fit. 

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

Brinley says consumers are unlikely to accept less than that, and will likely insist that even less-pricey EVs keep popular safety features like lane-departure warnings. 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 CEO Henrik Fisker said on the company's Feb. 27 earnings call.

"They may not need to carry around a giant expensive battery, if they're only using [it] as a city car," Fisker said. "So we'll offer some different variations there."

For market leader Tesla, the key to pulling costs down from the $41,990 list price of the Model 3 standard range begins with new or reimagined factories, vastly greater scale and advances in battery technology, Nelson and Ives said. Ives said battery costs have another 30 to 50 percent to fall after years of decline.

At the No. 2 U.S. EV maker, Ford expects simple scale economies to improve EVs' operating profit margins by 20 percentage points by 2026, according to a presentation to analysts on the company webcast on March 23. Another 25 points of margin will come from falling battery costs, and from redesigning vehicles so they can use smaller batteries, said Ford CFO John Lawler. Fisker has moved to save by outsourcing production of the PEAR to Foxconn.

How Tesla plans to lower costs

Tesla devoted the biggest chunk of its March 1 investor day to explaining its next-generation strategy, which it said will drive down unit production costs that are already low by another 50%. While Elon Musk has been dogged by a history of over-promising and under-delivering — at least by the original deadline — this is a trick the company says it has already accomplished once, when moving from the premium-priced Model S and Model X vehicles to a lineup dominated now by the Model 3 and Model Y.

The keys include new, bigger factories and a design that makes vehicles' large, flat battery do double duty as the floor of the car. Those moves let Tesla assemble cars in a different order, skipping steps like removing doors after painting to let workers install seats and other interior components, resulting in less downtime during production, Lars Moravy, Tesla's vice president of vehicle engineering, said at the investor day. The company's new power train factories have 65% lower costs than what they replace, he added. 

Tesla argues that its vertical integration, in which it designs its own batteries and much of its manufacturing equipment and software, will drive costs down further. Tesla said its overall efforts have driven the cost of drive units, which include the car's electric motor, as low as $1,000. 

"We don't think any other automaker is even close to that number," vice president of drivetrain engineering Colin Campbell said, a contention backed by engineering firm Munro & Associates, which says suppliers to other automakers charge $2,500 or more for similar systems. 

"That's big news," Cory Steuben, Munro president, said.

While Tesla hopes the entry-level car will cement its role as a carmaker that can serve all segments of the market, automakers have spent years reducing their footprint in the less-profitable low end of the market, preferring to concentrate on larger vehicles with wider profit margins. Indeed, a spokesman for Hyundai's U.S. operation said in an e-mail that the company has no plans to introduce a lower-end EV. No low-end Fords have been announced either. GM will add the Equinox to its existing Bolt sedan, which starts at $26,500 – itself down almost $6,000 for the 2023 model year. A majority of the EV sales that allowed GM to surpass Ford as No. 2 behind Tesla, though still far behind, have been the Bolt.

"At this moment a $25,000 [battery electric vehicle] is difficult without compromising driving range," Hyundai said in the statement. "Eventually, Hyundai expects ICE and BEV models to reach price parity, but the exact timing is still unclear."

The solution to low profits in lower-end electric cars, the companies hope, will be to load them with options, just as mid-priced cars and trucks do, Nelson said. In Tesla's case, this might mean battery upgrades and subscriptions to services, or even a version that lets drivers deploy the vehicle for autonomous rideshare driving while the owner stays home, Nelson added. Or automakers can simply try to sell buyers of smaller EVs on leather seats, more powerful batteries and premium stereos, counting on the same forces that make some Civic buyers pay $43,000-plus for the sportier Type R version or push some Model 3s as high as $79,000.

Or the automakers might simply not make the new vehicles as inexpensive as they are promising now, Brinley said.

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

The real answer depends on exactly how far costs come down, and how aggressively Tesla lowers prices, if at all, as healing supply chains and its own falling costs empower it to squeeze some of the recent inflation in car prices out of the market.

"Everybody is watching to see where Tesla heads," Ives said. "That's going to dictate pricing and competition in the market."