- Ford's CEO says the future of EVs is in smaller, more affordable products.
- Some analysts don't buy it, arguing that car companies need higher transaction prices to make a profit.
- It's the customers, though, that will shape this. We tend to buy expensive, overbuilt, excessive vehicles, so that's what car companies sell.
There is a fundamental truth you have to understand about car companies:They do not exist to make cars. They exist to make money. That distinction, analyst Kevin Tynan tells me, is why they’re not really interested in making affordable electric vehicles.
Perhaps that’s an oversimplification. Tynan is the director of research at an auto-dealer-focused investment bank, the Presidio Group, with decades of experience as an analyst at firms like Bloomberg Intelligence. What he means isn’t that automakers have no interest in affordable products. It’s that their interest begins and ends with winning customers who will eventually buy more expensive, higher-margin products.
One of the auto industry’s dirtiest secrets is that at scale, it doesn’t cost that much more to make a bigger, more expensive than a smaller and cheaper one. But they can charge you a lot more for the former, which makes this a game of profit margins and not just profits. In recent years especially, that’s a big part of why your new car choices have skewed so heavily toward bigger crossovers, SUVs and trucks.
“Look at the Chevrolet Cruze,” Tynan told InsideEVs. “I mean, that was [selling] 200,000 units a year. It sold in the low [$20,000] range. Why doesn’t it exist anymore? If selling things were the goal, these cars are great products. But selling things profitably is the goal, which is a whole different ocean. And so that’s why everybody went to the big truck, because that’s what sells here, and that’s what sells profitably.”
Cheap cars like the Ford Focus and Fiesta probably weren’t profitable for Ford at scale, he said. And he doesn’t buy the idea that anyone is going to offer a 200-mile-range EV for 25 grand. But Bloomberg has reported that Ford’s “Skunkworks” EV truck is targeting that price point. It’s a tall, tall ask. Especially when the still-limited supply chain makes profitable EVs at any price pretty elusive for nearly all manufacturers aside from Tesla and a couple of Chinese brands.
“Put it this way, I don’t think anybody’s making money on $25,000 vehicles in the U.S., regardless of drive type. It’s just not happening.”
He's not the only analyst making that argument.
"Looking at the economics of a lower-cost, mass-market EV," CFRA Research equity analyst Garrett Nelson told Investors Business Daily. "They are going to be money losers for these companies."
Nelson told the outlet that no unsubsidized $25,000 EV is going to be profitable. It's "just not realistic," he said. Still, unprofitable doesn't mean impossible.
Tynan says some companies like Honda will sell cheap cars at a loss to capture young customers that will remain loyal for decades. But the big American companies have largely given up on the practice.
“If you look at GM, Ford and Stellantis, average transaction price in is in the low [$50,000 range],” Tynan said. "I ballpark that to say that’s where they need you to be for them to be profitable on their vehicles, around $50,000, right?”
He says GM doesn’t want to sell people a $25,000 Cruze, then a $32,000 Malibu and then a $38,000 Impala to stair-step a buyer into profitability. They’d rather you buy the $60,000 Silverado now and just finance it forever. “What they’re saying is ‘we don’t want to sell you five unprofitable things on the hope that someday, you know, 12 years from now, you’re going to get into the profitable part of our portfolio. We’re just not doing it.’”
Modern super-cheap lease deals, he said, are a symptom of this, not a suggestion that cars are going to get cheaper. Even with hefty federal incentives, most automakers are still selling their EVs at a massive loss. That can be reduced over time as automakers pay off large-scale, one-time EV investments and trim cost from the product, but Tynan argues it won’t be enough to drive prices much lower. Current ultra-cheap lease deals are a symptom of oversupply, he says, not a sign of things to come.
“Automakers are squeezing pennies out of their manufacturing processes, not thousands of dollars,” he said. Even if they could drive down prices, automakers are no longer addicted to volume. They’re hooked on margin. Selling more cars means more recall expenses, warranty claims, transportation infrastructure, capital expenditure and headaches. Tynan says car companies will continue to focus on large, high-margin, pricey products as much as they can.
Ford’s Counter-Argument
Ford CEO Jim Farley doesn’t agree.
“We believe smaller, more affordable vehicles are the way to go for EV and volume,” Farley said on Ford’s second-quarter earnings call. “Why? Because the math is completely different than ICE. In ICE, the business we've been in for 120 years, the bigger the vehicle, the higher the margin. But it's exactly the opposite for EVs. The larger the vehicle, the bigger the battery, the more pressure on margin because customers will not pay a premium for those larger batteries.”
A 6.2-liter V-8 may require more metal than a 2.0-liter turbocharged four-cylinder, but the four-cylinder is just as difficult to manufacture, if not more expensive. Smaller vehicles still need complicated suspension components, carefully engineered cooling systems, strong crash structures and plenty of fixed-cost components. They cost similar amounts to federalize and certify, similar amounts to design and similar amounts to develop as their larger, more expensive kin. But Ford gets a lot more money for the bigger and pricier stuff.
Much of that is still true in the EV era. But with batteries being such a substantial proportion of the overall cost, there is reason to believe that economic factors will drive automakers to produce smaller cars, SUVs and trucks. That’s especially salient when you consider the exponential math of long-range battery sizing.
The bigger the vehicle, the more air resistance it will encounter, requiring more battery for the same range. The bigger the vehicle, the more it weighs, also necessitating more juice from a bigger pack. Fitting a truck with a larger pack substantially increases the weight, requiring… you guessed it… more batteries to offset it. Each extra cell adds more cost, but the range payoff tapers down as you saddle the car with more rare earth metals.
This relationship is not theoretical. You can see it in today’s production cars. A Lucid Air Grand Touring can go 516 miles on a charge. It weighs 5,236 lbs and has a 118 kWh battery. The Chevy Silverado EV weighs a tick under 9,000 lbs, thanks in no small part to its whopping 205 kWh battery. With a pack that’s 1.7 times as big as the Lucid’s, it can go 450 miles. Sure, it’s a truck, not a sleek sedan, but that’s the point Farley is making: If you want to go far in an EV, for a reasonable price, giant trucks and SUVs with massive batteries aren’t the way forward.
Tynan, for his part, doesn’t buy Farley’s argument, nor his reasons for making it. He argues that the fundamental truth hasn’t changed: Car companies can get a bigger margin on a more expensive product. Even if it’s a smaller-battery vehicle, the money’s going to be made on the expensive versions. Bigger vehicles with bigger batteries will always command enough of a premium to make them worthwhile.
“The thing you’ve got to remember is that Jim Farley has a lot more wherewithal to say things that he thinks the market wants to hear,” Tynan said. Everybody got caught up in this because you look at Tesla and you have Elon Musk saying whatever he wants, and his company is worth $1.3 trillion. [...] At the end of the day, where’s Jim Farley gonna be when this all blows up? He’s gonna be retired on the beach in Cartagena somewhere, and nobody’s gonna remember what promises he made.”
Ford did not respond to InsideEVs’ request for comment.
Ultimately, It’s Up To You
Tynan’s right that no automaker nor automaker executive is pining to sell you a car for less money. These businesses exist to make money. They go where the money is. But that doesn’t mean Farley is absolutely wrong. One fundamental mistake automakers continue to make is that the EV playbook is exactly the same as the internal combustion car playbook. This transition is fundamental, and old axioms may not survive.
Take pickup trucks, the moneymakers for the internal combustion world. Wearing your old-car hat, why not stuff one full of batteries and sell it for twice the price of your regular electric car? Americans love pickup trucks, and car companies supposedly make more money on big, pricey trucks. Yet the reality is that the cost to make a long-range, highly capable EV pickup truck is just far too high right now.
There may be a market for a $100,000 electric truck, but it’s not going to do F-150 numbers. Not even the Ford F-150 Lightning is doing F-150 numbers, because it still has to compete against the gas truck. As much as I think it’s a great truck, I’m not sure I’d recommend one over the cheaper gas truck that requires no lifestyle adjustments. GM, for its part, argues that increased scale will drive battery prices down. But with the big-battery basic Silverado EV “Work Truck” starting around $80,000, it’s hard to imagine shaving $25,000 off the price and still having a profitable product.
Meanwhile, simpler cars like the Tesla Model Y and Model 3 are still profitable and desirable. The Model Y was the best-selling car in the world last year. Hyundai’s portfolio of cheaper EVs is posting record sales, and the company maintains that they’re profitable. Cheap options from Chevy and Ford are posting staggering sales growth while higher-priced options struggle. They aren’t profitable yet, but with the amount of fixed-cost investments required to make them happen, there’s reason to be optimistic that automakers can eventually make money selling affordable products that people buy.
The thing to remember, though, is that they’ll only do it if they have to. Tynan is right. No company that has gotten used to over-$50,000 average transaction prices will focus on cheaper products out of the kindness of its corporate leaders’ hearts. Automakers want to maximize profit. Even if they could make an EV for $25,000, they’d charge $40,000 if consumers and competitors would let them. (Or the $25,000 price tag will be what’s advertised, and with trim levels and options, the actual cars on dealer lots will be well north of that.)
Automakers will pivot to affordable products if and only if demand for expensive products wanes. That’s a bigger ask than you may think. Because while people say they want affordable products, at the dealership they tend to go for the priciest thing they can afford, the thing that makes them feel the coolest, look the richest. Jeep Wranglers didn’t become $70,000 accessories because people wanted a right-sized off-roader. Wranglers became $70,000 because cheaper Wranglers became ubiquitous, and buyers wanted to show off that their Wrangler was the cool one. Never mind that the pricey one still rides like a covered wagon. It conveys the message.
In America, we buy for status. We buy for the edge case. We buy for the things we hope we might do, rather than the things we do. All of these things are incompatible with affordability. They cause us to seek out “cooler” cars over reasonable ones, giant ones over right-sized options, expensive over cheap. Cars for image, not for utility. I’m guilty of it myself. Automakers have rewarded this behavior with wilder, more expensive and more over-the-top options, preferring to pitch themselves to the aspirational set.
Who can blame them? No company wants to be known as the place you turn when you can’t afford anything else. No GM executive gives Mitsubishi a jealous glance. It’s easier for companies to sell fewer high-margin products to a richer audience. That Americans are willing to take out 84-month loans and leverage themselves to infinity makes the buyer pool deep and wide. So automakers will keep pursuing higher prices as long as we pay them. The problem isn’t with them, it’s with us.
Illustration: Sam Woolley.
Contact the author: Mack.hogan@insideevs.com.
