The big question for the electric vehicle industry and the legacy ICE (internal combustion engine) car makers – and their customers – is when price parity between EVs and petrol and diesel cars might be achieved.

Some experts say it may be in just a few years, others suggest the second half of the decade. Many still scratch their head as to why there is even a big difference now between the price of EV models and the fossil fuel equivalents.

Perhaps one reason is that the EV makers can get away with it. Subsidies, or taxes, are bringing the prices into line in those countries, or states, where electric cars are now mass market items. In other markets where buyers are mostly “early adopters”, they can get away with a premium because the customers want them so much.

Tesla, which produces the best selling EVs in most markets across the world, has only recently started posting profits from its operations, but that disguises the fact that its margins per unit are high, and steadily growing. Much of its money goes into R&D.

Morgan Stanley estimates those margins to be getting close to 20 per cent, near the luxury end of the auto market, even though its Fremont plant in California is regarded as the highest cost car manufacturing plant on the planet.

Morgan Stanley estimates the margins at the new Berlin, Austin and other plants, or “gigafactories”, will be 1,000 to 1,500 basis points higher than Fremont, so as their share of production grows, the costs of production will fall dramatically and the margins (assuming the prices remain study) will soar at the same time.

Will Tesla book all those gains as profits? Not likely, Morgan Stanley suggests, because its top strategic priority will be to expand the availability of lower priced Tesla vehicles to as many people as possible.

Why is that? Because Tesla sees even bigger profits in the future not from the cars themselves, but from its multiple “ancillary” business possibilities  – software, full self driving, subscriptions, insurance, robo-taxis, and more.

To make this work, Tesla needs as big a fleet as it can get. Design and engineering will deliver a new level of scale at EV factories, possibly at a level that the industry has never seen.

“We see the EV market as a highly deflationary business,” the Morgan Stanley analysts wrote in a recent note.

“”While it may take several years to play out, we would be prepared for Tesla vehicles to be offered as low as $US20k/unit this decade.” That’s half the current price of just under $US40,000 for the base level Model 3.

And others will be forced to do the same. “We also expect the price of certain EVs across different manufacturers to be as low as $US10k,” the analysts say. “OEM (Car maker) profitability will be derived from monetizing the customer via other revenue streams, such as software, as opposed to the hardware (the car).”

To give some idea of the scale of Tesla’s ambition, Morgan Stanley estimates that Tesla will spend around $US27 billion a year by 2027 on d annve R&D – that’s more than Apple spends now and more than NASA.

“Investors are witnessing one of the most spectacular industrial ‘arms races’ in a generation,” the analysts write. “The ‘batteries are the new oil’ mantra is being put to work in the form of extraordinarily large budgets across private and public enterprise, research labs, and government sponsored efforts.”

Morgan Stanley estimates that more than $US1 trillion will be spent on developing advanced battery materials and cell architecture and “industrializing its production at tera-scale”

And they believe that Tesla has a big advantage in terms of innovation and scale, from the raw materials of the battery, to the data coming off the car.

“The battle for EV supremacy is still in its early skirmishes … even in our own modeling, we may be underestimating the ambition and speed with which Tesla is industrializing the EV, its supporting infrastructure and its ‘internet of cars’ revenue model.”

Extracted in full from: Why the price of Tesla electric cars could fall by half in just a few years (