Since the Tesla Model 3 was first unveiled as the world’s first “mass market” electric vehicle, aspiring EV owners have been hanging out on the promise of an affordable EV.

In the end, the Model 3 – despite being the best selling EV in the world – didn’t quite turn out the way many people thought it might. The basic Standard Range never materialised, the cheapest we got was an SR plus, and once it got to Australia – with freight costs and GST, it was quickly propelled beyond the range of most people’s budget.

The Model 3 landed on these shores at a driveaway price of more than $70,000, and while it has now been reduced to nearer $60,000 – thanks to cost reductions, more favourable forex rates, rebates and stamp duty exemptions – it is still beyond what most people would pay for a car.

Which is why a lot of people got excited by talk that Tesla was considering building a $US25,000 compact EV, which some had dubbed the Tesla 2.

There was even talk that Tesla could, within a few years, produce an ultra low cost EV, possibly around $US15,000, thanks to its new manufacturing innovations such as the “giga-press” being used for the Model Y in Berlin, and from sheer scale, producing at more than one million units per plant.

But Tesla boss Elon Musk made it clear at the last earnings call that there wouldn’t be any new models launched in 2022 – not the highly anticipated Cybertruck, not the Semi, and not the Roadster. And he insisted the company was not even working on the low cost model.

There’s a couple of reasons for this – right now Tesla is making so much money (profit per sale) that it would seem daft to weaken that with a lowest cost model and smaller margins. And, given the world-wide shortage of chips, it is focusing on the already highly popular and profitable Models 3 and Y.

But there is something more fundamental behind Musk’s reasoning, and it goes to very future of the electric vehicle transition, and car ownership. And it helps explain the astronomical valuation of Tesla, because this is not just a car company that happens to be electric, it’s just as much a software and service company.

Musk gave an insight into this in that earnings call. First of all, he dismissed the idea that Tesla had time to focus on a $US25,000 EV because “we have enough on our plate right now, too much on our plates, frankly.”

And then he made this observation.

“I think … it’s just sort of the wrong question. Really. The thing that overwhelmingly matters is when is the car autonomous? At the point at which is autonomous the cost of transport drops by a factor of four.”

As Musk explained later in the phone hook up: a fully autonomous car will be used five times more than a regular privately owned passenger car, and that delivers a massive amount of potential revenue and earnings from a single vehicle.

Indeed, as we reported at the time, Musk says Full Self Driving could deliver the biggest uplift in asset value of any product ever seen. A car with FSD can be used many more times and at lower cost than a car with a driver. Hence his claim that using a “robo-taxi” would be cheaper than a bus ticket.

“Just going from having an asset that has a utility of around 12 hours a week to a passenger car that can do maybe 50 or 60 hours a week, that’s a 5x increase in the utility of the asset, at no change to cost,” Musk said. “That’s where just things just kind of blows your mind.

“Look out the front windscreen. This is such a profound step change …. every car will have FSD and the value of that will be a very big number.”

It will have other significant impacts. It will have an impact on parking lots, because cars won’t be sitting idle all day, so many parking lots won’t be needed. But there could be a major problem with a boost in traffic, because there will be so many cars on the road.

“There will be a crazy number of cars. I mean, it’s going to be, I think, really cheaper to go from point to point with a Robo taxi, which is an autonomous Tesla ….  that costs less than the subsidised value of bus tickets,” Musk said.

“People just do not understand how profound change this is.”

Musk of course is not the first person to think along these lines. Stanford futurist Tony Seba was talking about the impact of  autonomous driving way back in 2017, when he predicted that by 2030, many people won’t own their own car. They won’t need to, because robo-taxis will be cheap and readily available.

Seba’s think-tank RethinkX, said then that Transport-As-A-Service will use only electric vehicles and it will upend two trillion-dollar industries. It’s effectively the death spiral for privately owned cars. You can read that article in full here.

The big question is how good autonomous driving will be, and how soon will it be a reality. Musk says it could be proven this year, although it seems doubtful that many regulators will be allowing it to happen on public roads beyond specific trials any time soon. Validation is one thing, approval is another.

As Musk notes, it won’t be good enough that autonomous cars are safer than those driven by humans. “Frankly, being safer than a human is a low standard,” Musk said. The question is how does a robo-taxi prove to 1,000 per cent better. Will the safety standard be set at 99.9999 per cent, or 99.99999999 per cent.

Another big question, however, goes to whether this is what the public wants. Are they ready to give up their own cars and the convenience of using it how and when you want, and to act as a mobile cupboard?

The implication from Musk is that if you want access to low cost EVs, the way to do this will be through accessing robotaxix. If you want to drive your own, you may have to pay for the privilege (and the added insurance costs if AVs become a reaility). Chances are that Tesla will find a way to build an ultra-low EV anyway. Just for total market domination.

Extracted in full from: Why Tesla is not going to build a low cost EV any time soon, if ever (