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April 24, 2024

Tesla’s Strategy Shift on Affordable Cars Alters Investment Plans, Puts India Expansion on Hold

A Tesla Model X is photographed alongside a Model S at a Tesla electric car dealership in Sydney, Australia, May 31, 2017. REUTERS/Jason Reed/File Photo

In a significant strategic move, Tesla announced on Tuesday its intention to utilize existing factories for the production of new, more affordable vehicles, delaying investments in new factories in Mexico and India for the foreseeable future. This decision has thrown Tesla’s plans for expansion in India into uncertainty.

The world’s leading electric vehicle (EV) manufacturer revealed plans to boost production by 50% from 2023 to nearly 3 million vehicles, before considering investments in new manufacturing lines. This move, although expected to achieve less cost reduction than previously projected, allows Tesla to incrementally grow its vehicle volumes in a more capital-efficient manner amid uncertain market conditions.

Investors reacted positively to the decision, with Tesla shares surging 12% in after-hour trading despite the company’s quarterly results falling short of financial targets. Elliot Johnson, chief investment officer at Evolve ETFs, praised the cautious approach, stating, “I think it’s a positive that he’s not just barreling ahead with an expansion plan, ignoring the challenges in the market and the fact that he’s doing a cheaper vehicle from the existing product line.”

Earlier reports indicated Tesla’s plans to launch its affordable Model 2 vehicle, priced at $25,000, in Texas, Mexico, and another undisclosed location. However, Tesla recently scrapped these plans, prompting CEO Elon Musk to dismiss reports as “lying” without further elaboration. Instead, Tesla hinted at unidentified new models, signaling a departure from the initially proposed Model 2.

While Musk previously targeted the second half of 2025 for the release of the cheaper model, Tesla’s head of engineering, Lars Moravy, highlighted the risks associated with new manufacturing processes and production lines. Consequently, the company made a “major shift” to focus on building low-cost vehicles using existing facilities efficiently.

Musk’s planned meeting with Indian Prime Minister Narendra Modi to announce significant investments in an auto factory was canceled last minute, with Musk citing “very heavy Tesla obligations.” Analysts speculate that Tesla’s hesitation to expand capacity comes as the company braces for slowing sales after years of rapid growth.

Although Musk had previously confirmed plans for a factory in Mexico, the timing remains uncertain, contingent on economic conditions and interest rates affecting vehicle affordability. Tesla did not provide further details on its plans in Mexico and India.

Rival EV manufacturer Rivian also adjusted its strategy, opting to produce its smaller, less expensive electric R2 SUVs at its existing US factory to expedite deliveries by the first half of 2026. This decision deviates from its previous plan to build the R2 at a new $5 billion plant.

In conclusion, Tesla’s shift towards producing affordable vehicles using existing infrastructure has put its investment plans, particularly in India, on hold. The company’s cautious approach reflects the challenges of navigating market uncertainties while maintaining growth in the EV sector.

Jhumpa Lahiri

Jhumpa Lahiri

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