Tesla Model 2 may be 37% cheaper to do than Model 3 as it is 15% shorter and with 25% smaller battery

Tesla is gearing up to announce its new platform for affordable mass market electric cars at Investor Day tomorrow. Tentatively called Model 2, it is expected to be smaller and much cheaper than the current Model 3. At the last investor call, Elon Musk said that he expects it to outsell "all of Tesla’s other vehicles combined," and now Pierre Ferragu, a managing partner at the New Street Research industry analyst shop, outlines how by breaking down the expected Tesla Model 2 specs and price.

"We expect Model 2 [to be] 15% shorter, 30% lighter, and [with] 25% smaller battery than Model 3," he said after running the numbers, which would bring its manufacturing expenditures down to the US$21,600 point. Thus, it would cost Tesla 37% less to build a Model 2 than a base Model 3, according to the analyst. Sandy Munro's team had a similar Model 3 COGS breakdown recently, but they were saying that each unit costs Tesla about US$33,600 to make.

Pierre Ferragu expects the Model 2 tag to start from about US$25,000, with an average selling price of US$27,000 when all trims and options are taken into account. This would still bring Tesla a very decent 20% gross profit margin on each Model 2 sold, although it is notorious for earning about US$10,000 for each EV sold now.

What the Model 2 specs and cost analysis may not be taking into account, however, is a comparison with the Model 3 upgrade dubbed "Project Highland" that is coming this year, and which is expected to cost Tesla even less to make after it optimizes redundant components and manufacturing processes. "Over and over, we found parts that are not needed. They were put in there just in case or by mistake. We eliminated so many parts from a car that did nothing," tipped Elon Musk as to how Tesla is approaching the cost management problem.

Moreover, Elon Musk is on record saying that Tesla is on a "2-for-1 target" in terms of Model 2 platform costs, referring to the goal to halve its production expenditures to be 50% of what the Model 3 commands. That would mean a Model 2 COGS way below US$20,000, so at the US$27,000 ASP that Ferragu is predicting here, Tesla would still earn nearly US$9,000 per car, even from a cheap mass market EV like the Model 2.

Given the weight reduction from the smaller body and powertrain, a Model 2 with Ferragu's predicted 46 kWh LFP battery capacity may have a range on a charge that is still very similar to the larger, heavier Model 3. If said LFP battery is ultimately being produced according to the federal Inflation Reduction Act subsidy requirements, the Model 2 could also qualify for the government's full US$7,500 of new EV tax credit amount.

For the prospective Model 2 owners that would mean that they are basically buying the car from Tesla at near its manufacturing cost which could drive demand up even further. Tesla's stock is already up quite a bit on the runup to Investor Day tomorrow, when Elon Musk is expected to take the stage and announce the new platform's specs and expected Model 2 release date.

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