Competing EV companies are under pressure from Elon Musk's cost-cutting initiatives

Tesla Inc.'s TSLA 2.09% electric vehicles have recently been dealt a curveball by Elon Musk's latest goal to reduce manufacturing costs by 50% in the near future.  Analysts have already estimated that creating Tesla's best-selling vehicles costs thousands less than producing those of competitors, who have been working to bridge the cost gap.

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"There is a clear road to creating a…smaller vehicle that is roughly half the production cost and difficulty of our Model 3," Mr. Musk said earlier this month during a Morgan Stanley conference.

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His comments reiterated an objective outlined during the auto maker’s investor day. Through a combination of vertical integration, manufacturing automation, part reduction, and other measures, Tesla's management wants to reduce costs.

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Mr. Musk has not provided particular numbers or a release date for the vehicles, and he has a history of missing aggressive pricing targets. Analysts, however, believe that these cost savings would enable Tesla to deliver the long-promised $25,000 electric car without jeopardizing its double-digit percentage margins, which are among the highest in the industry.

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A request for comment from Tesla was not answered.

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Executives have been fixated on cost-cutting since the early days of the automotive industry. This obsession has led to the development of the assembly line, messy mergers, international alliances, and design and engineering overhauls, all with the goal of finding ways to save money, if not actual money, on each car.

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Yet, their efforts have gained urgency as car executives struggle to manage inflationary cost hikes in addition to making significant investments in electric vehicles as investors and regulators prioritize this technology.

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According to AlixPartners LLP, which estimates that the car industry has committed a combined $526 billion to switch lines to electric vehicles through 2026, "this sort of ratchets up the pressure" on conventional auto manufacturers.

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The funding is being provided prior to the majority of businesses realizing any true economies of scale from EV sales, which have been expanding rapidly but still make up only a small part of total global deliveries.

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When VW AG VOW -0.46% met with analysts and investors on Tuesday, the new pressure brought by Mr. Musk was clear.

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Volkswagen officials were questioned about their EV, known as the ID. 3, which UBS analyst Patrick Hummel claimed starts at approximately $40,000 in Europe and is "just above break-even levels" for the company.

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“I truly struggle to see how VW will produce an affordable EV that is viable for you in a couple of years,” he told the executives.

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Arno Antlitz, chief financial officer at VW, stated, "We are well aware that competition will become stiffer. Consequently, in terms of overhead costs, we strive to maintain as much stability as possible."

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Volkswagen is ultimately hoping that its most recent generation of EVs, which are constructed with standard parts, will offer it scale over time to lower prices. Additionally, Mr. Antlitz reaffirmed that the business intends to sell an EV for less than €25,000, or around $27,000. The upcoming model will debut in Europe in 2025, according to the business, which debuted a concept version of it last week.

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“By then, we will be on a big scale,” he added.

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The Model 3 sedan, which has a starting price of roughly $45,000 in the United States and was originally intended to be a $35,000 vehicle when it was unveiled in 2016, marked Tesla's transition into a mainstream automaker. Nevertheless, when manufacturing started in 2017, it wasn't made available at that price because, according to Mr. Musk, the business couldn't make it without incurring a loss.

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Tesla, on the other hand, has made ongoing attempts to reduce costs. The company claims to have improved in a variety of ways since 2018—including productivity, technical upgrades, and supplier scale—and that these efforts have resulted in 30% gains. In order to further reduce costs for the next generation of automobiles, executives claim that these actions serve as a preview.

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According to Mathew Vachaparampil, chief executive of consulting firm Caresoft Global, which disassembles automobiles to analyze prices amongst rivals, Tesla's Model Y compact sport-utility vehicles have at least a $3,000 cost advantage over rivals' equivalent offers, excluding batteries.

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Market observers claim that even if Mr. Musk is unable to achieve 50% reductions, any considerable effort made in that direction would be worthwhile. In essence, Mr. Musk's assertions have raised the threshold for investors to use in assessing other automakers' capacity to compete with Tesla.

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Former CEO of Ford F 1.02% Motor Co. Mark Fields remarked, "This is them challenging the industry. Is the rest of the industry going to rise up and notice? I assume they will."

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Investors already have doubts about the ability of conventional automakers to compete with Tesla.