Despite numerous price decreases since the year’s beginning, Tesla just recently announced its Q1 2023 financial report. Tesla has a justification, but it may only be a partial one, which left investors wondering how these dips will influence profits.
Tesla’s earnings report opens with a couple of paragraphs meant to address the impact of these price cuts on its industry-high margins, giving a nod to the topic on everyone’s mind.
“In light of the macroeconomic climate at the moment, we believe that Tesla has a special opportunity this year. We want to take advantage of our place as a cost leader as many automakers struggle with the unit costs of their EV programmes. We are concentrated on accelerating production growth, making investments in autonomous driving and automobile software, and keeping up with our expansion investment plans.
Even though we decreased prices across numerous car types and areas in the start of the quarter, the decline in our operating margins was tolerable. We anticipate continuing vehicle cost reductions, including increased production effectiveness at our newest plants and decreased logistical costs, and we’ll keep an eye on operational leverage as we grow.”
Tesla claims that because their EV volume is so much larger than that of every other automaker, it can produce cars for less money than its rivals.
And in fact, Tesla has moved from standing near the top of the EV cost bracket to being near the bottom after yesterday’s price drops and prior even larger price cuts earlier this year. While the industry struggled with supply and EV demand far outstripped supply last year, Tesla increased prices frequently.
The base Model Y now costs less than $40k after tax subsidies, whereas many electric SUVs come with higher beginning prices. And the base Model 3 may now be purchased for $40k before incentives are applied, however it no longer meets the IRS’s revised battery criteria and only qualifies for $3,750.
Tesla acknowledges that these reductions have impacted company margins, but claims that this margin loss has been “manageable rate.” Tesla’s operating margin was 19.2% in Q1 of last year, and it is now 11.4%, down 779 basis points.
This is a significant amount, practically halving operating profits; more price reductions have been made after the quarter’s end, both domestically and internationally.
These price reductions are being caused by various factors. One is that prices have decreased, especially with the enormous global decline in the price of commodities like lithium following the enormous global increase last year. Elon Musk, the CEO of Tesla, also noted that because of the cost of borrowing money to buy a car due to rising interest rates, Tesla had to reduce pricing to make purchases more enticing (this is an example of how falling inflation can be caused by rising interest rates).
However, Tesla insists that these margin reductions are manageable and that, moreover, the business is adopting a long-term perspective:
“Considering the potential lifetime value of a Tesla car through autonomy, supercharging, connection, and service, our near-term price plan takes a long-term view on per automobile profitability into account. Depending on a variety of variables, we anticipate that the prices of our products will continue to change, either upwards or downwards.”
Tesla claims that even though the majority of its revenue—$19.9 billion in Q1—came from the sale of automobiles and only $3.3 billion via energy, services, and various other sources, it is confident that any declines in the revenue from automotive sales will be offset over time by these other revenue streams.
Tesla presently charges an eye-watering $15,000 for having access to it’s FSD Beta software. This is a huge sum of money, especially for a vehicle that costs $40k brand new. Elon Musk, the CEO of Tesla, asserted the great usefulness of FSD, but most users agree that it is probably not yet ready for widespread use. Timelines for its implementation may constantly getting pushed back because of this. (Is it already 2019?)
Supercharging is another potential source of income mentioned by Tesla. Currently, Tesla doesn’t generate much money from supercharging, but given that the firm has begun allowing other brands to use its Superchargers, this may soon change. The majority of automobiles as well as DC chargers in North America use Tesla’s connector, thus other manufacturers should follow Tesla’s lead and utilise its plug, according to Tesla, which used this chance to establish the “North American Charging Standard” using its plug.
This allows the company to access the billions of dollars in federal funding intended for charger installation but limited to chargers that can be used for different car brands. Superchargers were previously solely available to Teslas, but presently they are accessible to other vehicles, Tesla can perhaps compete for a portion of those billions.
Last but not least, Tesla offers the possibility that the service could turn a profit, a significant departure from Musk’s original viewpoint. The beginning of his response on service is timestamped at 1:36 in the following video from Tesla’s 2013 shareholder meeting:
Obviously, since then, things have changed, and Tesla is now much bigger and has entirely different objectives and priorities. But one would expect that this broad “philosophy” wouldn’t have changed given the fluctuating nature of business situations when it comes to talking about auto dealerships, an issue through which Tesla remains at odds.
However, this is one method Tesla can possibly offer lower upfront prices in the expectation that the ongoing work of servicing automobiles in the field will encourage margins. The majority of other automakers lack this option because they do not own their car dealerships, while Tesla does, giving it the freedom to take this income share. After first vowing not to, it appears that the corporation now clearly plans to pursue this revenue.
E Auto Arena’s Opinion
Demand, however, is a different factor that Tesla neglects to address in their paper.
I am aware; it has been said before. Other automakers, the media, established industry, oil firms, captured regulators, and others have all said that there isn’t enough EV demand during the past ten years. Every time we said they were incorrect, they proved us right.
But in this case, we’re explicitly discussing demand for Tesla, following the company’s significant price increases in 2021 and 2022 and in the wake of the CEO’s dubious public behaviour.
Demand for EVs was quite substantial and EV supply was extremely low at the time Tesla was boosting prices. Due to this, Tesla, the firm with the largest supply of EVs, gained considerable price leverage.
The demand for EVs is still great globally, and many other brands are selling out of their models while petrol cars aren’t moving. However, the tax credit environment is always evolving in the US, with some new regulations taking effect yesterday. Since only specific models are eligible for the tax credit, the market is undergoing a lot of change, making it difficult to predict which ones will be in high demand (although leasing allows you to get around most limitations).
And while Tesla is primarily benefiting from this—its cars are currently much less expensive, and the majority of its vehicles qualify for credits—it also has a tonne of supply, is ramping up quickly, and could be turning off potential buyers.
The company’s reputation has been impacted anecdotally (and statistically) by CEO Musk’s recent actions about the Twitter “dumpster fire” he continues to burn his money in. Musk claims that the pointless mischief he is very openly embroiling himself in would ultimately benefit TSLA shareholders, but we are not persuaded.
Customers may have turned elsewhere over the past year due to the availability of competing EV models, expensive costs, and the CEO’s unpredictable behaviour. As a result of this, Tesla had to start adjusting demand because its inventory began to increase in a way that it had never really had to. Incentives were employed initially, but this year, significant price reductions have taken centre stage.
Price reductions will undoubtedly be able to win back some customers, but it is unclear whether the CEO’s public behaviour has had a lasting negative impact on others.
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