• Tesla sparks price wars in the electric car market
• Discounts weigh on profits and margins
• Everything on one card – does Musk’s plan work?
After prices had risen steadily in recent years, Tesla has lowered its prices several times in recent months. In addition to China, South Korea, Japan, Australia and Singapore, the Musk Group also reduced the prices for its vehicles in the USA and Germany. This has created a price war among EV manufacturers. Some of Tesla’s competitors followed the example of the US electric car manufacturer, but came under pressure due to weaker margins – and the price cuts have also left their mark on Tesla.
Tesla boss Musk justifies the price cuts by wanting to make e-cars affordable for the general public – there is no lack of demand. Meanwhile, analysts see Tesla’s price cuts as a reaction to increasing competition in the electric car market.
US subsidies in focus
In the USA, the electric car manufacturer has already turned the price screw six times this year. Most recently, the Musk group had adjusted the prices for some of the electric car models downwards shortly before its figures for the first quarter at the end of April. The recent price cuts are likely due to the possible elimination of US subsidies for electric cars. Some Tesla models are threatened with the loss of tax credits, as the USA only wants to fully subsidize vehicles that are manufactured in local factories in the future. The minerals required for battery production are also said to be mined, processed or recovered in the USA or in countries with free trade agreements with the USA. In addition, the final assembly of the vehicle is to take place in North America. And so Tesla should arm itself with the price cuts just in case and support the demand for its vehicles.
Impact on the balance sheet
Tesla’s price cuts weighed on the company’s earnings at the start of the year. Despite a jump in sales, Tesla earned just $2.5 billion in the first quarter, down 24 percent from the same period last year. Musk’s attempt to boost sales with deep discounts weighed on Tesla’s profitability. Tesla’s operating profit margin fell from 16.0 to 11.4 percent quarter-on-quarter. A year ago it was even 19.2 percent. Nevertheless, Tesla is still far ahead in the industry. The margins of Ford and General Motors were recently five and seven percent.
The discounts have put Tesla’s auto gross margin in the spotlight of investors for quite some time. According to Bloomberg, Tesla had announced that gross margin would remain above 20 percent this year, but now the company has simply dropped the metric from its template. Analysts and investors did the math and came up with a margin of 19 percent – the lowest in eleven quarters.
Tesla’s revenue increased 24 percent to $23.3 billion in the first quarter. In the first quarter of the year, the US electric car maker delivered 422,875 electric cars, which was a new record but still fell short of expectations. Last year, Tesla clearly missed its growth target. The company increased its vehicle sales by 40 percent to 1.3 million electric cars. Nevertheless, the company is sticking to its target of annual growth of 50 percent and believes it is on track to deliver 1.8 million electric cars this year. In the first quarter, however, deliveries rose only 37 percent year-on-year despite all the discounts, Bloomberg reports.
Analysts see light and shadow
Tesla’s price cuts are received differently in the market. For example, Dan Ives, managing director of equities at Wedbush Securities, told CNBC, “This is an EV arms race and Tesla has the margins to make price cuts and still be well ahead of other automakers.” He described the price cuts as “short-term pain and long-term gain.” Automobile expert Ferdinand Dudenhöffer takes a similar view. He explained: “Tesla is fanning the price war, because Tesla can afford to make life very difficult for other car manufacturers with good prices”.
Goldman Sachs analyst Mark Delaney wrote in a study that the margins of the electric car manufacturer were below his estimates and that the interim report was negative overall. The German Press Agency reported that the most recent price cuts had a surprisingly significant impact on profitability in the car business, and the analyst expects this trend to continue. However, the expert remains positive about the long-term market positioning of the US electric car manufacturer.
Competition also divided
Meanwhile, the competition is showing itself to be combative. While some are trying to keep up with Tesla and are also reducing their prices, other car manufacturers want to buck the trend. In response to Tesla’s price cuts, other manufacturers in the EV market such as NIO, Xpeng and BYD reduced their prices. But traditional car manufacturers such as Mercedes-Benz, VW & Co also reacted to the price pressure.
“We’re trying to resist,” said Luca de Meo, CEO of French automaker Renault, recently, according to Bloomberg, in reference to the price war fueled by Tesla. Renault CFO Thierry Pieton sees no reason why Renault should also get involved in the price war: “There is not much incentive to lower prices and get into a spiral that some of our competitors follow,” Pieton told analysts. “If that leads to a slightly lower volume in the short term, then so be it.” However, Bank of America analysts believe that Renault will also be forced to reduce the price of its electric cars in order to sell the necessary number of vehicles that the company needs to comply with emissions regulations in Europe.
Compare with Ford, Apple and GM
It remains to be seen whether Musk’s plan, which he is pursuing with the price cuts, will work. In any case, major comparisons are already being made in the industry – in a positive as well as in a negative sense.
According to Bloomberg, Ford CEO Jim Farley recently told reporters, “Look at 1913.” Which suggests that Elon Musk’s plans for Tesla today may remind the Ford CEO of Ford at the time.
Another theory, linked to former Apple CEO Steve Jobs, is that Musk is bringing Silicon Valley tactics to the electric vehicle industry. Just as the iPhone pushed out Nokia, Motorola & Co, Musk wants and needs to wipe out Rivian and Lucid.
However, one could also draw a negative comparison to the traditional car manufacturer General Motors. More than ten years ago, this was in the midst of a severe crisis. As Bloomberg reports, then-GM boss Richard Wagoner was also using incentives to boost sales at the time. The “Keep America Rolling” campaign put Detroit on a path of destruction. General Motors accumulated billions of dollars in losses and initiated bankruptcy proceedings, Fiat bought a 20 percent stake in Chrysler to save it and took over management responsibility, while Ford initiated a turnaround in time.
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