The steep price cuts by Tesla in Europe and the US that came after two rounds of reduction in China in 10 weeks can be viewed in several ways.
For the audience that sees the glass half full, the car manufacturer was clearly struggling to ramp up the orders. Tesla produced 34,000 plus vehicles, more than what it delivered in the last quarter of 2022. This was not catastrophic but unlike a Tesla trend. CEO Elon Musk told investors that Tesla expected to sell every car it produced.
Toni Sacconaghi, an analyst with Bernstein Research, said the demand issues were the reasons for price cuts. The price cuts were bigger and came earlier than expected by the investors. For the half-full brigade, the pricing war by Musk gave Tesla a strong chance of coming out as a winner.
Bottomline Under Pressure
Profitability will no doubt be under pressure after the price of Model Y was slashed by 20% and
Model X and S performance version was made $20,000 cheaper. However, Tesla is easily out-earning other Electric Vehicle makers apart from BYD in China; there are no other EV makers who can produce as many EVs as Tesla.
An analyst with Bank of America, John Murphy, said Tesla has higher margins than other car makers including Ford and GM, and they have the cushion to lower prices. The analyst has a hold rating on the Tesla stock compared to Bernstein, which gave a sell rating.
Murphy said that most of the OEMs were losing money on EVs, and the price cuts will make the business more challenging even as they are trying to ramp up the production of EV models. OEMs will have to rework their investments to see if they generate enough returns if the EV pricing becomes less favorable.
Fifteen years ago, when the recession took place, Tesla nearly went bankrupt. The company managed to grow in parts thanks to the availability of easy capital, low-interest rates, and less competition. All of that has changed now.
The Federal Reserve interest rate hike has increased borrowing costs, and Tesla is no longer the only player in the market today. Volkswagen is fighting it out in Europe, while BYD is growing in China.
General Motors and Ford are doing the same in the US.
Expansion Plans Intact
Despite Tesla falling short of delivering its targeted vehicles last year, Musk is determined for continued expansion for the company. The price cuts for Model Y and three will make them eligible for the new tax credits introduced in the US by Inflation Reduction Act.
Last month Musk, in Twitter platform conversations, predicted a serious recession in 2023 and warned that consumers would cut down on big-ticket spending. He said Tesla had to choose between lower demand and higher interest rates which delivered a double blow.
The Tesla chief said it was better to grow fast in unit volumes and reduce the price without putting the company at risk. In such a scenario, the profit could be lower or even negative during the recession, highlighting that the company’s cash reserves were sound.
