NEW YORK (Reuters Breakingviews) -Tesla boss Elon Musk has introduced big discounts to car prices, a potential sign of panic amid weakening demand — or an opportunistic move to kneecap rivals. The $450 billion car company’s industry-leading profit margins give it plenty of ammo. But as a global downturn looms, it might not be enough to sate his goal of world domination.
Tesla’s fat margins mean it likely accounts for most of the profit made in the electric car industry. But results released Wednesday show profit falling from its peak.
A growing gap between the number of cars Tesla makes and delivers to customers meant margins were doomed to shrink. Musk faced two unpalatable choices. Either he could let demand fall further short of supply, potentially leaving Tesla’s rapidly expanding - and expensive - factories running idle. Or he could cut prices to boost demand. Musk chose the latter option.
While that hurts profit, it may help Tesla stay ahead of rivals who are elevating their own electric vehicle ambitions. Musk could push others who are in an investment stage to respond in kind, forcing cash flow to fall and strangling their attempts to grow their manufacturing operations.
Recent reductions to Tesla’s prices will help cheaper models qualify for federal tax credits, making them even more attractive. But budget-price cars like the Chevrolet Bolt are still cheaper, and competitors might similarly build out lower-priced models.
Musk still has a goal of growing sales to 20 million by 2030, up from 1.3 million in 2022, which means Tesla needs to become a globally dominant automaker like no other. Gross profit from its core automotive business less sales of regulatory credits came in at $12,473 per car delivered this quarter. Zeroing out that profit could reduce Tesla’s implied global average selling price from $51,421 now to $38,949. This ignores possible savings on variable costs as increased sales volumes deliver benefits of scale. Still, that’s well above the $21,550 U.S. starting price of the Toyota Corolla, the world’s best-selling car.
As the U.S. Federal Reserve raises interest rates, increasing the cost of an auto loan, while other markets slow, Tesla is facing the real possibility of falling short of its goals. The company may simply outgrow the market for high-priced cars, requiring further steep discounts to soak up its output. Indeed, Wednesday’s results don’t include the impact of another round of price cuts in January. There’s more pain still ahead.
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CONTEXT NEWS
Electric-vehicle maker Tesla said on Jan. 25 that it made $24.3 billion in revenue for the fourth quarter of 2022, up 37% from last year and narrowly above analyst expectations of around $24.2 billion, according to Reuters. Gross margins in its core automotive business came in at around 26%, down from nearly 31% the year prior.
After raising prices in recent years, Tesla cut them in major markets in December, followed by further discounts in January.
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