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• Tesla creates a price war in the electric car market
• Discounts are weighted by profit and margin
• Everything on one card – is Musk’s plan working?
After increasing prices rapidly in recent years, Tesla has reduced its prices several times in recent months. Apart from China, South Korea, Japan, Australia and Singapore, the Musk Group also reduced the prices of its cars in the USA and Germany. This has created a price war between EV manufacturers. Some of Tesla’s competitors followed the US electric car maker’s example, 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 cut by wanting to make electric cars affordable for the general public – there is no lack of demand. At the same time, analysts see Tesla’s price cut as a response to increased competition in the electric vehicle market.
US subsidies considered
In the US, the electric car maker has already turned the price screw six times this year. Recently, Musk’s group had revised the prices of some electric car models downward shortly before its first quarter figures in late April. The recent price cuts are likely due to the possible removal of US subsidies for electric vehicles. Some of Tesla’s models are threatened with losing tax credits, as the US only wants to fully subsidize cars that are made in domestic factories in the future. Minerals needed for battery production are also said to be mined, processed or imported in the United States or in countries that have free trade agreements with the United States. In addition, the last meeting of the car will be held in North America. And so Tesla has to arm itself with price cuts if only to support demand for its cars.
Impact on the balance sheet
Tesla’s price cuts weighed on the company’s earnings at the start of the year. Despite the 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 increase sales with deep discounts weighed on Tesla’s profits. Tesla’s operating profit margin decreased from 16.0 to 11.4 percent quarter over quarter. A year ago it was even 19.2 percent. However, Tesla is still ahead in the industry. Margins for Ford and General Motors were recently five and seven percent.
The discount has kept Tesla’s overall earnings in the eye of investors for a long time. According to Bloomberg, Tesla had announced that gross margin would remain above 20 percent this year, but now the company has removed the metric from its template. Analysts and investors did the math and found a volume 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 American electric car maker delivered 422,875 electric vehicles, 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 vehicles. However, the company is sticking to its annual growth target of 50 percent and believes it is on track to deliver 1.8 million electric vehicles this year. In the first quarter, however, deliveries rose just 37 percent year-over-year despite all the cuts, Bloomberg reports.
Analysts see light and shadow
Tesla’s price cut is being 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 edge to cut prices and is still ahead of other automakers.” He described the price cuts as “short-term pain and long-term gain.” Automotive expert Ferdinand Dudenhöffer has a similar opinion. He explained: “Tesla favors a price war, because Tesla can afford to make life very difficult for other car manufacturers at a good price”.
Goldman Sachs analyst Mark Delaney wrote in a research note that the electric car maker’s margins were below his estimates and that the interim report was generally negative. The German Press Agency reported that the recent price cuts had a surprisingly large impact on profits in the car business, and the analyst expects this trend to continue. However, the expert remains positive about the long-term market position of the American electric car manufacturer.
Competition is also fragmented
At the same time, the competition is showing itself to be a fight. While some are trying to keep up with Tesla and are also lowering their prices, other automakers want to buck the trend. In response to Tesla’s price cuts, other manufacturers in the EV market such as NIO, Xpeng and BYD lowered their prices. But traditional carmakers such as Mercedes-Benz, VW & Co also reacted to the price pressure.
“We are trying to resist,” said Luca de Meo, CEO of French carmaker Renault, recently, according to Bloomberg, referring to the price war fueled by Tesla. Renault CFO Thierry Pieton sees no reason why Renault should also get involved in a price war: “There is no great incentive to cut prices and enter the chain that some of our competitors are following,” Pieton told analysts. “If that results in a slightly lower volume for a short period of time, then so be it.” However, Bank of America analysts believe that Renault will also have to cut the price of its electric cars to sell the necessary number of vehicles the company needs to comply with European emissions regulations.
Compare with Ford, Apple and GM
It remains to be seen whether Musk’s plan, which he is pursuing with price cuts, will work. In any case, big comparisons are already being made in the industry – both positively and negatively.
According to Bloomberg, Ford CEO Jim Farley recently told reporters, “Look at 1913.” Which shows that Elon Musk’s plans for Tesla today may remind the CEO of Ford at that time.
Another theory, attributed to former Apple CEO Steve Jobs, is that Musk is bringing Silicon Valley techniques to the electric car industry. Just as the iPhone pushed Nokia, Motorola & Co, Musk wants and needs to wipe out Rivian and Lucid.
However, one can also draw a negative comparison with the traditional car manufacturer General Motors. More than ten years ago, this was at the center of the crisis. As Bloomberg reports, then-GM boss Richard Wagoner was also using incentives to boost sales at the time. The “Keep America Rolling” campaign set Detroit on a path to destruction. General Motors racked up billions of dollars in losses and filed for bankruptcy, Fiat bought a 20 percent stake in Chrysler to save it and took over management, while Ford initiated a timely turnaround.
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