profitability suffers
Price battle causes Tesla profit to collapse
04/20/2023, 00:40 am
With its quarterly figures, Tesla remains below the expectations of analysts. Significant discounts on its vehicle models significantly reduce the profit of the electric car manufacturer. The automaker’s stock fell in after-hours trading.
The price war is leaving its mark on the balance sheet of electric car pioneer Tesla. The Elon Musk-led company reported a total gross margin of 19.3 percent after the US market closed on Wednesday – a measure pundits were particularly excited about this time. Analysts surveyed by Refinitiv had expected 22.4 percent, at the start of 2022 a record return of 32.9 percent had been achieved. Revenue for the first quarter was $23.3 billion, up 24 percent, slightly ahead of forecasts. However, net income fell 24 percent to $2.5 billion. Tesla shares initially fell almost four percent in after-hours trading. Since the beginning of the year, however, the price has risen by almost 50 percent.
Tesla delivered 422,875 electric cars in the first quarter. The company thus broke its previous record, but also fell short of expectations. The global market leader had instigated a price war for e-cars, which is particularly raging in China. Musk boosted sales with heavy discounts, this year there have already been six rounds of price cuts in the US alone. Profitability suffers as a result, even if Tesla has high profit margins compared to the industry.
Musk justifies the lower prices by wanting to make e-cars affordable for the masses. There is no lack of demand. However, Tesla manufactured about 18,000 more vehicles in the quarter than the company shipped. With the discounts, Tesla wants to defend itself against the competition from established car manufacturers, who are increasingly bringing electric cars onto the market. In China, there is also the rise of companies such as BYD, which is now number one in the world’s most important car market.
Musk is unimpressed
Tesla CFO Zachary Kirkhorn announced in January that the average price of Tesla vehicles should be $47,000. However, analysts predict further price cuts: “Even though many investors hope that margins have bottomed out in the first quarter, we do not believe that this will happen, especially since further price cuts are likely,” wrote the Bernstein experts.
At the same time, Kirkhorn promised that the yield would not fall below 20 percent. Tesla relies on economies of scale when production is ramped up in the plants in Grünheide near Berlin and in Austin in the US state of Texas. In addition, there is the declining price of lithium: The price of the metal, which is required for electric car batteries, had reached a record high in November, but has now fallen by around a third.
After presenting the current quarterly figures, Musk said that he thinks it is the right strategy to focus on higher volume instead of lower sales and higher margins. The plants in Grünheide near Berlin and Texas would therefore initially have to reckon with “headwinds” in terms of profit margins until Tesla has reached the desired volume.