Tesla has lowered car prices in several regions including Europe. While the price cuts might help spur sales, they would also lead to lower margins.
Tesla has lowered prices across Europe on its all its models – with prices of some models cut by almost 10%.
The Elon Musk-run company has lowered prices multiple times this year and last week, it lowered prices in the US – for the fifth time this year.
Tesla started a price war at the beginning of the year only when it cut prices in key markets like the US and Europe.
It has since been cutting prices often in an apparent bid to spur sales.
In its statement on the price cuts, Tesla said, “Our mission is to accelerate the transition to renewable energy. Our masterplan has set a clear pathway to achieve that mission: the transformation of cost-intensive small-series products to cheaper mass-series vehicles.”
Tesla has set a goal of producing 1.8 million cars this year – which Musk said could rise to 2 million if everything goes right.
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During the Q4 2022 earnings call, its CFO Zack Kirkhorn said, due to the price cuts “there will be an impact on operating margin in the near term.”
He however added, “we believe our margins will remain healthy and industry-leading over the course of the year.”
Tesla Price Cuts to Take a Toll on Margins
Tesla expects economies of scale, lower operating expenses, and falling raw material prices to somewhat offset the margin impact.
Analysts polled by TIKR expect Tesla’s pre-tax margins to fall to 12.4% in the first quarter – as compared to 16% in the previous quarter.
Notably, Tesla still has quite healthy margins as both Ford and General Motors have single-digit pre-tax margins.
Also, the EV business of both these companies is posting losses. Ford – which would start reporting the results of its EV business separately this year – expects the segment to post a loss of $3 billion in 2023.
Notably, Ford was the second-largest EV seller in the US last year but fell to the fifth rank in the first quarter due to production-related issues. By the end of 2023, Ford is targeting an EV production capacity of 600,000.
Tesla’s price cuts have also put pressure on other automakers to lower EV prices. Ford, for instance, lowered Mach-E prices earlier this year while Lucid Motors offered a $7,500 credit to buyers.
EV Price War Is Set to Escalate
Several Chinese EV companies including Xpeng Motors have also cut prices after Tesla cut prices in the world’s largest auto market.
The EV price war is set to escalate in coming years as legacy automakers ramp up their production.
Over the last week, Toyota and Hyundai committed billions of dollars towards their EV business.
In March, Volkswagen announced a massive 180 billion euros ($192.6 billion) investment over the next five years – two-thirds of which would go toward electric vehicles and digitization.
Last year, Volkswagen said that by 2025 its EV sales can overtake Tesla which is currently the market leader with total EV sales of 1.31 million in 2022.
Musk believes that Tesla can sell as many as 20 million cars annually by 2030 and the company would need to set up more plants in order to meet the demand.
Last month, Tesla confirmed that it would set up its next Gigafactory in Mexico – but stressed that the plant won’t replace US capacity and instead complement its global capacity.
The competition in the EV industry is all set to rise multi-fold as new models hit the roads. While it would mean buyers would be spoilt for choice – it would also mean that EV producers would struggle to make high margins.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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