[Economics] Price cuts take their toll on Tesla's profit

[#Wittels-]

The result falls 24% as the margins of the leading electric car manufacturer deteriorate and revenue slows down

Tesla has disappointed with its first quarter accounts. Sales growth slows, margins deteriorate and profit falls. The company run by Elon Musk has made several excuses, but at first they have not convinced investors, who punish the price in the hours after the session. The revenue of the leading manufacturer of electric cars grew by 24%, to 23,329 million dollars (about 21,300 million euros at the current exchange rate), while the profit fell, also by 24%, to 2,513 million dollars.

There are other negative signs in their accounts. The generation of operating cash flow was reduced by 37% and that of free cash flow, subtracting investments, by 80%. But perhaps what is most striking is the deterioration of the gross margin by almost 10 points, from 29.1% a year ago to 19.1%. The reason for this is, above all, the price reduction undertaken by the company to face competition from other manufacturers. “Our operating margins were reduced at a manageable rate,” the company says despite those numbers.

 

Tesla's stratospheric valuation a year and a half ago, when it was worth more than all the other car manufacturers combined, was based on the false premise that it would be able to corner the electric car market, maintain its margins and contain its revenues. costs. As competitors launched new models and it lost market share in its segment, the price has fallen sharply and valuations have been revised.

Tesla defends his model. “In the current macroeconomic environment, we see this year as a unique opportunity for Tesla. While many automakers are struggling with the unit economics of their EV programs, we want to take advantage of our position as a cost leader. We are focused on the rapid growth of production, investments in autonomy and software for vehicles, and on maintaining the course of our growth investments, ”he says in his quarterly results report.

Growth at the cost of margins
Tesla also justifies the price cuts, which it acknowledges that it has applied to many models and in all regions. The underlying idea is that gaining share favors it in the long term due to post-sales services and the possibility of building customer loyalty, a strategy not very different from that of traditional companies in the sector, but adapted to the new times: "Our Short-term pricing strategy takes into account a long-term view of profitability per vehicle, given the potential lifetime value of a Tesla vehicle through range, overload, connectivity, and service.

In the conference with analysts, Elon Musk has confirmed that his strategy involves sacrificing margins to defend his market share as much as possible. "This is a good time to further increase our and we will continue to invest in growing as quickly as possible," he said. "We have the vision that driving higher volumes and a larger fleet is the right choice now compared to lower volumes with higher margins," he explained. And he has insisted that he could make current sales profitable in the future by adapting cars to gain autonomous driving capabilities and charging for it.

In the first quarter, the average price of each car sold has been around $46,000, clearly below the $52,200 in the first quarter of 2022.

The company has announced this Wednesday new price reductions in part of its models. In addition, the company has had to lower prices when seeing that it had gone from waiting lists to not being able to sell all the cars it manufactured. It produced 440,808 cars and delivered 422,875 cars. Sales of high-end models (S/X) fall especially short: it barely delivered 10,700 of the 19,437 cars manufactured. This, despite the fact that Musk had said that demand had skyrocketed and that orders were twice the pace of production. With the figures for the quarter in hand, it looks like he was selling smoke.

 

Rising costs of raw materials and logistics have also deteriorated profitability. The company expects to defend margins by reducing the unit costs of its vehicles, by improving production efficiencies in its newer factories and by reducing logistics costs.

 

Link: https://elpais.com/economia/2023-04-19/las-rebajas-de-precios-pasan-factura-al-beneficio-de-tesla.html