- Tesla ups the ante in EV price war
- Going after the large US SUV market with gusto
- Gross margins seen dipping to three-year low at 23.2%
The timing was impeccable - just a day after the US Internal Revenue Service released the list of vehicles eligible for the electric vehicle tax credit, Tesla (TSLA:NASDAQ) cranked up the EV (electric vehicle) price war pressure, unveiling its sixth price cut across its models.
If three is the magic number, perhaps chief executive Elon Musk is hoping to conjure twice the wizardry for volumes.
Changes included trimming 4.7% off the price of the Model 3 rear-wheel drive variant, and a 5.6% reduction for the Model Y long-range version.
The subsidies available on all models remain the same after yesterday’s IRS announcement, with all Model Y vehicles eligible for the full $7,500 EV tax credit. As Bloomberg reported just a few days ago, Tesla’s Model Y can now be purchased for less than the average new vehicle in the US.
WHY IS THIS IMPORTANT?
Musk has been harping on about the affordability of EVs as the economy navigates through uncertainties. Tesla has built up a sufficient scale and achieved production efficiency to be able to afford the price cuts.
These aggressive price drops will certainly pose a threat to start-ups that have yet to iron out their own production issues, such as Rivian Automotive (RIVN:NASDAQ). Chinese rival Nio (NIO:NYSE) has already said it will stay out of the EV price war, claiming its products and services are worth the price.
But even the automotive establishment will wonder how to respond. Two days ago (17 Apr) Renault’s (RNO:EPA) boss Fabrice Cambolive called Tesla’s wave of price cuts a ‘warning’ for rival EV manufacturers.
Cambolive said Tesla’s price cuts would force the group to take a close look at its pricing policy worldwide. ‘We will analyse country by country, market by market, which level of competitiveness we need to have to stay in the match,’ he told reporters.
FINANCIAL COST QUESTION
Tesla is clearly going after the US SUV market in a big way, which is probably sensible, even if it means a near-term squeeze on financial performance.
As Tesla prepares to announce its financial results for the first quarter, which saw multiple rounds of price cuts, investors are jittery about the impact these actions will have on margins and in turn profitability.
First-quarter margins are anticipated to have hit a more than three-year low as the EV maker slashed prices to lure more buyers in the face of rising competition and a weaker economy.
Tesla is expected to report an automotive gross margin of 23.2% for the quarter when it reports after the market closes in the US today (about 9.30pm UK time), a three-year low. Perma-fan Dan Ives, analyst at Wedbush, believes 20% is the line in the sand under which Tesla must not drift for margins.
Tesla shares closed Tuesday’s session down 1.5% at $184.31, while pre-market data implies another 2%-plus decline today.
