The news mid-Jan 2023 is about Tesla reducing their pricing massively.
The news is everywhere, in all the trade press, the national press and the TV news!
Tesla is in trouble maybe ? Demand has vapourised for their product perhaps?
What is actually going on?
As someone who has owned a Tesla for several years, been an investor and followed their journey for a long time, this is my take.
Tesla can't be compared to other car companies. This is the reason many car companies dismissed it as competition several years ago, and now struggle to match the way it does business.
Look at the financials.
Tesla has a gross margin on vehicle sales approaching 30%
Most car manufacturers are in the teens - Toyota is 15% for example.
Then remember that the minimum price for a Tesla in the UK is over £40,000. Tesla Model Y was the second best selling car in the UK in Dec 2022. This had a starting price of £47,000. Compare with no 1 - the Nissan Qashqai - which has a price of £26,000.
Taking the margins and putting that into pounds per vehicle, Tesla made £10,000 on every Model Y they sold in the UK in December.
Remember though, that Tesla margins are based on Customer price - they sell direct to the consumer. Most other brands share profit with the dealer - lets say 10% ? On that basis Nissan made £3000 per unit.
Even if you compare like with like. So, take the Audi Q4 ETron - which is a Model Y alternative. In December,2022 it was priced at the same price as the Model Y - starting at £50k The margin Audi make here (they have slightly higher margin than the average) is about £6k
Tesla reduced the price of the model Y entry model to £44k. It's now 6k lower than the Audi. Even if Tesla has the same cost base as it does today, it's still making 4k per unit.
If Audi reduces it's price by 6k to compete. It's no longer making money. Audi are one of the more profitable volume brands.
But, Tesla has a history of driving cost out of it's manufacturing. You would expect that they will increase their margin as the year goes by - at a time when Audi is still ramping up and is yet to really see those gains.
Pull markets for a car are where the natural demand for the car is higher than the supply.
Push is the opposite, cars need to be sold and marketed to consumers with offers and expensive advertising.
Tesla has always been a "pull" brand. It has always had a demand for it's cars far far higher than supply.
It has traditionally spent zero on advertising. It still does.
But, in the UK - Tesla holds a 25% market share for Battery Electric Vehicles. This is selling every car it can make! Where its models are generally more expensive than the competition.
With no sales dealer network, no advertising and up until now very little in the way of visible offers.
As Tesla manufacturing volumes continue to climb they are now transitioning into a brand which will need to push more of it's cars to market and the question is how they will do it.
In 2012 Tesla made 5,000 cars.
In 2022 Tesla made 1,300,000 cars
Expect 2 million in 2023 - that is pretty close to the numbers that BMW and Mercedes make annually!
And will make more profit in Automotive than BMW - even if BMW continue to sell at 2022 prices and Tesla at 2023 pricing!
That is a good question - does the price reduction reflect a move to keep the production numbers to the market or is it an aim to destroy it's competition.
Clearly, it's the former.
But, it reflects really that until now, Tesla hasn't really had to compete - it has been able to sell every car it has made at a significant premium to the market.
All that is really happened now, is that Tesla has now pushed their margins down towards where the very best of the rest are today.
This will help the extra production get to market.
But, it also gives the other brands a problem.
They will have to match the pricing somehow, and this will eat into (decimate) their margin.
Many brands have been moving towards an Agency model. From the OEM perspective, this will be a way of retaining more of the profit in the unit.
However, Agency works best in a Pull Marketplace. The next few years are likely to be anything but!
Mercedes have made the move in early 2023, but many other brands seem to be back-pedalling on this a little as the marketplace changes rapidly. If they get it wrong, the risk having massive stocks of unsold cars (at the moment, the dealers get left with these!)
Let's go back to advertising and marketing.
A typical OEM spends £1,000+ per unit on marketing and advertising. Some much more.
Tesla spends close to zero.
So how does it spread the word.
Let's look at the January 2023 price-drop.
Firstly, it didn't happen in January - they were offering an £8,000 discount on all models right through December for December handovers. This informally continued in January.
The January price decrease was less than £8,000 on the volume models. So, this is actually a January price rise compared to December.
But Tesla made a large announcement of price drops.
Why?
Firstly. generally, when Tesla is in the news, it's deliberate. Tesla doesn't spend money on marketing - this is their marketing.
They just got a massive amount of free marketing that their already highly desirable product - which was getting too expensive in the marketplace - has had a massive price drop.
They don't need to spend any more to get this news to the consumer.
Thank you BBC!
Well, I won't make a prediction.
But, I will look at history.
When Tesla started, the Automotive Industry dismissed it, Bob Lutz (who has run all the top 3 US car manufacturers in his time) famously said :
"Tesla burns cash. It's not a car company, it's a cult of fanatics who think Elon Musk can do no wrong. But financially, it doesn't work." - Bob Lutz
This seems to have been the position of most Car Manufacturers throughout most of Tesla's life - it's a sideshow company making niche cars, at a massive loss, selling to mad fanatics only. It will never be successful, it will never make a profit.
Unfortunately, they were wrong.
Elon Musk, the driver behind Tesla, Space-X and other companies has a history of doing things that the competition believes is impossible, He is described as a lunatic (and he probably is).
But, he has a history of proving the nay-sayers wrong.
"You can't land rockets"
"You will never make a 200 mile range Electric Car"
"You will never make a profit at Tesla"
The mistake today, will be to believe the negative and not consider that Tesla will continue to advance.
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