Shareholders hate it. It’s bitter medicine for the industry that pushed upscale and raised prices so that average Americans could no longer afford new vehicles.
By wolf richter For wolf street,
What Tesla is doing is fascinating, and it’s wreaking havoc among legacy automakers. Tesla shareholders hate it, and the shares have sold off, although they are still ridiculously high. And shares of other automakers have also sold off.
Tesla’s deliveries continue to boom. In Q1, global deliveries grew 36% year-over-year, which is a huge increase. Its overall market share has exploded. In the US, its market share reached nearly 4%, tripling over 2020. In Q1, it delivered a record 422,875 vehicles globally.
But it has increased production and production capacity even more rapidly. Production rose 44% to 440,808 vehicles in Q1. It has been ramping up production and investing in production capacity so rapidly that for two consecutive quarters it produced significantly more vehicles than it sold.
In those two quarters combined, it built 880,509 vehicles, and delivered 828,153 vehicles. In other words, sales have gone up, but production and production capacity have outpaced sales growth.
And now it needs to sell the 50,000 or so vehicles it hasn’t sold, on top of the vehicles it’s cranking out in Q2, and instead of cutting production, it’s going to cut prices to boost sales. doing.
And it can do this because it had the fastest profit margins of any major automaker to begin with. For traditional automakers, with their continued price hikes on internal combustion vehicles, and their falling sales, Tesla’s threat of price cuts and over-capacity is a major threat.
Tesla continues to build capacity with new factories. It now has vehicle assembly plants, auto component factories, battery factories, manufacturing equipment factories in the US, Europe and China, where it makes some of its manufacturing equipment, etc. It is building an assembly plant in Mexico. there are Rumors that it is close to a deal to build an assembly plant and component plant in Indonesia.
Unlike some other automakers – such as General Motors and Ford – it doesn’t burn cash by buying back its own shares, it doesn’t pay a dividend, and it doesn’t have the ability to build or take on debt to fund its products. is not needed. Development; It funds them with its operating cash flow. And it sat on $22 billion in cash in Q1, up from $18 billion a year earlier.
More capacity and cut prices. These two words are anathema to legacy automakers. Those are scary words for legacy automakers.
What Tesla is doing is the best medicine ever for the auto industry, and it’s bitter medicine for Tesla, GM, Ford shareholders and others., and they hate it because now they’re sitting on this highly publicized material that has dropped in price. But so what.
What matters is to salvage the industry through new competition that will lead it to produce cars that the average American can once again afford.
The industry has spent the last 20-plus years upscale and raising prices to where the average American can no longer afford a new vehicle. American brands have phased out their entry-level ICE cars over the years because they had lower prices and lower profit margins than larger appliances.
Upscaling, and price hikes in their models since 2014 have driven the average transaction price of new vehicles up almost 50% to now $46,000 (JD Power), which is just insane:
What’s gone horribly wrong with the auto industry is that they all – even Kia and Hyundai – got high because that’s where the big profit margins are, and on top of that , They raised the prices. And they’ve done it together. And over the years, new vehicles have become a luxury many Americans can no longer afford.
I’ve been whining about this for years – because with this strategy, automakers are losing out on customers in America. And because sales stalled and then fell, they’ve gotten even more advanced to make up for the dollars they were losing with unit sales. That’s a big problem for the industry — and for the Americans who can’t afford those vehicles.
In 2022, Total new vehicles delivered to end users declined by 8% from an already dreadful 2021, up to 13.7 million vehicles, where deliveries peaked in 1977. Over the past 25 years, the sound barrier for the auto industry has been to deliver 17.5 million vehicles a year, and they’ve come close to it many times, but never broken it. As a result of prices moving away from customers, new-vehicle unit sales have stagnated for decades, with steep declines in between:
And this chart also tells you that growing EV sales come at the expense of ICE vehicle sales. The sale of EVs has been the only segment that has been growing in leaps and bounds.
They’re all chasing Tesla now – after years of letting Tesla eat their lunch. There are now about 40 EV models on the US market. And after Tesla’s price cut, those models have had big price cuts through them.
According to Cox Automotive, total EV sales rose 45% to a record 258,882 EVs in the first quarter compared to a year earlier. More than one million EVs will be sold in the US this year. In Q1, the EV market share rose to 7.2% of total sales.
So now Tesla is eroding the oligopolistic playing field of legacy automakers, where everyone agreed to go up and raise prices. Tesla waded into this playground, and it’s taking names, and kicking butt, and cutting prices.
Tesla still has one of the highest profit margins among major automakers, and it can cut prices to get volumes.
It has cut prices several times since last year. And it is constantly changing its prices, not being weighted by the franchised dealer system. It raised the prices of its high-end low-volume toy-for-the-rich models by 2% or 3%, even as it drastically cut the prices of its highest-volume low-end models.
Now in the US a base Model 3 – classified as near-luxury – is listed on Tesla’s website for $39,990, not including rebates. This is almost 13% less than the average transaction value for all new vehicles.
The vehicle is also eligible for a new $3,750 federal tax credit and some state incentives, such as $2,000 in California. i hate ev incentives, ev will be fine without them, but this is what we have. So the Model 3 now costs $34,240 in California – about 25% cheaper than the average transaction price for all new vehicles in the US.
GM cut the price of its Bolt in the $26,000 range before rebates; 43% cheaper than the average transaction price across all vehicles. Ford has cut the prices of its Mustang Mach-E SUV. Other EV makers have also cut prices.
But they haven’t been able to scale up their production capacity and supply chains, and they still can’t mass-produce like Tesla, and so they cost more. Ford, which is years behind Tesla in building out its EV supply chain and production capacity, has said it will lose a ton of money on its EVs in the coming years until production reaches sufficient scale.
Tesla has changed this dynamic of the auto industry. The promise of EVs was all along that they would eventually be cheaper because they are much simpler to manufacture than ICE vehicles. And by and large, they are now cheaper than ICE vehicles, as demonstrated by Tesla’s profit margins and price cuts.
And EVs are so easy to manufacture that a whole new generation of startups has sprung up, promising to level the oligopolistic playing field as well as create a graceful shakeout between each other — and lower prices.
Assuming that’s the case – that price competition kicks in, and prices are cut until profit margins are exhausted, and those who can’t become low-cost producers get washed out. Consumers are benefited.
But Tesla isn’t just competing with EVs. From day one, they competed with ICE vehicles. And competing with other EV ICE vehicles. And older automakers are going to deal with this threat, and their strategy to try and raise prices on their ICE vehicles is failing in the face of growing competition from EVs. In the long term, they will need to price their ICE vehicles to be competitive with EVs.
But obviously, this kind of competition is tough for stockholders. Tesla is still an extremely expensive stock even though it’s down a lot. GM, Ford and other automakers are going to blow a lot of money trying to catch Tesla; And their ICE vehicles are facing margin pressure and declining volumes from this intense new low-cost competition. And the EV startups in the US that do survive will burn cash for years to come trying to develop models, scale up production, and grow their sales to where they can break even. It will be tough for shareholders. But I’m loving the fact that Tesla is taking a stab at legacy automakers and shaking up their game.
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