The electric vehicle manufacturer Tesla just reported a severe drop in deliveries during the first quarter of 2024, marking its first year-over-year decline in nearly four years.

The alarming results missed Wall Street’s expectations by a significant distance and are raising serious concerns about potential cracks in Tesla’s business model and competitive edge.

Tesla delivered just 386,810 vehicles globally in the first three months of 2024 according to the latest report published by the company. This results in a staggering 8.5% decline compared to the 422,875 vehicles delivered in Q1 2023. It was also Tesla’s lowest quarterly delivery figure since Q3 2022.

This figure was a huge miss compared to the roughly 457,000 vehicle target that analysts were expecting for the quarter, according to estimates compiled by FactSet. Some analysts had even more optimistic expectations above 470,000 units.

While a miss was anticipated, very few if any analysts predicted such a precipitous year-over-year decline in deliveries for Tesla in Q1. Analysts at Wedbush Securities called the results “an unmitigated disaster” and “hard to explain away” while others described them simply as “ugly.”

Production Challenges and Demand Looking Weaker

In a statement, Tesla blamed the decline in vehicle deliveries primarily on temporary production setbacks:

“Decline in volumes was partially due to the early phase of the production ramp of the updated Model 3 at our Fremont factory and factory shutdowns resulting from shipping diversions caused by the Red Sea conflict and an arson attack at Gigafactory Berlin.”

Tesla (TSLA) had to pause production at its Berlin factory for two weeks in January due to parts shortages stemming from a disruption in shipping channels caused by attacks from Houthi militia forces in the Red Sea.

Then, in March, an arson attack on the electrical grid supplying the Berlin plant forced another multi-day shutdown.

At the same time, Tesla’s production of the Model 3 sedan dropped significantly as the company worked through early manufacturing issues with the updated 2024 model year version being produced at its Fremont, California factory.

While these were clearly headwinds that constrained total production, which dropped 1.7% year-over-year to 433,371 vehicles, it seems like Tesla is trying to divert attention from the real problem: demand. The nearly 50,000 vehicle gap between Q1 production and deliveries suggests that “there may also be a serious demand issue”, Deutsche Bank analyst Emmanuel Rosner asserted.

By the end of Q1, Tesla had amassed a much higher than normal inventory level of around 50,000 vehicles. This raises questions about whether consumer demand for Tesla’s current aging vehicle lineup may be starting to deteriorate.

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Tesla stock dropped by 4.9% yesterday following the release of these latest delivery and production figures while shares are dropping nearly 2% in pre-market stock trading action this morning as well.

Meanwhile, by the end of yesterday’s session, Tesla stock had lost 33% of its value since the year started.

Competition Heating Up, Especially in China

One potential factor weighing on demand could be the increasing competition that Tesla is facing, predominantly in China, where domestic EV manufacturers are quickly catching up and producing affordable vehicles with similar technology.

For the first time in nearly two years, Tesla ceded its crown as the world’s largest seller of all-electric vehicles in Q1 2024 to the Chinese automaker BYD. While Tesla’s deliveries fell 8.5%, BYD’s global EV sales rose 13% year-over-year to just over 300,000 vehicles in the quarter.

BYD offers a lineup of more affordable EV models compared to Tesla’s premium pricing. With many new entrants like smartphone maker Xiaomi also launching lower-priced electric cars in China, Tesla faces intense competition in the world’s largest auto market.

Xiaomi’s new SU7 EV in particular could prove to be a legitimate rival to Tesla’s entry-level Model 3, which now starts at almost $37,000 after the most recent price cuts. Moreover, up-and-coming EV brands like Nio and Xpeng are also potential threats in China for the American automaker headed by Elon Musk.

Rising Interest Rates are also Denting Consumer Demand

Beyond rising competition, another likely culprit weighing on Tesla’s vehicle demand is the impact of sharply higher interest rates over the past year. As a result, consumers are finding it much more expensive to finance the purchase of a Tesla in these conditions.

General economic uncertainty has also risen. In this environment, consumers may be more hesitant to make large discretionary purchases like a $50,000+ electric vehicle. This also causes Tesla’s lower-priced models like the Model 3 sedan and Model Y crossover, which make up the majority of its sales, to experience softer demand than in previous years.

While Tesla enacted a series of price cuts earlier this year in an attempt to stoke demand, the impact appears to have been limited based on these weak Q1 delivery figures. Analysts at Morgan Stanley warned that Tesla “may be witnessing price-cut fatigue” that could continue to pressure profitability if steeper discounts are required.

Are Brand Controversies Taking a Toll?

Consumer demand and interest in Tesla’s vehicles may have also been hurt by changes in the company’s brand perception, which has become increasingly polarizing in recent months.

A February report from Reuters citing data from market intelligence firm Caliber showed that the number of prospective Tesla buyers in the US market had shrunk in Q1. The report attributed at least part of that declining demand to controversies surrounding CEO Elon Musk’s public persona and statements.

Also read: Will Tesla Ever Reclaim Its Former Glory? Wave of Downgrades Hits the Stock Hard

Musk, who is known for his erratic behavior on the social media platform formerly known as Twitter, which he acquired for $44 billion in 2022, has alienated some customers according to reports. This includes his amplification of an anti-Semitic tweet in late 2023, which drew condemnation from the White House, as well as his support of anti-immigration policies and theories.

Brand controversies and public feuds involving Musk could certainly be turning off some potential Tesla buyers, especially in more liberal-leaning regions like the West Coast and New England where the company has a strong customer base.

Beyond Musk’s antics, Tesla itself has also come under fire on multiple fronts that may be tarnishing its image and repelling customers:

While Tesla has stood by its products and technology, the negative headlines create public relations headaches and reputational damages that the company cannot afford anymore as competition intensifies.

Growth Stalling as Tesla Awaits New Models

Looking ahead, analysts expect that Tesla will produce little to no volume growth in 2024. The disappointing Q1 results have only added to those concerns.

Without any major new models hitting the market until late 2024 at the earliest when its long-awaited “affordable” EV is slated to arrive, Tesla’s growth runway could stall out this year as the current ‘S3XY’ lineup shows its age. It still has the updated roadster in the works but no one knows when it might be available and they won’t be cheap.

The refreshed Model 3 could provide a moderate sales uplift but given its elevated pricing and increased competition from rivals, any demand boost may prove temporary. The all-new but polarizing Cybertruck pickup is also a wild card, with production just starting to ramp and consumer interest being difficult to predict due to its unconventional design.

Analysts expect further pricing pressure for Tesla the longer it goes without a true mass-market offering below the $30,000 mark as legacy automakers like Volkswagen, Ford (F), and GM introduce more affordable EVs of their own.

Profitability Could Take a Hit This Year

Beyond the slowing growth trajectory, Tesla’s bottom line is also expected to take a hit in 2024 amid the price cuts and higher operational costs.

Analysts forecast that Tesla’s Q1 earnings will drop by 27% year-over-year to $1.8 billion when the company reports its quarterly results on April 23. Meanwhile, revenues are expected to grow by a modest 4% year-over-year to $24.3 billion.

With pricing being Tesla’s main lever to try and stoke demand, further cuts could compress margins and profitability even further for the EV maker. Competitors may even be able to undercut Tesla on pricing for lower-end models once production scales up.

Stakes Remain High for Tesla’s Next Phase

While the disappointing Q1 results amplify analysts’ concerns that Tesla could be entering a lengthy period of stagnating growth and demand, the stakes remain incredibly high for the company to execute in its lofty long-term ambitions.

Musk has set a target of producing 20 million vehicles annually by 2030, up from around 1.3 million in 2022. Meeting such aggressive targets will require hitting on new, more affordable models and significantly expanding the firm’s production capacity globally.

To that end, Tesla is working on an all-new vehicle platform using a revolutionary manufacturing process that Musk claims could radically reduce production costs. If successful, this could allow Tesla to produce a true $25,000 mass-market vehicle and unlock explosive growth in even price-sensitive emerging markets.

However, executing this ambitious next-generation program will be an immense technical challenge that could face delays or stumbling blocks. It is also worth noting that Musk has a long history of setting overly optimistic targets across Tesla’s product pipeline.

Moreover, Tesla will need to funnel billions more in capital expenditures to ramp up its production capacity to reach these output levels so it can achieve its long-term volume goals. This could put further pressure on the company’s financials and cash flow in the near term.

Competitors are Rapidly Closing the Tech Gap

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Another major potential headwind for Tesla is that the technological gap is closing between its EVs and those from legacy automakers like Ford, GM, Volkswagen and others.

While Tesla was the clear leader in EV tech and software just a few years ago, these rival automakers have now invested tens of billions to rapidly close the gap through their own dedicated EV platforms.

Also read: Ford Slashes 1400 EV Jobs as Lightning Sales Crumble

Ford’s Mustang Mach-E crossover and F-150 Lightning pickup have proven to be legitimate Tesla rivals and have been well received by both critics and consumers. Meanwhile, GM’s Ultium platform underpins strong new entries like the Lyriq and Hummer EVs, while Volkswagen’s MEB platform is launching a wave of mass-market EVs globally.

These models match or even exceed Tesla’s offerings in some areas like interior quality, range, charging speeds, and advanced driver assistance technology. Moreover, they benefit from decades of manufacturing experience and global scale that could eventually allow them to produce EVs more affordably than Tesla.

China’s domestic EV makers like BYD, Nio, Xpeng, and now Xiaomi also keep making rapid technological strides, adding some extra pressure on Tesla’s ability to further innovate to stay ahead.

The Risk of Elon Musk’s Divided Attention

Yet another major risk facing Tesla is the perpetual question of whether its CEO, Elon Musk, is spreading himself too thin across his ample portfolio of business ventures and passion projects.

In addition to running Tesla and SpaceX, Musk has devoted significant time and over $44 billion of his personal fortune to acquire Twitter (now called X) in a controversial privatization deal that was completed in 2022.

His focus and priorities often appear divided across his different companies, new technologies like artificial intelligence, and various other interests ranging from underground tunnels to neural interfaces.

While one could argue that Musk’s ADD-like habits allow him to push multiple ambitious projects forward simultaneously, there is a reasonable concern that his lack of full attention on Tesla could prove detrimental as the company enters a critical new phase that demands flawless execution of next-generation strategic approaches.

Any operational missteps, product delays, or strategic miscalculations by Tesla could prove extremely costly as established rivals like BYD, Ford, and Volkswagen close in with their own dedicated EV efforts.

In many ways, Tesla finds itself at an inflection point coming off the heels of the massively disappointing Q1 2024 delivery numbers that sent shockwaves across the EV industry.

Achieving its daunting mission to produce mass-market and cheaper vehicles will be critical for Tesla to reignite the growth pace that investors have become accustomed to and avoid stagnation. It will also require tremendous capital, focus, and flawless operational execution – areas where the company and its eccentric CEO have not always excelled.