tesla price cuts

Tesla has lowered car prices in the US for the fifth time this year. The move comes days after the tepid first quarter delivery report.

There is a sense of déjà vu as the company had slashed prices after missing Q4 2022 delivery report as well.

Tesla has cut the prices for its Model 3 sedan by $1,000 – bringing the YTD price cut to a cumulative 11%. The Elon Musk-run company has lowered the Model Y crossover price by $2,000 now which brings the YTD price on the base model to 20%.

The company also lowered the price for its higher-priced Model S/X by $5,000 each. The share of these two models in Tesla’s sales mix has been falling gradually and together they accounted for only 2.5% of its first-quarter deliveries.

Tesla delivered 422,875 cars in the first quarter of 2023 – which is 36% higher YoY and slightly higher than the fourth quarter.

The deliveries meanwhile fell short of analysts’ estimates making it the third consecutive quarter of below-par deliveries.

Also, Tesla’s production surpassed deliveries by almost 18,000 in the quarter. Last year also, it delivered 1.31 million cars which were below the 1.37 million that it produced in the year.

The growing disparity between Tesla’s production and deliveries has led to an inventory overhang which seems to be putting pressure on the company to lower prices.

Tesla Lowers Car Prices Even as Musk Sees No Demand Pressure

On more than one occasion Tesla has denied that it is facing demand pressures – even as its growing inventories and frequent price cuts tell us otherwise.

During its 2023 investor day on March 1, Tom Zhu who heads Tesla’s global production said: “As long as you offer a product with value at affordable price you don’t have to worry about demand.”

He was responding to a question on how Tesla plans to accelerate its market share in China, the world’s largest automotive market.

Musk also echoed similar views and added: “The desire for people to own a Tesla is extremely high. The limiting factor is their ability to pay for a Tesla.”

The company expects to produce 1.8 million cars in 2023. While it would imply growth of only about 31%, Musk said that the company could produce as many as two million cars in 2023.

Tesla Price Cuts Have Irked Many Buyers

Tesla’s frequent price cuts have irked buyers who happen to buy the car at a higher price just days ahead of the price cuts.

The company’s price cuts signaled a price war and soon automakers like Ford and Xpeng Motors followed suit.

Notably, Ford was the second-largest EV seller in the US last year but fell to the fifth rank in the first quarter due to production-related issues. By the end of 2023, Ford is targeting an EV production capacity of 600,000.

Meanwhile, the EV price war especially makes things tougher for startup EV companies which are anyways posting losses. Their losses and cash burn might only intensify amid the price war.

Several startup EV companies including Lucid Motors, Rivian, and Nikola have raised cash over the last year to bolster their balance sheets. However, given the perennial cash burn, their cash pile continues to dwindle with every passing quarter.

EV Price War Has Escalated

Multiple EV companies went public between 2020 and 2021 forecasting rosy sales numbers. However, they are either running behind on production timelines or their 2023 production guidance is way below what they forecasted while going public.

For instance, during their Q4 2022 earnings call, Lucid Motors forecasted production between 10,00-14,000 cars in 2023-a fraction of the 49,000 that it forecast during the merger presentation in 2021.

EV companies did not factor in a macroeconomic slowdown, supply chain issues, and EV price war which means that practically all the newly listed EV companies are running way behind on production and deliveries, while their losses are ahead of what they forecast.

Looking at the price war and the deteriorating economy, things might not improve for startup EV companies anytime soon.

As for Tesla, while the price cuts might lead to a contraction in its margins – it still has plenty of financial legroom to cut prices given its industry-leading margins and strong balance sheet.

Legacy automakers also have profitable ICE (internal combustion engine) businesses which can fund their EV losses. However, the price war further dampens the outlook for loss-making startup EV companies.

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