Mohit Oberoi
Tesla (NYSE: TSLA) has cut vehicle prices in China. The price cut comes after a tough third quarter where the company’s deliveries and revenues trailed analysts’ estimates.
Tesla has lowered prices in China by as much as 9%. The company has reduced the starting prices for Model Y SUV from 316,900 yuan to 288,900 yuan. It has cut prices for Model 3 sedan from 279,900 yuan to 265,900 yuan.
Notably, this is the first price cut from Tesla this year. In 2022, it has raised car prices across geographies amid rising inflation. Other automakers including Ford and Rivian also raised car prices.
Musk previously said that Tesla would lower car prices once inflation comes down. Commodity inflation has indeed come down and in its response to Reuters on the China price cut, TSLA said that capacity utilization at the Shanghai Gigafactory has improved, while the supply chain has been stable.
In response to an analyst question during the Q3 2022 earnings call on whether TSLA would need to lower car prices to sustain demand, Tesla’s CEO Elon Musk said, “We believe that Tesla will continue to grow deliveries and revenue production at a 50% or greater compound annual growth rate. It might occasionally be a year that is a little less, and then some years would be maybe a little more or a lot more.”
Tesla Cuts Car Prices in China amid Demand Concerns
Meanwhile, for 2022, Tesla expects its delivery growth to be below 50%. The company’s deliveries fell on a sequential basis in the second quarter amid the lockdowns in China. In the third quarter also, its deliveries trailed analysts’ estimates which it attributed to logistics issues.
Musk has predicted an “epic” fourth quarter though. However, some analysts are now worried that Tesla’s demand growth might be tapering down amid high prices. Bernstein analyst Toni Sacconaghi said that TSLA’s lead times in China have come down, indicating softening of demand.
Some other analysts, especially Morgan Stanley maintained their buy rating on Tesla stock. After President Boe Biden signed the Inflation Reduction Act of 2022, several Wall Street analysts turned bullish on TSLA stock.
BYD Sold More Cars Than Tesla in China
Tesla sold 83,135 China-made vehicles in the wholesale market in September, which was a new monthly record for the Elon Musk-run company. However, its deliveries were less than half of what BYD Motors delivered in the same month in China.
BYD delivered 200,973 vehicles in China in September, which was 15% higher than the previous month. Overall, BYD delivered 538,704 NEVs (new energy vehicles) in the third quarter which easily beat Tesla. While Tesla was the market leader in NEV sales in 2021, it lost the crown to BYD in the first half of the year. With the nearly 200% rise in Q3 deliveries, BYD extended its lead over TSLA.
In August BYD began delivering the BYD Seal Model which is similar to Tesla’s best-selling Model 3 sedan. However, the model was priced $10,000 below that of Tesla’s Model 3. BYD expects to sell 4 million Seal cars in 2023.
BYD is backed by Warren Buffett’s Berkshire Hathaway. While Buffett has sold some BYD shares this year, he has bought more Apple shares. We have a guide on buying Apple stock.
China’s GDP Recovered in the Third Quarter
China’s GDP increased by 3.9% in the third quarter which was better than expected. In the first nine months of 2022, the world’s second-largest economy has expanded by 3%. Most analysts believe that China would not be able to meet its official GDP growth forecast of 5.5% for 2022.
Coming back to Tesla’s price cut in China, it might lead to a price war in the world’s largest automotive market. While Tesla has the financial flexibility to cut prices given its industry-leading gross margins, many Chinese EV companies like NIO and Xpeng Motors are posting losses.
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This article was written for Business 2 Community by Mohit Oberoi.
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