Elon Musk has a game plan for Tesla (TSLA.O) as it enters what he predicts will be a “severe” recession: slash costs across the board, from logistics to parts, while maintaining pressure on rivals with lower sticker prices.
Musk as well as other executives from Tesla discussed plans to restructure the EV manufacturer’s cost base during a phone call to discuss the company’s fourth-quarter results. After cutting costs by up to 20%, some analysts believe this is the start of a pricing war.
Since scale produces savings, officials said, part of the plan includes increasing production at Tesla’s latest plants in Austin, Texas, and Berlin, Germany, as well as the company’s internal battery manufacture.
Zachary Kirkhorn, chief financial officer, however, stated that the business would also be addressing every other expense area and reversing cost rises brought on by years of COVID-related uncertainty.
Putting Tesla’s vendors on notice would entail running Tesla plants more leanly with fewer supplies in inventory, reducing shipping and logistics costs, and negotiating cheaper rates for components.
Tesla sources its batteries from companies like China’s CATL (300750.SZ) and Japan’s Panasonic (6752.T), as well as Italy’s IDRA Group, which provides Tesla with the enormous presses it uses to reduce production costs and complexity.
Based on data gathered from Model 3 sedans as well as Model Y SUVs that are now on the road, the business claimed that Tesla is also reducing costs by redesigning components of batteries and electric motor technologies and deleting features that consumers are not utilising.
Taking a cue from consumer electronics makers, Bill Russo, the creator of the China-based consultancy Automobility, claimed that Tesla had already improved its cost competitiveness by promoting simplified hardware layouts for its electric vehicles.
By employing large size and more basic electronic architecture, a person can somewhat offset the margin impact caused by pricing, according to Russo. They are attempting to win the sport in this manner.
According to Kirkhorn, the cost of lithium, the single most costly component of EV batteries, will increase in 2023 compared to last year. This increase will put more pressure on Tesla’s competitors, who are still making losses on EVs.
The recession may be severe, and it likely will be, but people are afraid of it since it would result in a significant drop in practically all input costs, according to Musk.
Input cost deflation is therefore anticipated, which would probably result in a higher margin.
On Tuesday, Tesla announced that it would spend more than $3.6 billion to extend its Nevada factory facility and boost battery cell production, enabling it to create enough there to fuel 2 million vehicles each year.
Tesla said it would market 1.8 million electric vehicles this year, which would represent a 37% increase in sales. Barring an exogenous shock, Musk stated that the annual total may reach 2 million vehicles.
In the fourth quarter, Tesla produced an average profit of roughly $9,100 per vehicle sold, a decrease of 6% from the third quarter but still far higher than its well-established rivals.
For instance, Toyota Motor Corp (7203.T)’s profit per vehicle sold was more over seven times lower than Tesla in the third quarter.
Earlier this month, Tesla cut costs by as much as 20%, expanding the range of its lineup that is eligible for tax credits of $7,500 for each vehicle in the United States.
The gross margin for auto sales, excluding credits, has drawn the attention of analysts as a key indicator of Tesla’s ability to maintain profitability.
Kirkhorn believed Tesla anticipates that metric to be above 20% for 2023, with an average vehicle cost of more than $47,000 even after incentives. In contrast, according to Kelley Blue Book, the average cost of a new car in the U.S. market in the month of December was a little over $49,500.