![](https://southcarolinadigitalnews.com/wp-content/uploads/2023/11/86e1211f42a9c8709ce366b2b4586c90-780x470.jpeg)
[ad_1]
Elon Musk has started an electric-vehicle price war that Tesla can’t finish.
Under increasing pressure from new competition, Tesla spent the past year slashing the average price of its models by roughly 25%. The Model 3 fell from $48,000 to $44,380. The luxury Model S, meanwhile, plunged from a high of $130,000 to $96,380. The cars, as they say, have been priced to move.
It’s an unusual business strategy, to put it mildly. “I can’t think of another point in the history of automotive when a brand that wasn’t going out of business cut prices 20% a year,” Mark Schirmer, the director of communications at the research firm Cox Automotive, told me. Tesla is hoping that lower prices will drive up sales and slow the advance of the company’s rivals — maybe even scare some of them out of the market altogether.
But that’s not what’s happening. Lower prices are not translating into higher sales. The number of cars Tesla delivered to customers in the third quarter actually declined. Revenue is dropping, and the company’s once fat profit margins are getting squeezed — down to 17.9% in the third quarter, compared with 25.1% a year ago. Competitors aren’t being driven out of business, either. Once totally dominant in the EV space, Tesla’s share of the US market has fallen from 62% at the beginning of the year to only 50% today.
To make matters worse, the public’s appetite for EVs isn’t growing as fast as automakers expected. That means Tesla has set off a protracted battle for a piece of a pie that’s growing crumb by crumb.
“If you do the price war, you have to make sure you have enough volume to increase and maintain profitability,” John Zhang, a professor of marketing at the Wharton School, said. “It has to be a continuous battle. This war you have to wage all the way. And you need to plan ahead. That’s how you win.”
Conversely, some experts will tell you that price wars are unwinnable — that they’re a race to the bottom that serves only to kill profitability for the entire industry. And in an industry where the underlying technology — and, thus, the costs of production — are changing rapidly, no one can be sure where the bottom is. Winnable or not, Musk chose a terrible time to pick a fight. As legacy automakers walk the tightrope to our electric future, they can rely on sales of their traditional combustion-engine vehicles to provide them with a safety net. Tesla has no safety net. For Musk, it’s go electric, or bust.
Tesla creates a cash problem — again
Musk’s decision to offer deep discounts on his vehicles was an act of pure desperation. That became apparent earlier this month when Tesla reported its third-quarter numbers. The results were frightful across the board: Tesla missed Wall Street’s expectations on revenue, vehicle deliveries, and free cash flow, which was down to $848 million from $3.4 billion a year before. Most importantly, the company reported that its gross margins — a measure of the company’s profitability after costs — continued to shrink. This horrified investors who had just gotten used to Tesla making money.
Over the past two years, despite Tesla’s addition of more moderately priced vehicles such as the Model 3 sedan and the Model Y compact SUV, its margins have grown to be some of the fattest in the car business. That has bolstered the argument that Tesla wasn’t a traditional car company such as Ford or GM and deserved its much, much higher stock price. Naturally, this is a status Musk would like Tesla to keep, so he’s promised to do everything he can to cut costs. (On the conference call on third-quarter earnings, he said it’s like “‘Game of Thrones,’ but with pennies.”)
Unfortunately, cost cuts can’t be spoken into existence, not even by Musk. In the third quarter, Tesla’s capital expenditures actually ballooned to their highest level in a year — $2.4 billion, up from $1.8 billion a year ago. If prices are going down, and costs are going up, even the most fervent of Musk’s Wall Street believers will tell you that margins don’t have a prayer.
Musk gave no indication of when this cash drought would end or how margins would improve. He could not say when the company’s Cybertruck would be available to the public and even admitted that Tesla had “dug its own grave” trying to build the new vehicle. He also could not provide details on when there would be a meaningful update to the aging models that currently make up Tesla’s fleet. But there was one thing Musk was clear on: Prices need to keep coming down. In a call that Wall Street widely acknowledged as one of Tesla’s worst in some time, it was like a mantra Musk repeated over and over again, with a certainty borne more of faith than facts.
“So I just can’t emphasize again how important cost is,” Musk said. “It’s not an optional thing for most people. It is a necessary thing. We have to make our cars more affordable so that people can buy them.”
The only real hope Musk offered investors was a suggestion that driverless-car technology would (eventually, someday) offset Tesla’s falling prices. But how exactly the math would work on that trade-off was unclear. Months into his pricing campaign, Musk has nothing to show for it, and no plans to change. The market responded to Musk’s disappearing profits by dragging Tesla’s stock down 15%.
The whole EV market is in a cash bleed
Tesla’s dismal results illuminated Musk’s short-term reason for the desperate pricing strategy. But the underlying reason is even more alarming: Despite increasing demand and bountiful government investment, the world’s transition from gas to electric cars is not going as smoothly as automakers expected.
Experts will tell you with certainty that EVs are the future and that internal-combustion engines will eventually disappear from America’s driveways and parking lots. But the march to electrified highways isn’t proceeding in a straight line. There are two main reasons that consumer appetite for EVs hasn’t been as robust as automakers initially expected. One is the uneven way new technologies are adopted; it inevitably takes awhile to sell people on even the most amazing innovation. The other is the slowing global economy. Customers around the world have become more price-sensitive, which is bad news for EVs: While the average selling price of an electric vehicle is going down — from $65,000 last year to $53,633 in July — it’s still higher than the average selling price for new vehicles overall, which hovers around $48,451.
Traditional carmakers, from Ford and GM to BMW and Mercedes, have responded to the EV price challenge by doing what they do best: building the gas cars that customers still want. “Ford is able to balance production of gas, hybrid, and electric vehicles to match the speed of EV adoption in a way that others can’t,” John Lawler, Ford’s chief financial officer, said during the company’s latest earnings call. “That’s obviously good for customers, who get the products they want — and good for us, too, because disciplined capital allocation and not chasing scale at all costs maximizes profitability and cash flow.”
But while the traditional automakers can coast on their older models, Tesla doesn’t have that option. Cue the price cuts.
“Musk’s starting a price war,” Schirmer of Cox Automotive said. “I do think there was nothing else he could do, in that he doesn’t have anything really new to compete against these other companies. He says it isn’t because he has a demand problem. But I’ve been in this business a long time, and I have never seen anyone cut prices without having a demand problem.”
Musk’s goal to undercut the rest of the market on price is no secret — and it’s made other car companies none too happy. Given the uncertainty around the future of EVs, almost every other automaker is reluctant to slash prices on their models because doing so would make continued investment in EV tech an even tougher business case to make. In April, Ford CEO Jim Farley said Tesla’s cuts could start an unsustainable price war. But the company still felt forced to cut the price of its Mustang Mach-E SUV at least twice this year.
Many auto executives are refusing to engage in Musk’s fight because they know from experience that the best way to win a price war is not to get into one in the first place. “We have no interest in sinking prices to gain market share,” BMW CEO Oliver Zipse said in a recent call with investors. “That’s not our strategy.”
There are other, more imaginative, more savvy ways to entice customers without a fire sale. During the 2008 recession, rather than slashing prices, Hyundai tried to figure out what was holding customers back from buying a new car. Turns out, it was worries over getting laid off. So Hyundai offered customers a guarantee: Anyone who bought a car and then lost their job could sell it back to the company. That’s the kind of creative work-around that gets a car company through hard times unscathed. It’s an exercise in market research and advertising. Tesla has given little indication that it does the former and has flatly rejected doing the latter. Musk has always maintained that his outsize public profile makes advertising for Tesla a waste.
“Rationally, he doesn’t have to drop prices so fast. He can only delay the competition,” Navdeep Sodhi, a managing director at the pricing consultancy Sodhi Pricing, said. “If Elon was smart, he would not drop the price. Instead, he should justify the cost of ownership.”
Part of the point of advertising — and the reason investors are pushing Tesla to start spending money on it — is to educate customers about why Tesla’s vehicles are worth their higher price tags. According to Sodhi, Tesla has a compelling argument to make about how much money EVs can save customers over time. Why slash prices if you can persuade customers to pay more? Building a market for a product such as an electric vehicle is a marathon, not a sprint. Traditional carmakers expect to lose money on their EVs for the foreseeable future. Tesla just became profitable in 2021. If it slides back into the red because of its price cuts, expect investors to run in another direction.
A losing battle
If the short-term point of Tesla’s price cuts is to maintain its market share and sell more cars, it’s not working. At the same time, the move could damage Tesla in the long term. When companies play with price, Zhang said, they’re playing with customer expectations. Once customers get used to paying $40,000 for a standard EV, they’re not going to go back to $60,000. In a price war, you may prompt a few more people to buy from you today, but you’ll be sacrificing millions of dollars in future sales.
Then there are all the customers who paid that $60,000 in the past. Learning that they could have saved thousands of dollars if they’d waited a few months to make their purchase has a negative impact on brand loyalty. In China, Tesla’s price cuts even sparked protests among owners who paid more for their vehicles.
But Musk isn’t thinking about the future. He needs the money he hopes to make from price cuts — and he needs it now. Making cars is an expensive business, and if the price cuts don’t generate more demand, Tesla’s fortune could change rather quickly. “If you have a factory that makes something and you’re not selling it, you’re losing huge money in automotive,” Schirmer said.
This is a moment when you want an experienced team of automotive executives at the helm of your company. Instead, Tesla is onboarding a new chief financial officer. Zach Kirkhorn — a Tesla veteran of 13 years who presided over the most profitable quarters in the company’s history — stepped down as chief financial officer in August. According to company documents, his severance package included the kind of payoff and strict nondisparagement requirements that reek of a C-suite firing.
In the end, price cuts won’t be enough to drive sales. If Tesla is going to keep its business healthy, it needs to appeal to new customers beyond Musk fans and early adopters. It needs to conduct research and launch advertising that makes the right argument, to the right customers, that one of Tesla’s four models is the right car for them. Discounting the sticker price may drive a few sales. But in the long run, you can’t build a global automotive juggernaut without cash flow. Musk himself has admitted that Tesla narrowly evaded death by cash burn in both 2008 and 2018.
Waging price war during a downturn is a challenge unlike any Tesla has faced before. The company has survived for years on a first-mover advantage, on being small and nimble, and on the willingness of investors to bail it out. But today’s Tesla is increasingly a normal car company, with normal car-company problems. Musk’s unfulfilled promises of robo-taxis and unmatched artificial intelligence may dazzle the market for a while, but they’re not driving the sales Tesla needs to win the price war it started. The company has a growing fleet of competition, an expensive manufacturing process, and shareholders who have grown used to fat profits. If cutting prices is all Tesla can do to survive this new reality, it will continue to bleed money every time the rubber hits the road. And at some point, turning it around may no longer be an option.
Linette Lopez is a senior correspondent at Insider.
Read the original article on Business Insider
Source link