Things haven’t been going well for Elon Musk lately – SpaceX’s Starship exploded midway while Tesla reported drop in profits due to the impact from its price cuts. And he caused a lot of unhappiness after dropping the legacy blue ticks on Twitter.
Tesla share price tanked 10% in a day, wiping out more than $10 billion value from Elon Musk’s net worth.
According to the latest quarterly financial results, Tesla experienced a decline in both gross profits and earnings per share. Specifically, gross profits were down by 17% and earnings per share decreased by 23%.
Tesla has already slashed prices six times this year, but more price cuts are to be expected. It is likely the margins would compress further in the upcoming quarterly reports.
Why is Tesla doing this? Is the competition intensifying and Tesla is losing market share?
Musk has long said that EV prices have to come down to enable mass adoption.
One may argue that prices of Apple iPhones kept increasing and yet it managed to hit mass adoption.
It’s important to note that smartphones and automobiles are different products with different manufacturing costs and price structures. Smartphones typically have shorter product lifecycles and lower prices.
An iPhone 14 Pro Max is $999 while a Tesla Model 3 is close to $40,000. The level of affordability is different and EV prices have to fall in order to attract more buyers.
Tesla has always been focused on reducing the cost of production in order to maintain profitability even when selling prices go lower. That is why Musk redesigned the entire manufacturing process to include more automation to make it as efficient as possible.
The efforts have helped to bring down the cost of manufacturing. It cost Tesla $84,000 to make a vehicle in 2017. It dropped to $36,000 in 2022. Tesla is looking to lower the cost further.
In addition to its focus on innovation and efficiency, Tesla’s success in driving down manufacturing costs has been aided by the company’s impressive economies of scale. As the world’s largest 100% battery electric vehicle (BEV) seller in 2022, Tesla has been able to leverage its large production volume to negotiate better deals with suppliers, reducing the cost of raw materials and components. (BYD is the global best seller if we include hybrids.)
Tesla’s ability to cut prices while remaining profitable has put other electric vehicle competitors in a difficult position.
For many competitors, cutting prices may be a difficult choice to make. Unlike Tesla, these companies may not have achieved the same level of efficiency, innovation, and economies of scale to maintain profitability while lowering prices. As a result, they may be caught in a dilemma – if they cut prices to grab more market share, they will likely lose even more money. On the other hand, if they don’t cut prices, they may struggle to catch up to Tesla’s market share and sales.
Therefore, I think that Tesla’s strategy of accelerating price cuts is aimed at maintaining its competitive edge and fending off rivals.
Tesla has a competitive advantage that was derived from its economies of scale and cheaper production processes.
Wouldn’t lowering the price hurt Tesla brand image?
So far, this is not true. According to Kantar BrandZ ranking, Tesla brand value has actually increased over the years despite the repeated cost cutting.
In 2021, Tesla was ranked #47 with a brand value of $42 billion. However, in 2022, the company climbed up to #29 with a brand value of $76 billion.
Tesla has established a strong brand reputation in the EV market. When people think of EVs, Tesla is often the first brand that comes to mind. This highlights the power of branding, which is unlikely to diminish anytime soon, especially considering that Elon Musk continues to lead the company and actively promote the brand on social media.
Tesla’s second competitive edge lies in its intangible asset of brand recognition. It enables them to maintain pricing power over other car brands. While the ongoing price cuts may seem contradictory to this, Tesla has historically targeted the premium segment and leveraged its strong brand to command higher prices. However, despite being more expensive than the average car, Tesla continues to outsell other EV brands, demonstrating the power of its brand.
Tesla’s aggressive price cuts can be seen as a strategic move to maintain its position as the leader in the EV market by squeezing its competitors and preventing them from achieving economies of scale. By leveraging its cost advantages and strong branding power, Tesla aims to maintain a significant market share while pushing other companies to incur deeper losses if they try to compete on price.
Well played, Musk.
