EkaLore uses the Alien Invader framework to look at companies that seemingly come out of nowhere to dominate a market space. As a group, they come from another market or geography, confound their competition by not playing by the “rules,” and suck the most profitable business out from underneath their competition.
Tesla’s strategy for price reductions in many markets may not reflect the preferences of stock investors or recent purchasers. As an Alien Invader, Tesla may be striking at the traditional manufacturers in an attack not usually seen in the vehicle market space.
1) Tesla is seeing cost reductions in final delivered costs per unit. Tesla saw reduced costs simply on the shipping costs from Asia to Europe (and related costs of inventory, tracking, and delivery) as the Gigafactory Germany comes to 3,000 units per week production rate of Model “Y” vehicles. Production rates in Austin and Germany point to high volume production economics for Tesla yielding lower factory costs.
2) Tesla may be striking at the margins (or lack thereof) of competitors. One analysis (Reuters, https://www.reuters.com/business/autos-transportation/tesla-uses-its-profits-weapon-an-ev-price-war-2023-01-19/ ) called out profits for Tesla of USD $15,653 gross profit per vehicle in 3Q 2022. That puts their profit at >2x VW, 4x Toyota, 4x GM, and 5x more than Ford. And going forward, margin pressures from Tesla’s pricing may increase (as Ford won’t be able to ease margin pressure by increasing F-150 Lightning prices by 40% like in 2022 as a response to the Tesla CyberTruck).
3) The margins of some Chinese competitors (AITO, Xpeng) have gotten smaller as they have responded with their own price reductions. BYD and Nio’s gross margins are strong. Nio’s net income is still negative as it builds revenue and unit volumes. The increased competitiveness of Tesla increases competitive pressures in Challenging Times.
4) Tesla’s price reductions in the key USA market enabled buyers to take advantage of larger government tax incentives under the Inflation Reduction Act. Provisions and regulations are not fully spelled out for 2023-year purchases, though it’s likely Tesla, GM, and Toyota will all benefit in the marketplace from consumer access to these tax credits that effectively lower purchase prices. In Tesla’s case, this 19.7% discount on some Model “Y” cars effectively lowered the tax-advantaged price by up to USD$20,500 on a vehicle base price that was USD$65,990. Anecdotal reports point to increased unit volumes as Tesla customers respond.
5) At 1.3M units, Tesla is still increasing total manufacturing unit volumes at the same time as huge capital asset investments have been made (pressuring net income with startup expenses) for GigaFactories in Texas and Germany. Predicted increased capacity of up to 500,000 units from Texas and Germany will continue to provide manufacturing economies of scale, propelling net income.
Look for the next part of our series concerning Tesla’s price reductions and the effects it will have on its competition – www.ekalore.com/alien-invaders
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