Tesla margins in focus as EV price war kicks into high gear

Tesla margins in focus as EV price war kicks into high gear
© Reuters. FILE PHOTO: Visitors check a Tesla Model 3 car next to a Model Y displayed at a showroom of the U.S. electric vehicle (EV) maker in Beijing, China February 4, 2023. REUTERS/Florence Lo/File Photo/File Photo

By Akash Sriram

(Reuters) – Tesla (NASDAQ:TSLA) Inc’s first-quarter margins are anticipated to have hit a more than three-year low as the electric-vehicle maker slashed prices to lure more buyers in the face of rising competition and a weak economy.

The world’s most valuable automaker, which commands over half of the U.S. EV market, cut sticker prices on its cars five times between January and April – a move that boosted quarterly sales in the quarter ended March 31 but squeezed its industry-leading profit margin.

Tesla is expected to report auto gross margin of 23.2% for the quarter, according to 17 analysts polled by Visible Alpha, down from a record 32.9% a year earlier and the lowest since the fourth quarter of 2019.

Tesla’s automotive gross margin set to decline again, https://www.reuters.com/graphics/TESLA-RESULTS/lgvdkxqejpo/chart.png

Finance chief Zachary Kirkhorn promised in January that Tesla would not go below margins of 20% and an average selling price of $47,000 across models. Analysts, however, predict further price cuts and margin pressure.

“While many investors have been hopeful that Q1 margins might be (at their) bottom, we don’t believe that will necessarily be the case, particularly given our expectation that further cuts are likely,” Bernstein analysts said in a note.

The company on Friday slashed prices in Europe, Israel and Singapore. In the United States, Tesla has cut the price of its base Model 3 by a cumulative 11% since the start of the year, with a 20% reduction in its base Model Y.

How EV prices stack up against Tesla’s cars, https://www.reuters.com/graphics/TESLA-ELECTRIC/STARTUPS/lgpdkxqbjvo/chart.png

It has come under pressure as rivals such as Ford Motor (NYSE:F) Co have stepped up competition at home, even as consumers cut back spending on recession worries, while in China, Tesla’s second-largest market, it is playing catch up with BYD.

Tesla faced trouble at its Shanghai factory on Monday, after employees were informed about the company’s plans to cut their performance bonuses, which are linked to the factory’s performance, according to online posts and workers.

The company, led by billionaire Elon Musk, has said a ramp up in production at its factories in Austin, Texas and Berlin would help improve margins due to economies of scale.

Tesla is also likely to benefit from a plunge in lithium prices this year, especially in China, where a slump in demand for EVs has left stocks of the metal piling up.

“It’s probable that Tesla’s margins will be preserved based on the reduction in commodity costs,” said George Gianarikas, analyst at Canaccord Genuity.

Tesla is targeting deliveries of 1.8 million vehicles this year, though Musk said in January the automaker could hand out 2 million vehicles if circumstances are favorable.

Tesla stock regains ground in 2023, https://www.reuters.com/graphics/TESLA-STOCKS/dwvkdjnlopm/Pasted%20image%201681728684558.png

Source: Reuters