Analysis-Tesla uses its profits as a weapon in an EV price war
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[January 20, 2023] By
Paul Lienert and Joseph White
DETROIT (Reuters) - Tesla Inc earns more money for every vehicle it
sells than any of its global rivals. Now, Chief Executive Elon Musk is
using that superior profitability as a weapon in the EV price war he
started.
Tesla, once one of the auto industry's biggest money losers, has over
the past year built a commanding lead over most major rivals in profit
per vehicle, a Reuters analysis of industry data shows.
Tesla earned $15,653 in gross profit per vehicle in the third quarter of
2022 - more than twice as much as Volkswagen AG, four times the
comparable figure at Toyota Motor Corp and five times more than Ford
Motor Co, according to a Reuters analysis.
For most of this year, Tesla joined rivals in aggressively raising
prices on its most popular vehicles, such as the Model Y SUV. Shortages
of semiconductors and other materials kept auto industry production
down, allowing companies across the industry to focus on higher-margin
models and book strong profits, even as sales volumes fell.
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Tesla's decision to reverse course and spend its production-cost
advantage on price cuts now challenges the profit-over-volume strategies
established automakers such as GM have pursued since the 2008 financial
crisis, and doubled down on during the pandemic.
To control production costs, Tesla has invested heavily in new
manufacturing technology - such as the use of large castings to replace
small metal parts. Tesla brought battery manufacturing and other parts
of its supply chain in-house, and standardized vehicle designs to
improve economies of scale.
Using production-cost advantages to fund price cuts has a long history
in the auto industry.
Henry Ford slashed prices on his Model T in the early 20th Century as
his innovative mass-production system revved up. During the 1980s and
1990s, Toyota used the cost lead provided by its lean production system
to offer features at prices Detroit automakers struggled to match. Now,
Toyota is rebooting its strategy under pressure from Tesla.
Growth in electric vehicle demand outpaced the overall market in the
United States and globally during 2022. That emboldened automakers to
push EV prices higher. Ford hiked prices for its electric F-150 pickup
by 40% during 2022.
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![](../images/012023PIX/busine43.jpg)
Model Y cars are pictured during the
opening ceremony of the new Tesla Gigafactory for electric cars in
Gruenheide, Germany, March 22, 2022. Patrick Pleul/Pool via REUTERS
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RISING CAPACITY
But analysts are warning the global EV market could soon have more
production capacity than demand.
By 2026, North American EV demand will hit a level of about 2.8
million vehicles a year, said industry forecaster Warren Browne. But
North American EV factories will be capable of assembling more than
4.5 million vehicles, putting overall capacity utilization at just
under 60%, he said.
In China, the end of central government subsidies is accelerating a
market share war among rivals in the world's largest EV market.
“Tesla has taken the nuclear option to bully the weaker, thin margin
players off the table" in China, said Bill Russo of Automobility, an
industry consultancy in Shanghai. "Big pie, fewer slices, more to
eat for those that remain.”
Startups such as China's Xpeng Inc had benefited from Tesla's price
hikes. Now, Xpeng is cutting prices in China - but with less
financial leeway than Tesla. Xpeng reported gross profit of $4,565
in the third quarter, and a net loss of $11,735 a vehicle, according
to company data analyzed by Reuters.
“We hope more people can access smart vehicles after we make our
cars increasingly affordable," Xpeng said in a statement.
Vietnamese EV startup Vinfast said Thursday it will use price
promotions to fight back against Tesla.
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Chinese EV market leader BYD Co Ltd announced price increases
effective Jan. 1 after Beijing phased out EV subsidies. So far, BYD
has not responded to Tesla's latest price cuts in China. However,
BYD's gross margins of $5,456 per vehicle give it more headroom in a
price war than VW, Toyota or GM.
(Reporting By Joseph White and Paul Lienert in Detroit, Norihiko
Shirouzu and Zoey Zhang in China and Victoria Waldersee in Berlin;
Editing by Nick Zieminski)
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