Musk outlines Tesla's recession playbook: claw back costs
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[January 26, 2023] By
Abhirup Roy and Kevin Krolicki
(Reuters) -Elon Musk has a playbook for Tesla headed into what he
believes will be a "serious" recession: cut costs on everything from
parts to logistics, while keeping the pressure on competitors with
discounted sticker prices.
In a conference call to discuss Tesla's fourth-quarter results, Musk and
other executives outlined plans to reshape the electric vehicle (EV)
maker's cost base after slashing prices up to 20%, a move some analysts
see as the first shot in a price war.
Part of the plan is expanding production at Tesla's newest plants in
Berlin and Austin, Texas and increasing the company’s in-house
production of batteries, since scale yields savings, executives said.
But Chief Financial Officer Zachary Kirkhorn said the company would also
be "attacking every other area of cost and unwinding cost increases
created for multiple years of COVID-related instability."
That would mean running Tesla factories leaner with fewer materials in
inventory, cutting shipping and logistics costs and negotiating lower
prices for components, he said - putting Tesla's suppliers on notice.
Among its suppliers, Tesla buys batteries from Japan's Panasonic and
China's CATL, and sources the massive presses it has used to take cost
and complexity out of production from Italy's IDRA Group.
Tesla is also cutting costs by redesigning elements of battery and
electric motor systems, removing features that owners are not using,
based on data collected from Model 3 sedans and Model Y SUVs on the
road, the company said.
Bill Russo, founder of China-based consultancy Automobility, said Tesla
had already made gains on cost competitiveness by driving simplified
hardware designs for its electric vehicles, taking a page from consumer
electronics manufacturers.
"You can offset some of the margin hit from pricing with massive scale
and simpler electronic architecture," Russo said. "This is how they are
trying to win the game."
Meanwhile the cost of lithium in EV batteries – the single most
expensive component – will be higher in 2023 than last year, Kirkhorn
said, a pressure that will hit Tesla's rivals that are still losing
money on EVs harder.
"My guess is if the recession is a serious one, and I think it probably
will be but I hope it isn't, that would lead to meaningful decrease in
almost all of our input costs," Musk said. "So we expect to see
deflation in our input costs, which would likely then lead to, yes,
better margin."
PROFITABILITY KEY
Tesla said on Tuesday it would invest more than $3.6 billion to expand
its Nevada factory complex and to increase the output of battery cells
so that it could produce enough there to power 2 million vehicles
annually.
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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/File Photo
Tesla forecast it would sell 1.8 million EVs this year, which would
mean sales growth of about 37%. That annual number could be as high
as 2 million vehicles barring an external shock, Musk said.
Its shares rose nearly 7% in premarket trading on Thursday.
Tesla made an average profit of almost $9,100 per vehicle sold in
the fourth quarter, down 6% from a quarter earlier but still far
more than established competitors. Tesla's third-quarter profit per
car sold was more than seven times higher than Toyota Motor Corp,
for example.
Tesla slashed prices by as much as 20% earlier this month, a move
that broadened the range of its line-up that qualifies for tax
credits of $7,500 per vehicle in the United States.
But analysts have focused on how well Tesla can sustain a core
measure of profitability, the gross margin on auto sales, excluding
credits.
Kirkhorn said Tesla expected to see that metric above 20% for 2023
with the average price of its vehicles above $47,000 even after
discounts. By comparison, the average price of a new vehicle was
just over $49,500 in the U.S. market in December, according to
Kelley Blue Book.
Bringing costs down is also key to the next phase of Tesla's
expansion, which Musk hinted the company would detail at its
investor day in March: plans for an affordable EV that analysts have
expected to be priced below $35,000.
"While competition in the EV space continues to heat up, Tesla's
focus on electrical efficiency and investment in battery technology
likely makes them tough to chase in the short-term," said analysts
at Cowen and Company.
Tesla is also planning to roll out a revamped version of the Model 3
sedan later this year code-named "Highland" with a focus in part on
reduced production cost, Reuters has reported.
The company's average cost per vehicle, including all categories of
its spending, was almost $44,000 in the fourth quarter.
"Price really matters. I think there's just a vast number of people
that want to buy a Tesla but can't afford it," Musk said.
(Reporting by Kevin Krolicki in Singapore and Abhirup Roy in San
Francisco; Additional reporting by Norihiko Shirouzu in Beijing, Eva
Mathews in Bengaluru; Editing by Kenneth Maxwell)
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