Tesla has recently announced a significant price reduction for its Model Y electric vehicles in Germany, following a similar move made in China. However, this news hasn’t been well received by the stock market.
On its website, Tesla has slashed the prices of the Model Y Long Range and Model Y Performance by €5,000 (approximately $5,400). This reduction amounts to over 8% compared to the previous week. Furthermore, the cheaper rear-wheel drive version of the Model Y has also received a 4% discount.
In China, Tesla had already reduced Model Y and Model 3 prices by 3% to 6% just last week. The base version of the Model Y in China now starts at around $36,000, while the base Model 3 starts at about $34,500.
Following the price cuts in China, Tesla’s shares experienced a 3.7% decline. As of premarket trading on Wednesday, Telsa stock was down 1.5% while S&P 500 and Nasdaq Composite futures dropped 0.4% and 0.4%, respectively.
While these price cuts may attract more customers, they also lead to lower profit margins for Tesla. The company had already implemented price reductions globally last year in order to remain competitive and compensate for higher interest rates associated with car financing. As a result, it is expected that operating profit margins in 2023 will be below 10%, representing a decrease of around 7 percentage points compared to the previous year.
China, being the largest market for new cars and electric vehicles (EVs), is highly competitive with numerous auto makers vying for EV market share. Gary Black, co-founder of Future Fund Active ETF, expressed hope that these price cuts in China would not extend to other markets, but unfortunately, it seems that this hope has not been realized.
Tesla Faces Challenges in Competitive Electric Vehicle Market
According to industry experts, Tesla’s recent decision to reduce prices and offer inventory discounts may have unintended consequences. “Tesla management still does not see that cutting EV prices and inventory discounts by the same amount is value destructive,” says one industry analyst. The concern is that by continuously offering deals, Tesla is training its customers to wait for future discounts, potentially eroding profitability.
Despite this concern, analysts believe that the impact on Tesla’s earnings will be minimal, with estimated losses of only 15 cents per share. In fact, the projected earnings for Tesla in 2024 are still expected to reach $3.75 per share.
To protect its market share, Tesla may be willing to sacrifice profit margins. In Germany, for example, Volkswagen has surpassed Tesla as the leading electric vehicle maker in terms of market share. This growing competition highlights the challenges faced by Tesla in maintaining its dominance.
Meanwhile, BMW has also experienced a significant shift towards electric vehicles. The company’s Chief Financial Officer recently stated that combustion-engine vehicle sales are no longer the primary driver of sales growth. Instead, BMW now generates most of its sales growth from electric cars. In 2023, BMW sold approximately 376,000 battery-electric vehicles, representing a year-over-year increase of almost 75%. However, sales of non-electric vehicles remained relatively flat at around 2.2 million units.
In China, Tesla faces stiff competition from BYD, a local electric vehicle manufacturer. In the fourth quarter of last year, BYD delivered more all-electric vehicles than Tesla for the first time. This development underscores the increasing competition Tesla faces in one of its key markets.
While Tesla’s stock has experienced a decline of 12% since the start of the year, it is important to note that it has still gained an impressive 70% over the past 12 months.
In conclusion, Tesla’s decision to lower prices and offer inventory discounts may have long-term implications for the company. As competition intensifies in the electric vehicle market, Tesla must carefully navigate these challenges in order to maintain its position as a leader in the industry.