Tesla’s profits from selling is electric cars are taking a hit from its recent price cuts, but CEO Elon Musk said he has a plan to fix it. So far, investors seem to believe him, sending the company’s stock price soaring after its latest quarterly earnings release on Jan. 25. Shares stayed flat at first but jumped more than 9 percent after Musk spoke on the earnings call.
For the three months that ended Dec. 31, Tesla posted a record high profit of $4.1 billion on $24.3 billion in revenue, proving its business remains strong despite slowing demand in key markets like China. But the earnings report shows the profit margin of its electric cars is shrinking to the lowest level in more than a year, in part due to widespread price cuts in December.
During a call with analysts following the earnings release, Musk addressed one of the most urgent questions on everyone’s mind: How long can car prices stay low and is Tesla able to turn a profit still? Musk assured consumers Tesla’s goal is always to “make cars that are affordable to as many people as possible.” Meanwhile, he also promised to deliver a better profit margin—through cost cuts in every aspect of manufacturing.
Economies of scale and global distribution
On the same call, chief financial officer Zach Kirkhorn said Tesla plans to cut costs in parts, inventory and assembly line operation. Production at Tesla’s two newest factories in Berlin and Austin are starting to see the benefit of the economy of scale, which helps reduce manufacturing costs, Kirkhorn said. Together with Tesla’s Fremont, Calif. plant and the Shanghai Gigafactory in China, Tesla wants to gradually distribute its car production evenly across all four factories, Kirkhorn said. Currently the California factory and Shanghai factory each produces half of Tesla’s global supply.
In addition, Tesla could potentially benefit from an inevitable recession, according to Musk. “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,” he said. “So we expect to see deflation in our input costs, which would likely then lead to better margin.” Musk didn’t address the possible impact of a recession on car sales.
There was no mention of layoffs, although in December Tesla paused hiring and warned about a wave of layoffs in the first quarter of 2023, according to electrek, an electric vehicle news site.
In December, Tesla slashed the prices of most Model 3 and Model Y cars by as much as 20 percent. Kirkhorn suggested prices will stay low for at least 2023 with the average price of Tesla cars just above $47,000. Meanwhile, Tesla expects to maintain its gross profit margin at above 20 percent, Kirkhorn said.
“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.
Looking forward, Tesla is less ambitious about increasing sales. Musk said his company aims to sell 1.8 million electric vehicles this year, which would be a 37 percent annual growth. In 2022, Tesla initially projected a 50 percent increase in vehicle delivery but ended up falling short by about 10 percent.
Tesla’s stock price dropped 70 percent 2022, erasing more than $700 billion in its market cap. It has quickly recovered losses this year so far, rising 48 percent since the beginning of the month.