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The recent electric car price reduction applied by Tesla around the world continues to be a hot topic, as it might significantly affect other manufacturers.
According to a recent Reuters article, titled “Tesla uses its profits as a weapon in an EV price war,” Tesla CEO Elon Musk started the EV price war, using the company’s “superior profitability as a weapon.”
Well, it seems an exaggeration to call the recent move a war and that Elon Musk started it. The world is more complex.
In the second half of 2022, we have seen how Tesla’s estimated order backlog is consistently decreasing to less than 100,000 electric cars as of the end of December. In other words, we would rather say that the market conditions triggered this move.
What is interesting in the Reuters article is the profitability data. According to the report, Tesla is able to earn up to several times more (per vehicle) than large carmakers (like Volkswagen, Toyota or Ford).
“Tesla earned $15,653 in gross profit per vehicle in the third quarter of 2022 – more than twice as much as Volkswagen AG (VOWG_p.DE), four times the comparable figure at Toyota Motor Corp (7203.T) and five times more than Ford Motor Co (F.N), according to a Reuters analysis.”
We must keep in mind that Tesla has a noticeably different business model than other major carmakers (direct sales vs. dealers), which does not allow us to directly compare them (part of the revenues go to dealers).
However, it’s true that the fundamental advantage of Tesla was lower manufacturing cost, which allowed it to achieve such high margins and noticeable price cuts when needed.
There is a chance that lower prices will translate into a higher number of orders and a continuation of expansion. At the same time, other manufacturers might be put in a difficult situation, depending on their potential to also reduce prices.
Reuters refers to the early 20th Century when Henry Ford slashed the prices of the Model T or Toyota’s cost advantage in the 1980s and 1990s. The year 2023 might be truly crucial for Tesla.
We are very curious about what will happen, but let’s note that there is always a risk that even price cuts will not help if the global economy enters some bigger recession.