Tesla will sacrifice profit for higher volume — CEO Elon Musk

Telsa is willing to sacrifice profit for higher volume in the short term, said CEO Elon Musk, reaffirming the automaker’s commitment to price cuts after missing first-quarter expectations for total gross margin.

“We’ve taken the view that pushing for higher volumes and a larger fleet is the right choice here, versus a lower volume and higher margin,” Musk said on Wednesday’s quarterly earnings call. “However, we expect our vehicles over time will be able to generate significant profit through autonomy.”

Moreover, Musk said, Tesla’s margins remain among the healthiest in the industry even after multiple rounds of price cuts this year for its Model 3 sedan, Model Y crossover, Model S sedan and Model X crossover.

“While we reduced prices considerably in early Q1, it’s worth noting that our operating margin remains among the best in the industry,” Musk said, adding that global production should reach between 1.8 million and 2 million this year. In 2022, Tesla reported global production of about 1.4 million.

Musk also said on the call that he expects Tesla’s software and hardware combination to achieve autonomy in the near future on its current fleet of consumer vehicles.Tesla sells driver-assistance software that it calls Full Self Driving for $15,000, even though Tesla vehicles cannot drive themselves and require a human driver to be in control at all times.

Tesla missed market estimates for first-quarter total gross margin after cutting prices in the U.S. and globally.

Tesla reported total gross margin of 19 percent, compared with expectations of 22 percent, according to analysts polled by Refinitiv data cited by Reuters. The EV maker’s net income during the latest period dropped 24 percent to $2.5 billion.

Tesla reported global deliveries of 422,875 in the first quarter, a 4.3 percent increase compared with the previous quarter. The small quarter-on-quarter growth suggests price cuts were necessary to maintain momentum amid rising EV competition and higher interest rates.

The EV maker likely sold 161,630 vehicles in the U.S. in the January-March period, according to an estimate from Cox Automotive, for a 25 percent increase compared with a year earlier. Tesla doesn’t break out U.S. sales.

Tesla is also eligible for new EV tax incentives of up to $7,500. Its best-selling Model Y that was priced just over $65,000 last year without access to tax incentives is now just over $50,000 with the incentive now available.

Analysts say the price cuts are good for juicing volume but could hurt the EV brand over time.

“Ongoing price cuts and the latest federal tax credit rules are making Tesla’s intended mass-market vehicles, Model 3 and Model Y, far more attainable,” said Jessica Caldwell, executive director of insights at Edmunds. “In the long term, however, Tesla is walking a razor’s edge between maintaining its brand prestige while simultaneously attempting to grow volume.”

Musk also said on the earnings call that Tesla is preparing to launch its Cybertruck later this year and will probably have a delivery event in the third quarter. The automaker’s year-old Texas factory is tooling up to make the pickup.

“There’s a tremendous amount of demand for the product, obviously,” Musk said. “It is, in my view, a fantastic product, a hall-of-famer. But as with all new products, it takes time to get the manufacturing line going.”

Tesla also said it is making headway on ramping up production for an in-house battery cell called the 4680 for its dimensions in millimeters.

Tesla said profitability was weighed down by higher costs for raw materials, logistics and underutilization of new factories.

The company reported first-quarter revenue jumped 24 percent to $23.3 billion, just below a consensus estimate of $23.2 billion, according to 14 analysts polled by Refinitiv, Reuters said.