Tesla Inc (TSLA.O) makes more money for each vehicle it sells than any of its global rivals. Now, Chief Executive Elon Musk is using that superior profitability as a weapon in the EV price war he began.
In that context, Tesla, once one of the auto industry’s greatest money losers, has over the past year built a dominant lead over most top rivals in profit per vehicle, according to a Reuters analysis of industry data.
Tesla made $15,653 in gross profit per vehicle in the third quarter of last year – five times more than Ford Motor Co (F.N), four times the comparable figure at Toyota Motor Corp (7203.T), and more than twice as much as Volkswagen AG (VOWG_p.DE), according to a Reuters analysis.
For most of this year, Tesla joined rivals in aggressively hiking prices on its best-selling vehicles, such as the Model Y SUV. Shortages of semiconductors and other components held auto industry production down, allowing firms across the industry to focus on higher-margin models and record robust profits, even as sales volumes slumped.
Tesla’s decision to change course and spend its production-cost advantage on price cuts now called into question the profit-over-volume strategies legacy automakers such as GM have pursued since the 2008 financial crisis, and doubled down on during the pandemic.
To limit production costs, Tesla has invested greatly in new manufacturing technology – such as the use of large castings in place of small metal parts. Tesla purchased battery manufacturing and other parts of its supply chain in-house, and standardized vehicle designs to improve economies of scale.
Using production-cost advantages to finance price cuts has a strong history in the auto industry.
Henry Ford cut prices on his Model T in the early 20th Century as his innovative mass-production system perked up. During the 1980s and 1990s, Toyota used the cost lead offered by its lean production system to provide features at prices Detroit automakers struggled to keep up with. Now, Toyota is reviving its strategy under pressure from Tesla.
Growth in electric vehicle demand outperformed the overall market in the United States and worldwide during 2022. That encouraged automakers to lift EV prices higher. Ford raised prices for its electric F-150 pickup by 40% last year.
But analysts are cautioning the global EV market could soon have more production capacity compared to demand.
By 2026, North American EV demand will reach a level of about 2.8 million vehicles per year, said industry forecaster Warren Browne. But North American EV plants will be able to build more than 4.5 million vehicles, putting overall capacity utilization at just below 60%, he said.
In China, the end of central government subsidies is precipitating a market share war among rivals in the world’s biggest EV market.
“Tesla has taken the nuclear option to bully the weaker, thin margin players off the table” in China, said Bill Russo of Automobility, an industry consultancy in Shanghai. “Big pie, fewer slices, more to eat for those that remain.”
Startups such as China’s Xpeng Inc (9868.HK) had profited from Tesla’s price increases. Now, Xpeng is slashing prices in China – but with less financial leeway than Tesla. Xpeng posted a gross profit of $4,565 in the third quarter, and a net loss of $11,735 per vehicle, according to company data reviewed by Reuters.
“We hope more people can access smart vehicles after we make our cars increasingly affordable,” Xpeng said in a statement.
Vietnamese EV startup Vinfast said Thursday it will adopt price promotions to retaliate against Tesla.
Chinese EV market leader BYD Co Ltd (002594.SZ) announced price hikes taking effect on Jan. 1 after Beijing got rid of EV subsidies. So far, BYD has not responded to Tesla’s most recent price cuts in China. However, BYD’s gross margins of $5,456 a vehicle give it more leeway in a price war as opposed to VW, GM, or Toyota.