Tesla says price drops are long-term thinking, but it’s really about demand
Tesla has just released its Q1 2023 earnings report amidst several price drops since the beginning of the year. This left investors questioning how these drops would affect margins, and Tesla has an explanation, but it’s perhaps only a partial one.
In a nod to the question on everyone’s lips, Tesla’s earnings report starts off immediately with a couple of paragraphs intended to address the effect of these price drops on its industry-high margins.
In the current macroeconomic environment, we see this year as a unique opportunity for Tesla. As many carmakers are working through challenges with the unit economics of their EV programs, we aim to leverage our position as a cost leader. We are focused on rapidly growing production, investments in autonomy and vehicle software, and remaining on track with our growth investments.
Although we implemented price reductions on many vehicle models across regions in the first quarter, our operating margins reduced at a manageable rate. We expect ongoing cost reduction of our vehicles, including improved production efficiency at our newest factories and lower logistics costs, and remain focused on operating leverage as we scale.
Tesla is pointing out that since its EV volume is so drastically higher than every other automaker’s, it can build cars at a lower cost than the competition.
And indeed, after yesterday’s price drops and other even larger price drops earlier this year, Tesla has gone from being near the top of the EV price range to near the bottom. Last year, Tesla repeatedly hiked prices while the industry faced supply challenges and EV demand well exceeded supply.
After tax credits, the base Model Y is now under $40k, while many electric SUVs have higher starting prices. And the base Model 3 is now available for $40k before credits are taken into account, though it now only qualifies for $3,750 due to the IRS’ new battery guidelines.
Tesla points out that these cuts reduced its margins but says that this margin reduction happened at a “manageable rate.” In Q1 last year, Tesla’s operating margin was 19.2%, and this year it’s 11.4%, a drop of 779 basis points.
This is a big chunk, cutting operating margins almost in half – and note that there have been further price cuts, both in the US and elsewhere, since the end of the quarter. So we could expect average selling prices to go down further in next quarter’s earnings and perhaps another cut to margins.
That said, Tesla is still planning to grow production at a CAGR of 50%, guiding for 1.8 million deliveries next year (about 31% growth from last year’s 1.37 million production). Tesla says it would rather focus on high volume and lower margins.
And it should be noted that higher volume also displaces more gas vehicles, which is better for the environment and public health.
There are other reasons for these price drops. For one, costs have come down, particularly with a massive global drop in the costs of resources like lithium after last year’s massive global spike. Also, as Tesla CEO Elon Musk has pointed out, rising interest rates have made it more expensive to get a loan on a car, which means Tesla has had to lower prices to make purchases seem more attractive (this is a case study in how rising interest rates can lower inflation).
But Tesla claims these margin cuts are manageable, and not only that, the company is taking a long-term view:
Our near-term pricing strategy considers a long-term view on per vehicle profitability given the potential lifetime value of a Tesla vehicle through autonomy, supercharging, connectivity and service. We expect that our product pricing will continue to evolve, upwards or downwards, depending on a number of factors.
Here, Tesla says that despite the vast majority of its revenue coming from sales of cars – in Q1, $19.9b came from cars and only $3.3b came from energy, services, and other – it feels confident that any losses in automotive sales revenue will be made up for in the long term by these other revenue categories.
Tesla currently sells access to its FSD Beta software for an eye-watering $15,000. This is an enormous chunk of change, particularly for a car that sells for $40k new. Tesla CEO Elon Musk has claimed that FSD has enormous value, though most who have used it recognize that it’s definitely not ready for primetime yet. Perhaps this is why timelines for its rollout keep getting pushed back. (Is it next year yet?)
Tesla also mentions Supercharging as a potential revenue center. Right now, Tesla doesn’t make a lot of money on Supercharging, but that may change very soon, as the company has started opening up Superchargers to other brands. Tesla used this opportunity to establish the “North American Charging Standard” using its connector, claiming that, since its connector is on the majority of cars and DC chargers in North America, other automakers should follow Tesla’s lead and use its plug.
This also opens the company up to the availability of billions of federal dollars earmarked for charger installation but which can only be used on chargers that are open to multiple brands of car. Until recently, only Teslas could use Superchargers, but now that they’re open to other cars, Tesla can presumably angle for some of those billions.
Finally, Tesla says that service could be a profit center, a big change from Musk’s original philosophy on the topic. Here’s a video from Tesla’s 2013 shareholder meeting, timestamped to 1:36 when his answer on service begins:
Clearly, things have changed since then, and Tesla is much larger and has different goals and considerations now than before. But in the context of discussing auto dealerships, with which Tesla is still in a battle, one would think that this overarching “philosophy” would not have changed with transient business conditions.
Nevertheless, this is one way in which Tesla could conceivably offer reduced upfront prices, with the hopes that the continual business of servicing vehicles in the field would help to shore up margins. Most other automakers don’t have this option since they don’t own their dealerships, but Tesla does, which gives it the flexibility to capture this portion of revenue. It sounds like the company now explicitly intends to seek this revenue after originally promising not to.
Electrek’s Take
But there’s another reason that Tesla doesn’t mention in its report: demand.
I know; we’ve heard it before. For the last decade, other automakers, media, incumbent industry, oil companies, captured regulators, and so on have all said that there just isn’t enough EV demand. We’ve called them wrong every time, and they’ve been wrong every time.
But specifically, here, we’re talking about demand solely for Tesla, after the huge price hikes that the company engaged in over the course of 2021 and 2022 and amid questionable public behavior by the CEO.
At the time when Tesla was raising prices, EV demand was very high, and EV supply was very low. This gave Tesla, the company with the most EV supply, significant pricing power.
Now, we still have high global EV demand, with many other brands selling out vehicles while gas cars go unsold. But in the US, we have an ever-changing tax credit environment, with some new rules going into place yesterday. This means there’s a lot of shifting happening in the industry, and it’s hard to predict which models will have the most demand as only some qualify for the tax credit (however, you can bypass most restrictions by leasing).
And while Tesla is mostly on the good side of this – its cars are now much lower in price, and most of them qualify for credits – it also has a ton of supply, is continuing to ramp quickly, and may be alienating potential customers.
Anecdotally (and in data), CEO Musk’s recent behavior related to the Twitter “dumpster fire” he keeps burning his money in has affected the company’s reputation. Musk says that TSLA shareholders will benefit in the long term from all the irrelevant nonsense he’s very publicly getting himself into, but we are not convinced.
So between high prices, erratic behavior from the CEO, and availability of other EV models, customers have perhaps looked elsewhere over the last year. As a result, Tesla’s inventory started to grow in a way that the company hasn’t ever really dealt with before, and it had to start pulling demand levers. It first did this with incentives, but this year has focused instead on large price drops.
Those price drops will definitely be able to bring some customers back, but it remains to be seen if some customers were permanently turned off by the high-profile behavior of the CEO.
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Tesla’s driverless robotaxi has been spotted in Austin for the first time, but it is being followed by a trailing car with a driver.
CEO Elon Musk now says that Tesla aims to “tentatively” start its service on June 22.
Tesla now plans to operate its own small internal fleet of vehicles with dedicated software optimized for a geo-fenced area of Austin and supported by “plenty of teleoperation.”
The company has been discussing the launch of its paid service in June, but as we reported, it only officially began the “testing” phase earlier this week, according to Austin’s official website.
Musk admitted that Tesla only started testing the system without safety drivers at the end of May.
In comparison, Waymo tested its system, which was already in operation driverless in other cities, for 6 months with safety drivers and 6 months without safety drivers before launching its service in Austin earlier this year.
Now, a Tesla Model Y without a driver was spotted in Austin for the first time:
From the video, we can see that a second Tesla vehicle is trailing the driverless vehicle, likely with a remote teleoperator ready to take control or activate a kill switch.
As we previously reported, Tesla has been building a team of teleoperators to remotely control its vehicles when needed.
Just this week, days before the planned launch of the service, Tesla has posted a new job listing for engineers to build a teleoperation system with as low latency as possible.
Having a trailing car can address the latency problem.
After sharing the video above, Musk highlighted that these are unmodified Model Ys, like the ones that Tesla delivers to customers. This prompted someone to ask when Tesla plans to deliver unsupervised self-driving to customers, as he promised every Tesla vehicle produced since 2016 would be capable of doing.
Musk didn’t confirm it, but he said that the custom software running on those vehicles have about 4 times more parameters than the current version (FSD v13) in customers vehicles and he could see that being deployed in the customer fleet later this year:
It’s a new version of software, but will merge to main branch soon. We have a more advanced model in alpha stage that has ~4X the params, but still requires a lot of polishing. That’s probably ready for deploy in a few months.
As we previously reported, this fleet deployment in Austin is quite a moving of the goal post for Tesla, which has been promising unsupervised self-driving in all vehicles since 2016.
This service is only going to work in a geo-fenced area where Tesla is optimizing its FSD software to perform better, and it is supported by teleoperation, something that can’t be scaled to the customer fleet.
Electrek’s Take
I don’t know why Musk wants to emphasize that Tesla is using the same vehicles it delivers to customers as if it’s a giant advantage over Waymo.
We know that Tesla’s hardware approach is much cheaper than Waymo. That’s not new. The real question has always been about safety and performance.
I can see this program eventually helping FSD progress, but as you can see, Musk is not stating that unsupervised self-driving in customer vehicles will be achieved when the new customer version of FSD, which comes out of this custom software, reaches the market.
Even if this 10x the miles between disengagement in the current version, which would be impressive, Tesla would still only be at about 5,000 miles. That’s behind the competition and nowhere near what’s needed for level 4 unsupervised self-driving.
At this point, I expect Tesla to start admitting that HW4 will not support unsupervised self-driving in customer vehicles by the end of 2026.
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Porsche is preparing to release its Cayenne EV in the next year or so, but that didn’t stop it from taking the car out in secret to a hillclimb meet, where it utterly destroyed the previous course record previously held by a 12-cylinder Bentley Bentayga.
Hillclimbing is a specialized sort of racing where cars start at the bottom of a hill and then race to the top of it. And it’s a type of racing where electric cars do quite well because of their high amounts of instant torque and fast low-end acceleration.
We’ve covered some other hillclimbs before, such as the famous Pike’s Peak hillclimb, where EVs shattered records last year, and where Ford is running an unrecognizably modified Mach-E this year in just a couple weeks. EVs do well here due to the race’s high altitude, which leads to inefficient combustion from gas-powered cars due to low oxygen in the air, which EVs don’t have to worry about.
And hillclimbing is popular in the UK, where courses are much shorter than the brutal 12.42-mile “race to the clouds” at Pike’s Peak. Most UK courses are more like a mile long, give or take.
One of the most famous in the UK is Goodwood hill climb where an electric “fan car” holds the overall course record and where Ford competed (and won) with its ridiculous 1,400hp electric van.
Another course, part of the British Hill Climb Championship, is Shelsley Walsh, where this last weekend’s news happened. The race was first contested in 1905, with a length of 1,000 yards (910m, .57mi).
So, it’s just a sprint, and it’s a sprint that a Cayenne EV just absolutely destroyed every other car in its class on – even though the car isn’t out yet. It’s expected to get a full unveil later this year, but that didn’t stop Porsche from flexing its muscles ahead of release.
Porsche took a prototype version of its upcoming EV out to Shelsley Walsh, where it was looking to beat a record previously set by the Bentley Bentayga W12, an absolutely bonkers ultra-luxe SUV with a massive 12 cylinder, 6 liter twin-turbo engine capable of producing 600hp.
But that gigantic engine proved to be no challenge for the Cayenne, which crushed the antiquated dino-burner’s record by several seconds.
On such a short lap, records are often set by tenths or hundreds of a second, but the Cayenne EV beat the Bentayga’s 35.53 second record by more than four whole seconds, setting a new time of 31.28. Watch it below (the Cayenne EV’s part starts at 2:36:30, if the deep-link doesnt work):
(*Porsche told us those engine sounds are from another vehicle near the microphone, not from the Cayenne EV itself)
In the video, the Cayenne is extremely well behaved up the course, exhibiting very little body roll for such a large vehicle. This is owing to the low center of gravity characteristic of many EVs, due to the weight of the car being in the battery at the bottom of the vehicle, and to Porsche’s active suspension.
And on such a short run, the instant acceleration of the Porsche gave it a lasting advantage over the hulking Bentayga W12, allowing it to crush the previous record.
The Cayenne EV was driven by Gabriela Jilkova, Porsche’s development driver for its Formula E team. It even beat the production electric car record which was previously held by another Porsche, the Taycan Turbo. That record was 31.43 seconds, so the Cayenne was just able to pip it.
It isn’t, however, the fastest electric vehicle up the hill – that’s currently a 30.46, set in 2018 by Mitch Evans in a Jaguar Formula E car (from an earlier generation – surely the new Gen 3 EVO cars would be even quicker).
As of now, we still have no final numbers on what sort of specs the Porsche Cayenne will have, as the vehicle is still in prototype form and hasn’t gone through homologation. So, Porsche is still figuring it out like the rest of us, but from these results, it looks like they’ve got something good on their hands.
Electrek’s Take
Now this is just one race, and not a particularly famously-contested one. There are surely cars that haven’t run this hill that would beat the Cayenne up it. But 4 seconds is a huge record on such a short course, and is certainly a shot across the bow, such that we can’t wait to see where else Porsche takes this thing and what other gas SUVs it might be able to embarrass.
When I reviewed the 576-hp Macan EV Turbo, I found it to be absurdly, unnecessarily quick.
It also handled very well for a large vehicle (and it is indeed large – almost twice the weight of my own EV, a Tesla Roadster). An SUV is still not a sportscar, but I had no particular misgivings when driving it… except perhaps that maybe it was too powerful, and that I preferred the 4S since I just never knew when I would need the amount of power the Turbo could put down.
So I’m not surprised that its bigger sibling, the Cayenne EV, would also perform extremely well here. Porsche knows how to make a car and how to make it perform well, and somehow they’ve even brought that magic to a vehicle as big as the Cayenne EV.
So, I’m looking forward to a time that I get to bring the Cayenne EV to a Porsche meetup, just like I did with the Macan, and have another dad tell his child “you wanna see the fastest car here? it’s that one.” And it’ll have the records to prove it.
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EVs got a little more affordable in May, and Tesla’s price drop had a lot to do with that. According to new data from Kelley Blue Book, the average transaction price (ATP) for a new EV in May was $57,734. That’s down from $59,123 in April. Year-over-year, that’s a 1.1% drop.
At the same time, incentives are heating up. The average EV incentive in May hit $8,225, or 14.2% of the ATP. That’s more than double the average incentive across the broader auto industry and higher than last May’s 12%. According to Cox Automotive, that makes May the most incentive-heavy month since what Cox Automotive calls the beginning of the modern EV era, which is when EVs passed the 1% market share mark, in 2018.
Tesla’s prices played a big role in this shift. The company’s ATPs dropped 1.5% in May, landing at $55,277. Year-over-year, Tesla prices are down 2.8%.
The Model 3 and the Cybertruck inched up in price in May, but just barely – less than 1%. Every other Tesla model saw prices fall month-over-month. The Model Y, Tesla’s top seller and the most popular EV in the US, dropped 2.9% from April to an average price of $53,895.
Read more: Cybertruck sales slump as EV prices rise and incentives dry up
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