© Reuters. FILE PHOTO: FILE PHOTO: Visitors check out a Tesla Model 3 next to a Model Y on display at the US electric vehicle (EV) maker’s showroom in Beijing, China, February 4, 2023. REUTERS/Florence Lu
By Akash Sriram and Hyunjoo Jin
(Reuters) – Tesla Inc (NASDAQ:) chief Elon Musk on Wednesday doubled down on a price war he launched at the end of last year, saying the electric car maker would prioritize sales growth over profit in a weak economy.
The company reported its lowest quarterly gross margin in two years, below market estimates, and did not disclose another key margin measure to investors as it cut prices aggressively in markets including the United States and China to stimulate demand and fend off rising competition.
Shares of the Austin, Texas-based automaker fell 6% in after-hours trading.
“It’s better to convert a large number of cars with a smaller margin and harvest that margin in the future because we’re achieving full independence,” Musk told analysts on a conference call. He said that although the economy remains uncertain, the vehicle manufacturer’s orders have outpaced production.
Musk, who previously said he would have liked to achieve 2 million car deliveries this year, declined to reaffirm that on Wednesday but stuck to the company’s official goal of 1.8 million deliveries.
Tesla also didn’t announce gross margin for cars, a number investors are watching closely, with Musk citing the weak economy as a reason for not disclosing.
Musk had previously said the company could sacrifice its industry-leading margins to drive volume growth during a recession and keep up with growing competition in China, where it faces stiff competition from local favorite BYD (OTC:) Ltd.
China’s auto sales growth was flat in March, according to the China Passenger Car Association.
“Tesla’s worrying sales numbers in China indicate that demand for its cars is slowing more than expected in the face of increased competition from domestic electric vehicle companies,” said Jesse Cohen, senior analyst at Investing.com.
Tesla said in a statement that it still believes its operating margin will remain the highest among major automakers.
The company reported gross profit margin of 19.3%, below market expectations of 22.4%, according to 14 analysts polled by Refinitiv.
Graph: Tesla price cuts conflict with gross margins – https://www.reuters.com/graphics/USA-STOCKS/TESLA/jnvwylmkevw/chart.png
Chief Financial Officer Zachary Kirkhorn pledged in January that Tesla would never fall below the auto gross margin of 20% and average selling price (ASP) of $47,000 across models.
On Wednesday, Tesla said its service price fell in the first quarter from the previous year, but gave no details.
The company said that deliveries of its pricier Model S and Model X vehicles fell from the previous quarter
Analysts say the electric car maker may need to cut prices further, due to the pressures of a price war especially in China even as its new factories in Berlin and Texas produce cars.
In the first quarter, Tesla posted a record $14.38 billion in inventory, up from $6.69 billion a year earlier.
It burned $154 million in cash during the quarter, and would have consumed more had it not been for a $1.6 billion gain attributable to “return on accrual investments.”
new models
In 2020, Musk announced plans to produce a new battery cell to cut the cost of the most expensive part of the electric car in half, but he admitted at Tesla Investors Day last month that the company is still struggling to ramp up production of these cells.
Musk is looking to cut battery costs to make good on his promise to make a $25,000 car, and fans have long been eager for Tesla to update its aging model lineup.
“Our experts say Tesla is overly reliant on its Model 3 and Model Y for growth… Investors are keen to launch a new product soon,” said Urwa Mohamed, an analyst at Thirdbridge. “In particular, they need a full-size SUV to replace the Model X and a smaller, cheaper Model 3 to drive the size.”
In January, Musk said that Tesla expects to start production of the Cybertruck this summer, but that volume production won’t happen until next year.
Musk said on Wednesday’s call that he expects a Cybertruck delivery event in the third quarter.
Tesla confirmed that it expects to deliver about 1.8 million vehicles this year.
Tesla’s net profit fell by about a quarter to $2.51 billion from a year earlier, dragged down by higher raw materials, logistics and warranty costs as well as increased production of its 4,680 battery cells.
Income adjusted for one-time items and revenue were consistent with Refinitiv’s estimates.
Graph: Tesla Earnings – https://www.reuters.com/graphics/EARNINGS-AUTOMATED/TSLA-OQ/akveqnboovr/chart.png