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Musk outlines Tesla’s recession playbook: Claw back costs

Jan 26 (Reuters) – Elon Musk has a playbook for Tesla ( TSLA.O ) heading into what he believes will be a “severe” recession: cut costs on everything from parts to logistics while squeezing rivals held with reduced prices on stickers.

In a conference call to discuss Tesla’s fourth-quarter results, Musk and other executives outlined plans to reshape the electric carmaker’s cost base after cutting prices up to 20%, a move some analysts see as the first shot in a price war.

Part of the plan is to expand production at Tesla’s newest factories in Berlin and Austin, Texas, and increase the company’s in-house production of batteries as economies of scale bring economies of scale, executives said.

But CFO Zachary Kirkhorn said the company would also “attack all other cost areas and unwind cost increases created by several years of COVID-related instability.”

That would mean running Tesla factories leaner with fewer materials in stock, reducing shipping and logistics costs and negotiating lower prices for components, he said — which put Tesla’s suppliers on notice.

Among its suppliers, Tesla buys batteries from Japan’s Panasonic ( 6752.T ) and China’s CATL ( 300750.SZ ), and sources the massive presses it has used to take cost and complexity out of production from Italy’s IDRA group.

Tesla is also cutting costs by redesigning elements of battery and electric motor systems and removing features that owners don’t use, based on data collected from Model 3 sedans and Model Y SUVs on the road, the company said.

Bill Russo, founder of China-based consultancy Automobility, said Tesla had already made gains in cost competitiveness by running simplified hardware designs for its electric vehicles, taking a page from consumer electronics makers.

“You can offset some of the margin hit from pricing with massive scale and simpler electronic architecture,” Russo said. “That’s how they try to win the game.

Meanwhile, the price of lithium in EV batteries — the single most expensive component — will be higher in 2023 than last year, Kirkhorn said, a pressure that will hit Tesla’s rivals, who are still losing money on electric cars, harder.

“My guess is if the recession is severe, and I think it probably will be, but I hope it won’t lead to a meaningful drop in almost all of our input costs,” Musk said. “So we expect to see deflation in our input costs, which would probably lead to, well, better margin.”

PROFITABILITY KEY

Tesla said Tuesday it would invest more than $3.6 billion to expand its Nevada factory complex and increase production of battery cells so it could produce enough there to power 2 million vehicles annually.

Tesla predicted it would sell 1.8 million electric cars this year, which would mean sales growth of about 37%. The annual number could be as high as 2 million vehicles if you don’t have an external shock, Musk said.

Tesla earned an average profit of nearly $9,100 per sold cars in the fourth quarter, down 6% from a quarter earlier, but still far more than established competitors. Tesla’s third quarter profit per car sales were more than seven times higher than Toyota Motor Corp ( 7203.T ), for example.

Tesla cut prices by as much as 20% earlier this month, a move that widened the range of its lineup that qualifies for a $7,500-per-car tax credit. vehicle in the United States.

But analysts have focused on how well Tesla can maintain a core measure of profitability, the gross margin on car sales, excluding credits.

Kirkhorn said Tesla expected to see that target exceed 20% by 2023, with the average price of its vehicles above $47,000 even after rebates. By comparison, the average price of a new vehicle was just over $49,500 in the U.S. market in December, according to Kelley Blue Book.

Getting costs down is also key to the next phase of Tesla’s expansion, which Musk hinted the company would detail at its investor day in March: plans for an affordable electric car that analysts have expected to be priced below $35,000.

Tesla also plans to roll out a revamped version of the Model 3 sedan later this year, codenamed “Highland,” with a focus in part on reduced production costs, Reuters has reported.

The company’s average price per vehicle, including all categories of its expenses, was nearly $44,000 in the fourth quarter.

“The price really matters. I think there’s just a large number of people who want to buy a Tesla but can’t afford it,” Musk said.

(This story from January 25 has been re-filed to remove an extraneous word in section 5)

Reporting by Kevin Krolicki in Singapore and Abhirup Roy in San Francisco; Additional reporting by Norihiko Shirouzu in Beijing; Editing by Kenneth Maxwell

Our standards: Thomson Reuters Trust Principles.

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