San Francisco — The profitability of Tesla’s so-called affordable new cars will be in focus when the electric vehicle (EV) maker reports quarterly results on Wednesday, and analysts think that thousands of dollars in cost cuts per vehicle will not be quite enough to protect profit margins.
The standard Model Y and Model 3, introduced earlier this month, represent a bet by Elon Musk that Tesla can increase overall sales and earnings by driving volume, even if each vehicle itself is less profitable. He has prioritised robotaxis in Tesla’s future but must keep sales up while the new machines are developed.
The Model Y and Model 3 are priced between $5,000 and $5,500 lower than their predecessors in the US. Cutting battery size, offering a less powerful motor, removing rear touchscreens and myriad other current details have saved thousands of dollars.
“Tesla’s intent is clear: trade short-term margin for long-term network scale,” said Shay Boloor, chief market strategist at Futurum Equities, who said some cannibalisation of sales of pricier models was to be expected.
The new vehicles offer cheaper ways into a Tesla in Europe and Asia, where Chinese EVs are gaining ground, and partially offset the elimination of a federal tax credit in the US. That credit ended in September, leading to a last-minute jump in US sales, which will be reflected in quarterly results. Analysts polled by Visible Alpha expect an 8.5% fall in deliveries for the year, an issue that Musk might address.
Analysts and investors have said the new variants are still too expensive. And Tesla is walking a careful line, with many of the premium features as well as basic ones stripped out.
The smaller battery and the less powerful motor accounted for 40% of the price cut, according to estimates from Sam Fiorani, vice-president at research firm AutoForecast Solutions. Tesla avoided a deeper cut to the battery in order to offer a range of 516km per full charge on both of the variants.
Basic features
Instead, the company chose to remove many other parts, Fiorani said. It dropped ventilated, vegan leather seats, ambient lighting and power-folding mirrors. Gone are even basic features such as seat-side buttons to change position, seat-back pockets and the waterproof lining in the front trunk or “frunk”.
“The removal of components is enough to make a buyer think about moving up to the other model,” said Fiorani.
Tesla’s gross margin from automotive sales has dropped in the past few years as it slashed prices and offered incentives to stave off rising competition and waning demand due to high interest rates, an ageing line-up and consumer backlash against Musk’s political views.
“The big question is, how much incremental demand is there at this point with the staleness of their vehicle portfolio?” said Garrett Nelson, a senior equity analyst at CFRA Research.
The results will also show the speed at which a key driver of Tesla’s profit is disappearing. The US government has changed policy on regulatory credits that traditional vehicle makers bought from EV companies to make up for the pollution from internal combustion vehicles. The new policy means future sales of the credits are unlikely, and they may have dried up in the third quarter as well.
Reuters
