Tesla: Unit Cost Per Vehicle Is What Matters?Most

Sep. 11, 2023 10:11 AM ET Tesla, Inc. (TSLA)

Summary

• The market’s concentration on Tesla, Inc. gross profit margins overlooks the lack of progress in cutting unit production costs.
• Tesla’s ability to grow gross profit globally has been aided by first mover advantage in the USA and other markets outside China, giving it considerable pricing power.
• Tesla’s ability to cut prices and increase demand is now challenged by other BEV manufacturers in China who are also cutting their prices to capture market share.
• Pricing power has camouflaged the fact Tesla’s unit production costs have not been decreasing. With diminishing pricing power, Tesla must start to meaningfully cut unit production costs.
• Unless there is a start to ongoing cuts in unit production costs, enabling ongoing BEV price cuts, while maintaining margins, the Tesla profit growth story will be invalidated.

Introduction

The article delves into the significant factor often overlooked by the market when evaluating Tesla, Inc. While the focus often centers on Tesla’s impressive gross profit margins, it’s equally crucial to assess the company’s progress in reducing unit production costs. In this analysis, we explore how Tesla’s ability to cut costs per vehicle is vital for its sustained profitability, particularly in the face of increasing competition in the electric vehicle (EV) market.

Tesla’s Pricing Power and?Growth

Tesla has thrived on its first-mover advantage in the USA and other non-Chinese markets, affording it substantial pricing power. This advantage enabled the company to expand its gross profit globally. However, the landscape is evolving, as Chinese EV manufacturers are aggressively cutting prices to seize market share. Tesla’s traditional pricing strength is being challenged.

The Need for Cost Reduction

Underlying Tesla’s pricing strategy is the fundamental goal of reducing unit production costs continuously. This is achieved through efficient design and manufacturing processes, facilitating the reduction of vehicle prices to reach a broader consumer base and, consequently, realizing economies of scale.

Evaluating Tesla’s?Progress

Despite achieving considerable gross profit margins and profitability, Tesla’s ability to reduce unit production costs is in question. The company experimented with pricing elasticity, raising prices during production shortfalls and reducing them to boost demand during excess production periods. While this approach worked well for Tesla, it faces limitations in the long run if production costs remain high.

The Challenge Ahead

To justify its current share price, Tesla must significantly increase earnings, necessitating higher sales volumes and margins. Expanding sales volumes demands continuous price reductions, while sustaining margins requires consistent reductions in unit production costs.

The Current Situation

The article presents an in-depth analysis of Tesla’s financial data. Notably, it shows that Tesla has not achieved the necessary reductions in unit production costs to facilitate ongoing price reductions and drive substantial volume increases while preserving high margins.

Incremental Analysis

The incremental analysis of Tesla’s automotive sales, production costs, and gross profit margin reveals some concerning trends. While economies of scale may initially contribute to cost reduction, the data suggests that Tesla’s unit production costs have not seen significant improvements since the end of 2021, despite a nearly 50% increase in delivery volumes from 2021 to 2022.

Quarterly Assessment

A closer look at quarterly figures indicates fluctuations in unit production costs. For instance, the adjusted average cost per vehicle sold increased from Q4 2021 to Q2 2022 but has gradually decreased since then. However, the Q1 2022 cost was only marginally lower than Q4 2021, raising concerns about the sustainability of cost reduction efforts.

Summary and Conclusion

The article concludes by highlighting the erosion of Tesla’s first-mover advantage due to increasing competition from manufacturers capable of producing quality EVs at competitive prices. While Tesla’s gross profit margins have grown, it attributes much of this success to pricing power. The article argues that since the end of 2021, unit production costs have remained relatively unchanged, while vehicle prices have substantially decreased.

The critical question raised is whether Tesla can maintain profitability as it further reduces prices to expand its market share. Achieving this balance hinges on Tesla’s ability to lower unit production costs. The article maintains a “Hold” rating on Tesla’s stock, emphasizing the need for improvement in this aspect to justify the current share price.

In conclusion, the article underscores the imperative for Tesla to continue reducing unit production costs to navigate the competitive EV market successfully and sustain its profitability in the future.

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