Musk describes Tesla’s recession book: cost recovery

Jan 26 (Reuters) – Elon Musk has a playbook for Tesla (TSLA.O) heading into what he thinks is a “serious” recession: cutting costs on everything from parts to logistics, while maintaining pressure on competitors with reduced prices. .

During a conference call to discuss Tesla’s fourth quarter results, Musk and other executives outlined plans to reshape the electric vehicle (EV) maker’s cost base after cutting prices by up to 20% , a move that some analysts see as the first blow in a price war. .

Part of the plan is to expand production at Tesla’s new factories in Berlin and Austin, Texas, and increase the company’s in-house battery production as scale saves money, the companies said. leaders.

But chief financial officer Zachary Kirkhorn said the company would also “address all other cost areas and eliminate cost increases created over several years of COVID-related instability.”

That would mean running Tesla factories with fewer materials in stock, reducing shipping and logistics costs and negotiating lower prices for components, he said, warning Tesla suppliers.

Among its suppliers, Tesla buys batteries from Japanese Panasonic (6752.T) and Chinese CATL (300750.SZ), and buys the massive presses it used to reduce production costs and complexity from the Italian group IDRA.

Tesla is also cutting costs by redesigning elements of the battery and electric motor systems, 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 has already made gains in cost competitiveness by offering simplified hardware designs for its electric vehicles, taking inspiration from consumer electronics makers. .

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

Meanwhile, the cost of lithium in electric vehicle batteries – the most expensive component – will be higher in 2023 than last year, Kirkhorn said, pressure that will hit Tesla’s rivals losing even more money. money on electric vehicles.

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


Tesla said on Tuesday it would invest more than $3.6 billion to expand its Nevada factory complex and increase battery cell production so it can produce enough there to power 2 million vehicles a year. .

Tesla has planned to sell 1.8 million electric vehicles this year, which would mean sales growth of around 37%. That annual number could reach 2 million vehicles, barring an external shock, Musk said.

Its shares rose nearly 7% in premarket trading on Thursday.

Tesla averaged nearly $9,100 in profit per vehicle sold in the fourth quarter, down 6% from the previous quarter but still well ahead of its established rivals. Tesla’s third-quarter profit per car sold was more than seven times that of Toyota Motor Corp (7203.T), for example.

Tesla cut prices by 20% earlier this month, a move that broadened the range of its lineup that qualifies for tax credits of $7,500 per vehicle in the United States.

But analysts have focused on Tesla’s ability to maintain a basic measure of profitability, gross margin on auto sales, excluding credits.

Kirkhorn said Tesla expects to see that metric above 20% for 2023 with the average price of its vehicles above $47,000 even after the discounts. By comparison, the average price of a new vehicle was just over $49,500 in the US market in December, according to Kelley Blue Book.

Cutting costs is also key for 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 vehicle that analysts expected a price below $35,000.

“As competition in the electric vehicle space continues to heat up, Tesla’s focus on electrical efficiency and investment in battery technology likely makes them difficult to hunt in the near term,” they said. said Cowen and Company analysts.

Tesla also plans to roll out a revamped version of the Model 3 sedan later this year under the codename “Highland” with a partial focus on lowering production costs, Reuters reported.

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

“Price really matters. I think there’s only so many people who want to buy a Tesla but can’t afford it,” Musk said.

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

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