Ever wonder why Tesla has been cutting prices?
On 19 April 2023, Reuters cut US prices for the 6th time this year as per the news article above. It is interesting why Tesla would make this move when they can maintain the price to profit more.
An extract from a recent FT news article dated 20 Apr 2023:
Elon Musk has indicated he is willing to sacrifice Tesla’s profits in the short term in an aggressive push for market share, with the aim of making more money later when the company’s cars are fully autonomous and can earn extra fees by operating as “robotaxis”. The Tesla chief executive’s unconventional justification for why shareholders should stomach lower profits came as the US electric-car maker reported that price cuts this year had driven its profits margins in the first quarter below already-reduced forecasts.
Have we considered Scale Economics Shared (SES)?
Here is an explanation of Scale Economics shared (SES):
“Scale Economics Shared operations are quite different. As the firm grows in size, scale savings are given back to the customer in the form of lower prices. The customer then reciprocates by purchasing more goods., which provides greater scale for the retailer who passes on the new savings as well. Yippee. This is why firms such as Costco enjoy sales per foot of retailing space four times greater than run-of-the-mill supermarkets. ‘Scale economics shared’ incentivises customer reciprocation, and customer reciprocation is a super-factor in business performance.”
Source: http://mastersinvest.com/newblog/2020/9/16/learning-from-nicholas-sleep
I see some similarities in the “Scale Economics Shared (SES)” mentioned previously by Nick Sleep (Nomad). Be it a deliberate intent to share cost savings with customers or a business strategy to improve the demand, the recent cost reductions seem “somewhat” justified given their impressive efforts to bring costs down.
Twitter announcement about the new Giga Nevada (25 Jan 2023)
With the opening of the new Giga Nevada, we can also expect more savings, supply chain control and operational optimization. Some of the economies of scale gained can easily be shared with the customer. It is a gain for Tesla, an advantage to the customers and bad news for the competition.
My investing muse
With the price reductions, Tesla has become even more affordable. The price drops would be more attractive for all who wish to own an EV like Tesla. This will also add pressure on the other car makers who have priced their vehicles in similar brackets. Tesla models are challenging more vehicle categories. This allows a more premium car to be made more accessible and more affordable.
The main challenge remains the affordability of the vehicles in the current interest rate environment. The price drops will only play in the favour of Tesla.
For investors, Elon has warned about the impact of profits to gain volume of sales. Thus, the coming earnings may not be as good as previous but the price advantage has opened up more appeal. The rumours of a more “affordable” Tesla model will help Tesla to hit the goal of 20 million units in annual sales.
This would make Tesla’s coming earnings of great interest. Will this turn out to be a master stroke for Elon?
@TigerStars
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