Tesla Counts the Cost of Its Price War -- Heard on the Street

Tesla(TSLA.US)

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By Stephen Wilmot

It shouldn't have been a surprise that big price cuts have a big impact on margins, but such is the magical thinking around $Tesla(TSLA.US)$ that somehow it was.

The electric-vehicle maker reported an 11.4% operating margin for the first quarter, down from 19.2% a year ago. Analysts were expecting 12.2%, according to FactSet. This was the performance metric Wall Street was most focused on after a series of aggressive price cuts by the company, and the stock fell about 4% in after-hours trading.

Tesla's margin decline wasn't just about price cuts. It sold 36% more vehicles in the quarter, but the cost of those vehicles grew by 39%. That implies inflation in the bill of materials despite Tesla's growth, which should allow it to get better deals with suppliers. But cost pressures might ease from here, given the declining price of lithium and increasing capacity at Tesla's new factories in Berlin and Austin, Texas.

The company called the margin decline "manageable," and pointed out that its profitability still compares favorably with the wider auto industry. More creatively, it also implied that it might make up some of the lost margin on its first-quarter sales later "through autonomy, supercharging, connectivity and service."

As is his habit, Chief Executive Officer Elon Musk repeatedly stressed the value of autonomy, in particular on a call with analysts. Automated driving does indeed seem to be something consumers are prepared to pay serious money for. The problem is that it isn't an area where Tesla has shown a convincing technical lead over its peers, suggesting the value is likely to be competed away. Mr. Musk once again claimed that "full autonomy" might be achievable this year. This particular stopped clock may be accurate at some point, but investors have no reason to believe it is now.

Tesla's real competitive advantage is in the efficient engineering and manufacturing of EVs. The company also used this to justify its renewed bet on growth over profit. "As many car makers are working through challenges with the unit economics of their EV programs, we aim to leverage our position as a cost leader," read its first-quarter statement.

The price war Tesla started is probably already hurting financially precarious U.S. startups such as Rivian and Lucid. It will also accelerate EV adoption in the U.S., shortening the window for its would-be competitors in Detroit and Germany to make fat profits from gas engines.