Musk says Tesla may continue to cut prices in “turbulent times”

July 19 (Reuters) – Tesla Inc Chief Executive Elon Musk signaled on Wednesday that he would cut prices for electric cars again in “turbulent times,” even as an all-out price war against automaker rivals squeezes the company’s margins.

The company has lowered prices several times in the United States, China and other markets since late last year, and has increased discounts and other incentives to reduce inventory, as it tries to protect against competition and economic uncertainty.

“One day it looks like the global economy is collapsing, and the next day it’s okay. I don’t know what the hell is going on,” Musk told analysts on a conference call. “We are in turbulent times.”

Tesla shares, which were largely flat after hours, fell about 5% after Musk’s comments.

Deep price cuts squeezed gross margin for Tesla cars, a closely watched indicator in the industry, but Musk said Tesla would sacrifice margin to drive volume growth.

“I think it makes sense to sacrifice margins in favor of making more cars,” he said again on Wednesday, adding that if macroeconomic conditions weren’t stable, Tesla would have to cut prices.

For example, this year Tesla cut US prices for its long-running Model Y version by a quarter, to $50,490.

Tesla Motors’ quarterly gross margin, excluding regulatory credits, fell to 18.1% in the second quarter from 19% in the first quarter, according to Reuters calculations. This was in line with Street’s estimate, but a far cry from the 26% it reported last year.

Tesla posted a gross gross margin of 18.2% for the April-June period, the lowest in 16 quarters.

Earlier, Tesla said in a statement that it was focusing on cutting costs and developing new products, and that “the challenges of these uncertain times are far from over.”

“Multiple rounds of aggressive price cuts have put Tesla in a position of strength after building its electric fortress, and it is now poised to monetize its success,” Wedbush analysts said in a note.

Tesla reiterated its forecast for deliveries of about 1.8 million vehicles this year, but said production in the third quarter will decline slightly due to planned downtime for factory upgrades.

“It’s a good line,” said Thomas Martin, a portfolio manager at Globalt Investments, which owns Tesla shares.

“They’re trying to set prices right so they can generate demand for units, and then they want to run their plants as efficiently as possible…they don’t want to build up those inventories.”

Lower prices, combined with government tax breaks for electric vehicle buyers in the US and elsewhere, pushed Tesla deliveries to a record 466,000 vehicles in the April-July period globally, but it benefited from its profitability.

However, on an adjusted basis, Tesla earned 91 cents per share, based on the strength of non-core income and largely in line revenue of $24.93 billion. Analysts had expected a profit of 82 cents per share, according to Refinitiv.

FSD license

Musk said in the call that Tesla is in talks with a major OEM to license the “Full Self-Driving” (FSD) program, but did not name the company. He had previously said the company was open to licensing the driver assistance system.

The FSD does not make the car autonomous and requires driver supervision, and Tesla is subject to regulatory safety after a number of accidents involving its vehicles.

Last year, Musk said the world’s most valuable automaker would be “essentially worth zero” without achieving full self-driving capability.

Tesla stock received a big boost this year after Ford Motor Company (FN), General Motors (GM.N) and a host of other automakers and electric charging companies said they would adopt Tesla’s charging technology.

The company’s stock is up 60% since the first such deal on May 25. So far this year it’s up 138%, also helped by an expansion of federal credits for Model 3s and investor excitement around AI.

The company said Wednesday that lower raw material costs and government tax credits have helped reduce cost per vehicle, but it has seen an increase in operating expenses driven by Cybertruck, artificial intelligence projects and its 4,680-cell battery production ramp that are key to making cheaper and attractive electric vehicles.

The company said Tesla benefited from $150 million to $250 million in tax credits in the second quarter, while getting similar benefits from lower costs for raw materials such as lithium and aluminum.

Tesla said Wednesday that it made “significant progress” in improving yields at 4,680 cell production lines and increasing production in Texas by 80% in the second quarter from the first.

In 2020, Musk unveiled a plan to produce Tesla’s own EV batteries called “4680” cells. But the automaker has struggled to meet Musk’s goals for cell production and performance.

Tesla said production of its long-delayed Cybertruck electric truck remains on track for initial deliveries this year.

Additional reporting by Akash Sriram in Bengaluru and Hyunju-jin in San Francisco; Additional reporting by Abhirup Roy, Peter Henderson and Joe White.

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