Musk sums up Tesla’s recession playbook: Cost Recovery

Jan. 26 (Reuters) – Elon Musk has a Tesla playbook (TSLA.O) He headed into what he believes will be a “serious” recession: cutting costs on everything from parts to logistics, while keeping pressure on competitors with cut-off sticker prices.

On 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 as much as 20%, a move some analysts see as the first shot in a price war. .

Part of the plan, executives said, is to expand production at Tesla’s newest factories in Berlin and Austin, Texas, and to ramp up the company’s battery production, as scale brings economies.

But Chief Financial Officer Zachary Kirkhorn said the company will also attack every other area in terms of cost and eliminate cost increases that have stemmed from many years of COVID-related instability.

He said that would mean running Tesla’s factories leaner with fewer materials in inventory, lower shipping and logistics costs and negotiating lower prices for components — putting Tesla’s suppliers on notice.

Among its suppliers, Tesla buys batteries from Japan’s Panasonic (6752.T) and Chinese CATL (300750.SZ)and sources the huge pistons it used to eliminate the cost and complexity from production from the Italian IDRA group.

Tesla is also cutting costs by redesigning elements of the battery systems and electric motors, and removing features owners don’t use, the company said, based on data collected from Model 3 sedans and Model Y SUVs on the road.

Tesla has already made cost-competitiveness gains by driving streamlined hardware designs for its electric cars, said Bill Russo, founder of China-based consultancy Automobility, and has taken a page from consumer electronics manufacturers.

“You can offset some of the margin from pricing with massive scale and a simpler electronic architecture,” Russo said. “This is how they try to win the game.”

Meanwhile, Kirkhorn said the cost of lithium in electric vehicle batteries — the most expensive single component — will be higher in 2023 than last year, pressure that will hit Tesla’s competitors who are still losing money on electric vehicles even harder.

“I think a recession is going to be serious, I think it probably will be, but I hope it won’t be, it will lead to an appreciable drop in almost all of our input costs,” Musk said. “So we expect to see a contraction in our input costs, which will then likely lead to, yes, a better margin.”

The key to profitability

On Tuesday, Tesla said it would invest More than $3.6 billion To expand the Nevada plant complex and increase battery cell production so that it can produce enough to power 2 million cars annually.

Tesla predicted that it will sell 1.8 million electric cars this year, which means sales growth of about 37%. Musk said that this annual figure could reach two million vehicles, unless an external shock occurs.

Its shares were up about 7% in pre-market trading Thursday.

Tesla generated an average profit of nearly $9,100 per car sold in the fourth quarter, down 6% from the previous quarter but still significantly more than established competitors. Tesla’s profit in the third quarter per car sold was seven times higher than that of Toyota Motor Corp (7203.T)For example.

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

But analysts have focused on how well Tesla can maintain a core measure of profitability, which is gross margin on vehicle sales, excluding credits.

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

Cutting costs is also key to 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 car that analysts predict will be priced below $35,000.

“While competition in the electric vehicle space continues to heat up, Tesla’s focus on electric efficiency and investment in battery technology makes it difficult to chase in the short term,” said analysts at Cowen & Company.

Reuters reports that Tesla also plans to introduce a refreshed version of the Model 3 sedan later this year codenamed “Highland” with a focus in part on lower production costs.

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

“The price is really important,” Musk said. “I think there are an awful lot of people who want to buy a Tesla but can’t afford it.”

(Reporting by Kevin Krolicki in Singapore and Ahirob Roy in San Francisco; Additional reporting by Norihiko Shirozu in Beijing and Eva Matthews in Bengaluru; Editing by Kenneth Maxwell

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