Tesla CEO, Elon Musk said on Wednesday that the company’s massive price cuts have triggered a wave of demand for its electric cars. The comments allayed concerns that a weak economy would dampen buyer interest. Tesla’s fourth-quarter revenue and profit earlier on Wednesday topped Wall Street expectations despite a sharp decline in profit margins in its auto business. The company is trying to reassure investors that it can cut costs and continue generating cash amid heightened competition in the year ahead.
This month’s sharp price cuts have made Tesla the instigator of the price war, However, the company forecasts car sales will rise 37% this year to 1.8 million vehicles. Despite this, it will remain slower than growth in 2022. Tesla’s sales outlook is in focus for investors amid a weakening global economy. The company’s long-term goal is to achieve a compound annual sales growth rate of 50%.
Musk addressed the issue at the start of a conference call with investors and analysts. “These price adjustments do have an impact on the average consumer,” he said. Demand was roughly double production in January, he adds. If there is no external interference, Tesla’s sales in 2023 may reach 2 million cars. In 2022, Tesla will deliver 1.31 million cars.
Elon Musk claims that the price cuts are stimulating purchases in 2023 and Tesla may sell 2 million cars this year. Tesla CFO, Zach Kirkhorn claims the price cuts would dent profitability, but margins should improve as the company lowers costs. As of Wednesday’s close, Tesla shares rose 0.38%. Shares of Tesla rose 4.3% in after-hours trading following the earnings report.
How sustainable are Tesla’s price cuts
For car buyers, it is not always about moving from one place to another. It is also a symbol of the status and wealth of the owner. Tesla’s repeated price cuts seem to be able to stimulate sales in the short term, but it is slowly losing its own “high-end” aura.
Tesla like Apple brings a sense of luxury and superiority to people in different parts of the world. However, unlike Apple’s new mobile phones, which continue to increase the brand premium, Tesla’s main model Model 3 has been on the market for 5 years. There is no update to this model. Also, another main model, Model Y, has been in the market for over two years. With these delays in updating these models, the competition has enough room to catch up with Tesla. They are actively taking away parts of the “cake” that belongs to Tesla.
The new brands in the market do not think twice before they stack hardware in their new cars. This is to enable them to quickly launch better user experience and give customers a “high-end sense” in terms of image and experience. Thus, while the company cut prices to attract buyers, it is selling “old” products and may just lose the consumers that matter.
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We can make money from software – Tesla
For the price cut, Elon Musk has another explanation: “Even if you sell a car at a very low-profit margin, but then upgrade it to a self-driving car, its value will increase”, that is, even if Tesla does not rely on hardware to make money, we can also make money from software”. Morgan Stanley believes Tesla could end up making more money selling software subscriptions than selling hardware.
However, this is only a forward-looking forecast. At present, the company obviously cannot rely on software profits to maintain basic operations. According to Tesla’s financial report data, for the full year of 2021, Tesla’s operating income from services and other businesses including autopilot software will be $3.802 billion. Although it has increased by 65% year-on-year, this part of its revenue only accounts for 7.06% of its total revenue.
Is Tesla’s software as great as everyone thinks?
If there are not many Tesla users, then the issues with its software may remain hidden. However, as it gains more users, more issues will come to light. Tesla’s Full Self Driving (FSD) tech is far from perfect. It is not as good as what we read on the internet.
Gu Hongdi, vice chairman and president of Xiaopeng Motors, said… “As China continues to promote the development of new energy vehicles, many brands in my country have already surpassed Tesla in terms of technology, car manufacturing concept, and hardware.”
According to MotoTrend, some software of Chinese brands is already on par with Tesla. Tesla in the United States defines its core competitiveness as FSD. At present, only more than 10% of Tesla owners choose to buy FSDbeta, and there are occasional negative failures. The high-speed NGP previously launched by Xpeng has more than 84% of car owners choosing to use it. In the survey results of the 2022 Automobile Index released by AllerMedia, an authoritative Norwegian media organization, Xiaopeng won the “Most Famous New Car Brand Award of the Year”.
In response to questions from Bloomberg senior anchor, Francine Lacqua about whether Xiaopeng’s intelligence can copy Tesla, Gu Hongdi made it clear that the goal of Xiaopeng Motors has never been to copy but to surpass.
According to the iV-RATING smart car evaluation system of Autohome, compared with Tesla, the performance of Chinese brand cars is more eye-catching. In the list, the Top 3 with the total score are all Chinese car companies. There are 8 Chinese cars in the top 10 models, while Tesla Model Y only ranks 16th among 18 models.
Conclusion
Finally, if Tesla continues to cut prices in the future, it will indeed boost its global sales performance in the short term. However, it is very likely that the marginal effect will diminish. Moreover, it is still good for Chinese new energy car companies, which can promote the global smart market.
