Is Tesla’s price war backfiring with crumbling margins?

Grey clouds are overshadowing Tesla’s long-lasting winning streak. During the presentation of Q3 earnings, the company announced crumbling margins, a delay for its Mexican factory, and worries about the profitability of its highly anticipated Cybertruck.

Tesla’s chase for more volume, fueled by price drops, is eating away at the company’s margins. When the company realized 25% over the same period last year, margins during Q3 dropped to 17.8%. The results disappointed Wall Street, which sent the stock price 7% lower when trading re-opened, a loss of 16 billion dollars for the CEO of Tesla, Elon Musk. The dip is less significant from quarter to quarter, as the company realized margins of 18.2% during Q2 2023.

Profit dives

The missed earnings aren’t a complete surprise. Tesla already announced a dip in deliveries of more than 6% for Q3 2023 due to factory downtime, needing retooling for new models, like the Model 3 Highland. Tesla’s price war does affect revenue positively, as it grew by 5 percent in a year-on-year comparison. Still, operational profit has been slashed by almost half (-44%) and comes in at 1.9 billion dollars (1.8 billion euros).

Elon Musk points to an uncertain marketplace, referring to rising interest rates that might affect sales shortly. It’s one of the reasons why the company also has pushed the pause button on its new factory in Mexico, which it wanted to construct in a record time of less than nine months, beating the construction of the company’s Shanghai factory.

Cost reduction measures

In the shareholders’ letter, Tesla kept to its objective of registering 1.8 million vehicles for the entire year. When met, the American EV maker would outperform Audi. The company also refers to significant cost reduction measures undertaken during the past three months, which would turn into a benefit during the final quarter of 2023.

The earnings drop won’t make Tesla shift its strategy, but it seems more cautious about its pricing policy. The company has kickstarted official sales of the Model 3 Highland in China at rates that are 12% higher than the outgoing version. The retail price for the base version is 259 900 yuan (33 600 euros). First deliveries are expected for the end of this month.

In the wake of the announcement, Elon Musk also fixed a production date for the Cybertruck, set for November. Softening expectations, Musk added that the company “dug its own grave” with the Cybertruck, referring to the challenges of full-scale production at a profitable level.