Report: Tesla ‘Uses Its Profits as a Weapon’

Report: Tesla ‘Uses Its Profits as a Weapon’

Tesla's recent worldwide price reduction continues to be a hot topic, as it might significantly affect other manufacturers.

A recent Reuters article said CEO Elon Musk started the EV price war, using the company's "superior profitability as a weapon."

Well, it seems an exaggeration to call the recent move a war and that Musk started it. The world is more complex.

In the second half of 2022, Tesla's estimated order backlog consistently decreased, to less than 100,000 vehicles as of the end of December. In other words, the market conditions triggered this move.

According to the Reuters article, Tesla earns up to several times more per vehicle than large carmakers like Volkswagen, Toyota or Ford.

"Tesla earned $15,653 in gross profit per vehicle in the third quarter of 2022---more than twice as much as Volkswagen AG, four times the comparable figure at Toyota Motor Corp. and five times more than Ford Motor Co.," Reuters reported.

Tesla has a different business model than other major carmakers---direct sales vs. dealers---which does not allow it to be directly compared, as part of the other automakers' revenues go to dealers.

However, it's true the fundamental advantage of Tesla was a lower manufacturing cost, which allowed it to achieve such high margins and make noticeable price cuts when needed.

There is a chance lower prices will translate into a higher number of orders and a continuation of expansion for Tesla. Other manufacturers might be put in a difficult situation, depending on their potential to also reduce prices.

Reuters refers to the early 20th century, when Henry Ford slashed the prices of the Model T, or Toyota's cost advantage in the 1980s and 1990s. The year 2023 might be truly crucial for Tesla.

We are very curious about what will happen, but there is always a risk that even price cuts will not help if the global economy enters some bigger recession.

We thank InsideEVs for reprint permission.

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