A desperate bet that could make Elon Musk take Tesla ‘straight down the cliff’: Relying a lot of money to reduce car prices insatiable, waiting for profit from a business that has not yet formed.

Elon Musk’s bet to dominate the global auto industry is hitting a new turning point and causing mixed opinions. Some see Musk as Henry Ford in the Model T era. Others see him as Steve Jobs, who ushered in the iPhone era. However, what if Musk was Rick Wagoner – the man who sent GM straight off the cliff?

Tesla is slashing prices on some of its electric models, about 12 times this year alone. Their best-selling model in the US is even priced now up to 1/3 cheaper. The strategy is clearly unprecedented – it’s not clear whether it will herald more disruptions in the industry or signal Musk’s desperation.

The faction that compared Musk to Ford includes the current boss of Ford himself. Specifically, last week Ford CEO Jim Farley said: “Looking back to 1913, Musk’s actions including developing a product that opened a new era, innovated ways and reduced costs are reminiscent of us. Ford-like situation.”

For those who view Musk as Steve Jobs, they think Musk is bringing a Silicon Valley strategy into the electric car industry. Just as the iPhone took down Nokia and Motorola, Musk wants and needs to get rid of new electric car companies like Rivian and Lucid.

GM is a cautionary tale. Wagoner stepped up incentives instead of accepting that GM made too many cars after the 9/11 attacks. “Keep America Rolling” was the campaign that brought GM to a dead end, causing it and Chrysler to go bankrupt in 2009.

Notably, many of Musk’s previous plans were also controversial. In 2018, two famous short sellers Jim Chanos and David Einhorn made the opposite bet against Cathie Wood and Ron Baron on whether Tesla would be able to survive the initial difficulties of mass production, 1 I stand on the throne. The company’s stock then jumped more than 750% in five years.

Musk’s latest strategy has everyone waiting to see what happens next in an industry that Tesla has completely transformed over the past decade. After the pandemic led to the biggest disruption to the auto industry, Musk is betting that competitors will have no choice but to respond to his price cuts.

“We are struggling,” said Luca de Meo, CEO of French carmaker Renault this week. Speaking in January, he said automakers would need to generate money from electric vehicle sales. “Otherwise, this is going to be a very unhealthy business from the start.”

Even as rivals manage to weather the storm of price drops, a closer look at Tesla itself shows that things are changing within Musk’s own empire.

In its early years, Tesla expanded and started from a single car factory in California. After opening a second factory in Shanghai in early 2020, the company made an extremely ambitious forecast: Vehicle delivery sales increased by an average of 50% over the years, with production capacity expanding rapidly. possible.

Tesla has made good on part of the plan, opening two new car factories in the first two months of last year: the first is near Berlin and the second is in Austin.

What Musk hasn’t developed over the past few years is creating more of Tesla’s product lines. Two plants in Germany and Texas have only increased capacity to produce the Model Y sport utility vehicle, the latest passenger vehicle the company has added to its product portfolio. The Model Y has been a huge success and is a major reason why in the first five quarters after Tesla projected an average annual growth of 50%, it ramped up deliveries much faster than that.

But over the past four quarters, the company’s growth has fallen below that pace.

So, is the Model Y getting a bit dated or is the problem with the rest of Tesla’s product lines, which is more outdated?

Demand for the Model Y was remarkable as it sold for more than $65,000 last year in the US. There isn’t much of a chance for an expensive vehicle to move further up the sales charts in good times, let alone in an environment of soaring interest rates.

With a starting price now just under $47,000 and a new version said to be coming soon, the Model Y has a chance to top the global sales charts, a feat that a few years ago could not have been achieved. think.

The Model 3 needs more facelift as the model is about to celebrate its sixth birthday without undergoing a major redesign.

The extent to which Musk is compared to Henry Ford or Steve Jobs, seems to be based on the success of the Model Y and Model 3. The only other vehicle topping the global EV sales charts is a mini-car. worth $4,500 produced by a joint venture between Chinese manufacturers and GM.

With two electric vehicles in mass production achieving unprecedented economies of scale and manufacturing innovations ranging from monolithic vehicle construction to simpler batteries, Tesla is able to keep costs down. along with the price of your car. Rivals like Rivian and Lucid are far from breaking even, and the same could be said for Ford and other incumbents now ramping up their electric vehicle operations.

Building a sustainable electric vehicle business has been difficult. Musk’s new direction is now making that task more difficult for most of the other competitors.

“We have a competitor with really good results and really high margins,” said GM chief financial officer Paul Jacobson on Tuesday. We need to make sure we keep costs down.”

Automakers are used to operating on razor-thin profit margins. That’s why Musk is so optimistic, just last week that he asserted that Tesla could theoretically accept zero profits first and make money later on self-driving software.

There are many reasons to be skeptical about this, not least of which is the fact that he has “exploded” too much about Tesla’s self-driving car capabilities for a long time.

After Tesla fell short of its growth target last year of increasing vehicle sales by 40%, it has set a production target for this year at roughly the same rate, if not slower. Even after all the discounts Musk took in the first quarter, delivery numbers were up 37% from a year earlier.

The price drop means that Tesla’s gross margin – which has long been the focus of investors – will not be the same. Tesla has forecast that this number will stay above 20% this year.

Ford CEO Farley is drawing a comparison between Musk’s 21st-century strategy and Henry Ford’s invention of the mobile assembly line 110 years ago. But Farley also alluded to an important lesson Ford eventually learned after its unwillingness to replace the Model T caused GM and others to catch up.

“What he’s going to learn,” Farley said of Musk, “is that product novelty means a lot.”

Source: Bloomberg