DETROIT — Tesla Inc. makes more money per vehicle sold than any global competitor. Now, Chief Executive Elon Musk is using superior profitability as a weapon in his electric-vehicle price war.
Tesla, once one of the biggest money-losers in the auto industry, has grown far more profitable per vehicle than most of its major rivals over the past year. Reuters Industry data analysis shows.
Tesla’s gross profit per vehicle in the third quarter of 2022 was $15,653, more than double that of Volkswagen AG, four times that of Toyota Motor Co and five times that of Ford Motor Co. Reuters analyze.
For much of the year, Tesla joined rivals in aggressively raising prices on its most popular models, such as the Model Y SUV. Shortages of semiconductors and other materials have led to lower output in the auto industry, allowing companies across the industry to focus on higher-margin models and turn a healthy profit, even as sales fall.
Tesla’s decision to reverse course and use its production cost advantage to cut prices is now challenging established automakers such as General Motors Co.’s profit-over-volume strategy that has been pursued since the 2008 financial crisis and is doubling down on the bet during the pandemic. .
To keep production costs in check, Tesla invested heavily in new manufacturing techniques — such as using large castings instead of small metal parts. Tesla brought battery manufacturing and other parts of the supply chain in-house, and standardized vehicle designs to improve economies of scale.
Using production cost advantages to fund price cuts has a long history in the auto industry.
In the early 20th century, as innovative mass production systems accelerated, Henry Ford slashed the price of the Model T. In the 1980s and 1990s, Toyota took advantage of the cost leadership provided by its lean production system to deliver features at prices that Detroit automakers could hardly match. Now, under pressure from Tesla, Toyota is rebooting its strategy.
Growth in EV demand outpaces the overall U.S. and global market through 2022. This has encouraged automakers to push up prices for electric vehicles. Ford is raising the price of its electric F-150 pickup by 40% in 2022.
ever-increasing capacity
But analysts warn that capacity in the global EV market could soon outstrip demand.
Industry forecaster Warren Browne said that by 2026, North American electric vehicle demand will reach a level of about 2.8 million vehicles per year. But North American EV factories will be able to assemble more than 4.5 million vehicles, with overall capacity utilization at just under 60%, he said.
In China, the end of central government subsidies is accelerating a battle for market share among rivals in the world’s largest electric vehicle market.
“Tesla has taken the nuclear option, pushing the weaker, less profitable players in China off the table,” said Bill Russo of Automobility, an industry consultancy in Shanghai.
Startups such as China’s Xpeng Inc have benefited from Tesla’s higher prices. Now, Xpeng is cutting prices in China — but with less financial leeway than Tesla. Xpeng reported a third-quarter gross profit of $4,565 and a net loss of $11,735 per vehicle, according to company data analyzed by Reuters.
“We hope that as our cars become cheaper and cheaper, more people can use smart cars,” Xpeng Motors said in a statement.
Vietnamese electric car startup Vinfast said on Thursday it would use price promotions to fight back against Tesla.
China’s EV market leader BYD announced a price increase effective Jan. 1 after Beijing phased out EV subsidies. So far, BYD has not responded to Tesla’s latest price cut in China. However, BYD’s gross margin of $5,456 per vehicle gives it more room to compete on price than Volkswagen, Toyota or GM.
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