Tech

Tesla Cost Conqueror: Musk’s Battle to Make EVs Affordable for All

If interest rates persist at elevated levels, it will pose greater challenges for individuals to procure an automobile, as it will simply be beyond their financial means.” During Tesla’s third quarter earnings conference call in 2023, Tesla CEO Elon Musk reiterated the adverse effects of high interest rates on consumer confidence, stating, “Mitigating costs is akin to excavating a tunnel with a meager spoon.”

Musk candidly remarked, “The quandary that necessitates resolution lies in rendering vehicles affordable for the masses. For the average person, these machines are unattainable, regardless of the price point. This predicament is utterly critical.”

Over the past year, Tesla has consistently reduced the prices of its offerings, resulting in heightened sales. Data reveals that Tesla has delivered over 1.324 million electric vehicles in the initial three quarters of 2023, surpassing the total of 1.314 million vehicles in 2022. Tesla predicts that the total deliveries this year will amount to approximately 1.8 million vehicles.

“Perpetually sustaining a compound growth rate of 50% is an untenable proposition,” Musk proclaimed. “Nevertheless, I anticipate that our progress will be exceptionally swift, far surpassing that of any other automotive company on Earth.”

However, the capital market harbors concerns regarding Tesla’s dwindling profitability caused by its ongoing price reductions. According to the latest financial report, Tesla’s total revenue in the third quarter stood at approximately $23.4 billion (equivalent to approximately 171.2 billion yuan), reflecting a year-on-year increase of 9%. Meanwhile, in accordance with US GAAP, net profit attributable to ordinary shareholders declined by 44% to $1.853 billion.

Presently, Tesla remains the world’s most valuable automaker, and Musk’s wealth has burgeoned by over $70 billion in 2023.

Cost Conqueror

“Tesla is an immensely formidable vessel, yet even the sturdiest ship encounters turbulence during a tempestuous storm.” The storm, as described by Musk, alludes to the high interest rate climate prevailing in the United States, which has inflated monthly car loan payments. Consequently, despite Tesla’s price cuts, purchasing a car remains an unaffordable endeavor for consumers.

“Numerous individuals subsist hand-to-mouth, burdened by copious debts such as credit card loans and mortgages. This is the stark reality confronting most people,” Musk asserted. “For affluent individuals earning an annual income surpassing $200,000, it is often arduous to fathom the trials and tribulations endured by those earning $50,000, $60,000, or $70,000 per annum. For a considerable portion of the population, paying 18 months or even 6 months in advance to avail a $7,500 tax credit is implausible. In fact, some individuals lack the means to pay even $7,500 in taxes.”

During the earnings call, Musk disclosed that despite Tesla’s reduction in selling prices, the cost of the Model Y remains relatively unaltered due to elevated borrowing expenses.

“I cannot overemphasize the significance of cost reduction. For the majority, it is not a luxury but an absolute necessity. We must make our vehicles more affordable and ensure accessibility for all,” Musk emphasized.

“If a car costs $40,000 and encompasses approximately 10,000 components, the average cost of each constituent amounts to $4. Ergo, to achieve a 10% cost reduction, we must extract value from each component. On average, savings amount to 40 cents.”

Musk likened the endeavor of lowering Tesla’s vehicle costs to “a game of pennies. At times, it feels akin to excavating a tunnel with a spoon.”

“In the third quarter, our cost per vehicle plummeted to $37,500,” Tesla declared. “Though the production cost of our nascent factory remains higher than that of our established counterparts, we implemented necessary upgrades to our production line in the third quarter to further curtail unit costs. We steadfastly maintain that an industry pacesetter must exhibit mastery in cost control.”

The reduction in Tesla’s global prices has precipitated a substantial surge in sales. Tesla’s total vehicle deliveries during the third quarter amounted to 435,059 vehicles, reflecting a 27% increase from the 343,830 vehicles delivered during the corresponding period last year.

Nonetheless, analysts harbor deep apprehension regarding the impact of Tesla’s price cuts on the company’s gross profit margin. Data illustrates that Tesla’s gross profit margin dwindled to 17.9% during the third quarter, compared to 25.1% during the same period last year and 18.2% during this year’s second quarter.

Tesla expounded upon the factors contributing to the decline in net profit, attributing it to a reduction in delivery volume resulting from its factory upgrade. Additionally, Tesla emphasized its substantial investments in artificial intelligence, boasting the launch of one of the world’s largest supercomputers, which augmented computing power twofold fromprevious models.

In response to concerns about profitability, Musk stated, “We are fully aware of the challenges we face, but we are committed to finding innovative solutions. We will continue to optimize our production process, leverage economies of scale, and explore new technologies to drive down costs and improve profitability.”

Musk also addressed the issue of high interest rates, highlighting the need for the government and financial institutions to take action. “High interest rates not only make it difficult for individuals to afford cars, but they also dampen consumer confidence and hinder economic growth. It’s crucial for the government and financial institutions to work together to lower interest rates and make financing more accessible for consumers.”

Tesla’s CEO remains confident in the company’s ability to overcome these challenges and maintain its position as a leader in the electric vehicle market. “We have come a long way and achieved remarkable success, but there is still much work to be done. We are constantly pushing the boundaries of innovation and striving for excellence. With our unwavering commitment to cost reduction and accessibility, I have no doubt that Tesla will continue to thrive and bring sustainable transportation to the masses.

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