Elon Musk Announces Tesla’s Focus on Sales Growth Over Profit

The Elon Musk Effect: Tesla to Emphasize Sales Growth Instead of Profit

Tesla Inc. (TSLA.O) CEO, Elon Musk, has reasserted the price war he started at the end of last year by prioritizing sales growth over profit, especially during the current weak economy. The electric vehicle (EV) manufacturer has aggressively reduced prices in markets including the United States and China to stimulate demand and fend off rising competition. In the first quarter of 2023, Tesla posted its lowest quarterly gross margin in two years, missing market estimates. This article aims to discuss the impact of Tesla’s price war strategy and how it could affect the company’s financials and growth prospects.

Tesla’s Price War Strategy

Tesla’s strategy to prioritize sales growth over profit in a weak economy has come under scrutiny due to the recent decline in gross margins. However, Musk believes that it is better to sell a large number of cars at a lower margin and harvest the margin in the future as the company perfects autonomy. Musk stated that although the economy remained uncertain, the company’s orders exceeded production.

Tesla has been aggressively reducing prices in markets, including the United States and China, to spur demand and fend off rising competition. The company’s average selling price declined in the first quarter of 2023 from a year earlier, but it did not provide any elaboration. However, analysts say the EV manufacturer may need to cut prices further, pressured by a price war, especially in China, even as its new factories in Berlin and Texas churn out cars.

Impact on Financials

Tesla posted total gross margins of 19.3%, short of market expectations of 22.4%, according to 14 analysts polled by Refinitiv. The company did not report its automotive gross margin, a figure closely watched by investors, with Musk saying the weak economy made it hard to provide margin outlook. However, Tesla said in a statement it still believed its operating margin would remain the highest among big carmakers.



Also Read
Twitter Employees Fear Elon Musk’s Promised Stock Grants Are Worthless, Bonuses Nixed


The EV manufacturer’s automotive gross margin was 19% excluding regulatory credits in the first quarter, down from 24% the previous quarter, according to Reuters’ calculation. Tesla also reported record inventory of $14.38 billion in the first quarter, up from $6.69 billion a year earlier. The company burned $154 million in cash during the quarter, and it would have consumed more, but for a $1.6 billion gain attributed to “proceeds from maturities of investments.”


Growth Prospects

Musk had said earlier that he would have liked to achieve 2 million vehicle deliveries this year, but he declined to reaffirm that on Wednesday. He, however, stood by the company’s official target of 1.8 million deliveries. However, Tesla’s worrying China sales figures indicate demand for its vehicles is slowing more than expected in the face of rising competition from local EV companies.

Analysts believe that Tesla may need to cut prices further to keep up with the price war, especially in China. The EV manufacturer is also facing rising competition from local EV companies in China, which could negatively affect its growth prospects. However, The new factories in Berlin and Texas could help the company increase its production capacity and spur growth.

Conclusion

Price war strategy, which prioritizes sales growth over profit, has come under scrutiny due to the recent decline in gross margins. The company has been aggressively reducing prices in markets including the United States and China to spur demand and fend off rising competition. Although the orders exceed production, its worrying China sales figures indicate that demand for its vehicles is slowing more than expected in the face of rising competition from local EV companies. The EV manufacturer may need to cut prices further and increase production capacity to keep up with the price war and spur growth.