As we said the deliveries numbers were very important this quarter, it gave us an idea
of how Tesla's demand is holding during these economic times, and when there is more supposed
competition out there. It shows that there is still a lot of demand for Teslas, and it
is holding, and yes sure Tesla had to lower the prices of the cars considerably to achieve
that, but it worked. And Tesla may even have to lower prices again, but by not as much
this time. Previously Tesla were charging a premium for
their cars, as were car dealers too, adding premiums to the sticker price. Since then
Tesla has adjusted their prices more to where they were before the initial price rises,
and has various government incentives on top of that.
From there, any more price lowering will have a more dramatic effect on demand. For example
if before Tesla lowered their prices by 10%, then it might have attracted 20% more demand.
But now since Tesla's prices are already lower, a 10% price drop could attract more like 40%
demand. These numbers are just meant to be indicative, but the point is there are exponentially
more buyers at lower price points. There is a larger pool of buyers that can afford cars
between $25 and 35,000, than $45 and 55,000. Tesla is aiming to get into that sweet spot,
where the larger pool of buyers lies. Tesla are aiming to do this with the Model 3 and
Y, as the factories illustrate.
Tesla currently have enough margin to hit those price points too, but that would remove
a lot of profit. Therefore, Tesla need to hit those lower price points by lowering costs.
Which is what Tesla has been working on, and continue to. Tesla are not going to become
the best selling auto brand by making the best cars, it will only be achieved by getting
prices much lower. Look at Toyota, they are currently the best selling auto brand, and
they are a low cost car with basic features.
So how low cost can Tesla get? It's an electric computer on wheels. Is there going to be a
higher overhead for that car than you can ever get with the likes of a Toyota? Tesla
can cut back on all non-essential items, or luxuries, and reduce costs. But at the same
time not risk affecting the brand. However, the Tesla brand is somewhat evolving. It used
to be the electric sports car, then the electric luxury car, then the prestigious electric
car, that offered the most range and performance compared to the competition. It had to get
known, and make its mark, with record breaking specifications for the money.
The brand is now well known, and synonymous with electric cars. The reputation of the
vehicles are that they are safe, reliable, high tech, good range, and performance. And
now after the price cuts, they are becoming more affordable. That's the evolution of the
brand, it has to be, it has to become the affordable electric car.
Tesla no longer need to prove themselves that electric is superior, they need to start proving
themselves that electric is affordable for the masses. We don't need cars that go 0 to
60 in 3 seconds. Even 7 or 8 seconds is probably adequate for the majority of drivers, and
still competitive with ICE cars. Therefore Tesla have started using different motors
that cost less, and don't deliver as much performance.
Tesla are cutting back in costs where ever they can, and they have the user data to know
where. One example was the passenger seat lumbar support, no one seemed to be using
it, so it was removed. Another example was sunroofs. And of course Elon also tried removing
radar and ultra sonic sensors.
There is also a Model 3 Highland update and a Model Y Juniper update coming this year.
Yes, the update will involve a minor facelift to the aesthetics of the vehicles, to give
them a slightly more modern look and feel, but they will also be upgraded to hardware
4, however on top of that, I think various features that cost more money will be replaced
with lower cost alternatives. Tesla is no longer going to be a prestigious car brand,
its going to become an affordable brand for the masses.
I think Model 3 and Y prices probably need to come down another 10% in order to meet
demand at this new level of supply that Tesla offer. Especially when Texas and Berlin is
ramped up. At a guess perhaps going from an ASP of around $47,000 to $45,000. Which would
drop gross margins from 20% to 16%. Although I think it might be prudent to do
some financials and work out how much difference we see in Tesla lowering prices and margins,
and how much it effects earnings. And I do still think that part of this is the general
economy, of which could also get worse too of course.
However, costs are coming down too, so perhaps the drop in actual gross margin wouldn't be
quite that bad. However, in reality like I keep saying, its about operating margin more
than anything. The fact that Tesla are able to keep their OPEX so low, and ramp up so
high is going to be a major advantage Tesla have. Companies like NIO and Polestar, aren't
able to cover their OPEX even despite positive gross margins from their vehicles. Their OPEX
is a lot higher than Tesla's ever was at similar run rates, even despite the insane amount
Tesla was spending on R & D for FSD, which others aren't.
Added to this the fact that Tesla's actual costs are so much lower than other EVs too,
is why Tesla has such a competitive advantage and is the global leader in EVs. However,
Tesla are thinking big. They are not making lots of different models on mulitple production
lines that only produce around 10,000 units a month. Tesla are wanting to make lines that
produce 50,000 units a month, or possibly even more with the new gen 3 production, perhaps
closer to 100,000. That's right 5 times volume production. Tese think big, and each time
they think bigger and bigger. How to make enough EVs for the masses, that they can afford.
So this gen 3 vehicle is all about getting the costs down. Because like Elon says, it
doesn't matter how many people want a Tesla, if they simply cannot afford one. Which means
the gen 3 vehicle maybe somewhat more basic. I mean I say that, but how what is there in
the car left to remove? It's basically just a screen with no other buttons. Think how
long Tesla have been working on this gen 3 vehicle now. I mean we were told about it
as far back as battery day, almost 3 years ago. We have been told about research labs
in China working on this vehicle.
Why are Tesla taking so long? Don't they know the Chinese is winning with low cost EVs?
Well what would have been the point of Tesla releasing this gen 3 vehicle a year ago? Tesla
don't have enough cells for their current factories, how would adding an additional
factory help, especially when its producing a model that is going to be low cost and high
demand, if they don't have the batteries for it. Therefore Tesla had time. Tesla are doing
what they can, and working with partners to secure enough cells and batteries they can
in the meantime. Whilst that accumulates, they have been working on the perfect EV,
that can be built in the perfect way.
There has never been an auto company in history worth so much, able to justify investing so
much into making the perfect car. Remember when Tesla launched their last model the stock
was only about 1/10 the value it was compared to its all time high. That's a lot more potential
capital available to research and develop the ideal EV for the masses.
Although as investors its not so easy being left in the dark, and not being told about
exactly what is happening. When will this gen 3 vehicle be revealed, will it be a compact
or a van, or maybe both. We want to know the future of this company, we really haven't
seen much happen since the opening of the new factories, and they have not been going
as well as they were meant to, and the same with the 4680 cells. On the other hand, isn't
this common sense, isn't this what you would do? Keep all the intellectual property, and
secrets, until the project is complete and then launch it to the world, so they can marvel
over your creation.
Wouldn't you spend all the time you had to develop a new car, if you didn't have enough
batteries to make it yet? If you wanted to get the costs down as low as possible, and
learn as much from your previous processes of building a car, wouldn't you also want
to take every advantage you could in improving every single step of the process in building
these cars.
We have been told though, we have been told the gen 3 car is coming, and we have been
told where it is going to be built. We have been shown a new factory in Mexico, and been
told that they may start production in the next couple of months, and it may only take
9 months to build the factory. And this is what we need to see as investors. Tesla to
show us how they can take EV adoption to the next level, to the masses.