I have already touched on the price rises briefly in a past video, but I think it was
actually a big enough deal that it was worthy of it's own video.
Now although the prices are being risen in the name of inflation, well we will get to
the numbers, but I think it's pretty obvious that there is clearly going to be additional
profit from these new prices.
Firstly we will just discuss the prices rises and what they mean, but then we will go into
just how incredibly clever and strategic these prices are, more 3D chess moves explained.
Now Tesla have raised the prices of their
cars in the US, by a reasonable amount again.
It would seem that no LFP vehicles have had their prices raised, and it's just the vehicles
with 2170 and 18650 cells, except for the Plaid versions, which perhaps have already
had their prices raised quite a bit, for plenty enough margin, and are already closer to the
market clearing price now.
Out of all the price rises, the one that seemed to make people take notice the most was the
Model Y price rise of $3,000 for the Long Range.
But I would also like to point out, that the Model 3 Long Range, also just increased $2,500,
which is significant too.
The other rises were huge, but they are on the expensive S and X anyway.
Alright, so back to the Model Y.
A car that was under $50,000 last year, is now $66,000.
Just to be absolutely clear that is a $16,000 increase in price, or 32% increase.
That increase is also 24% of the existing price, which would mean that if the cost of
production is the same as it was last year, then there is an additional 24% in gross margin
for the long range model Y.
If before it was getting around 26% margin, it is now at 50% margin.
The cost of production may have increased, but it may have also decreased.
Either way, it has not increased close to the price rises.
In other words, there is going to be more profit coming from these vehicles since the
price rises.
Tesla should certainly see some cost reduction
in Austin though.
At least within time, when 4680s are ramped up further.
In fact the Austin Y could also end up seeing a price increase when it is officially launched,
perhaps about $62,000, but who knows.
It feels like Tesla's costs are coming down, whilst their prices are increasing.
And Tesla find ways of offering more value to customers too, like FSD and insurance.
And that's another thing, the Long Range Model Y, now has a serious competitor, in fact you
might have thought it would even potentially be somewhat cannibalized by this new Model
Y.
An improved Model Y, with better handling and safety, literally the latest technology
when it comes to EVs, the most advanced automobile for sale today on the planet.
But no, what happens when Tesla attempt to cannabalize or even somewhat Osborne the previous
Model Y, Tesla raise the prices!
Demand is just that good.
I think it also separates the Model Y Long Range from the Austin version more, with a
further apart price, previously the prices were too close, could be confusing to consumers.
It might also mean that the Austin Model Y may likely only have the range Tesla are saying,
and it's not software locked, as it would be too competitive to the Long Range.
But then that makes you wonder what will happen when the energy density of the 4680 cells
improve so much, that the range of the Austin vehicle approaches the Long Range.
Anyway, not sure, and not really my problem.
But Tesla will need to find consistency in models, variants, cell and battery packs.
The important thing to realize is that the world wants a lot of Model Ys.
And still there are plenty of people saying that Tesla is cutting a lot of people out
of the market by raising their prices.
Sure, they have, but so did Ferrari.
Why aren't you cross at Ferrari?
They make even larger gross margins than Tesla.
Yet people aren't on Twitter complaining to the CEO that they can't afford a Ferrari.
I am not meaning to sound flippant or facetious, but in Tesla's mission it doesn't say a Model
Y for everyone.
Tesla will increase prices, to make more profits, these additional profits will go into development
of the more affordable products for the masses.
And alright, perhaps the Long Range Model Y has now been priced out the market for a
lot of people, but there is now the lower cost Austin Model Y available.
And likely an even lower cost rear wheel drive version later.
Consumers simply see so much value in a Tesla, they are willing to pay more.
And where I live they cost even more than in the US, yet I still bought one and consider
it exceptional value for money.
We hear regularly about these US price updates,
and we immediately jump to the conclusion it must be a good sign, it means we have enough
demand, as we still have this big back order to get through too.
We know we have the margins, so we aren't raising prices for survival.
But we rarely see the same effect in China, as if the price there is closer to supply
meeting demand.
Except this time we are also hearing reports of Tesla raising their prices in China now
too.
Tesla increased the Long Range version price by 5%.
Now this was just the long range, so Tesla didn't increase the price of any of the LFP
vehicles.
This might mean that the cost of the nickel cells have increased more, and need to compensate
for the additional prices compared to LFP.
Alternatively, it could mean that demand for longer range vehicles has increased, and can
thus raise the prices higher, as the market does seem willing to add a premium on to longer
range vehicles.
Either way the fact that Tesla are raising prices in China too, looks good for global
demand.
If Tesla were at about 35% margin previously
with the Model Long Range, which I think it would be at least, given all the other price
rises.
Then when the Model Y was $63,000, that's a $41,000 cost.
The price has now increased an additional $3,000.
This would increase the profit margins further again.
This additional profit also goes straight into operating income, and is felt even more
in net profits.
If the cost remains constant, then that is a price increase of 7.3% relative to the cost.
Now do you think inflation will have added 7.3% to Tesla's costs in 9 months or so?
This is certainly going to add to Tesla's profits.
2170 Perhaps it's the 2170 cells, they now have
a higher opportunity cost, as they can be used in Berlin, where they can be produced
cheaper, and sold higher, i.e. more profit per 2170 cell, and as we are cell limited
it is partly about where to allocate each sell to get the highest profit.
It would seem it's all 2170 versions of the vehicle that are getting this price raise,
aside from the S and X Long Range, which may just be proving to be very popular.
I have said before that the supply and demand
curve is broken with Tesla, and this is not exception.
In a recession most businesses might think to lower their prices in order to increase
demand, which has likely dropped.
But no, not Tesla.
Of course Tesla can do the opposite.
They can raise prices to increase demand.
Ok, now the genius of what this move was.
Tesla already has enough Model Y orders in the US until March next year, and this was
just for the Long Range.
Now a recession will tend to last about 18 months.
Tesla has enough orders now, to last over half of that period.
And by the time they are all delivered, well we would have expected some new orders in
too.
But we have the recession, consumers are less confident to suddenly spend $60,000 or so
on a new electric car.
Instead they cancel their Tesla order.
This would be something that Tesla wants to avoid.
But now would you want to cancel an order for what is a $66,000 Model Y, yet you only
have to pay $55,000.
Because although the recent price rise is only $3,000, Tesla have been raising prices
all year, and a lot of customers only have to pay $53-55k for their Model Y.
You instantly get a car that would cost $11,000 more if you ordered it today.
Well actually $11,000 more and a one year wait.
Your $55,000 Model Y, could possibly be resold for perhaps closer to $70,000.
Now are you going to cancel that order?
Or are you going to accept a massively discounted car, and cut back on expenses elsewhere.
Or even if you can't afford it, you may just want to re-sell it at a profit.
Whatever the case, I think the chances of anyone cancelling their orders now, has just
reduced significantly.
Now to me that is an absolutely incredible move, and just an example of some of the pricing
power that Tesla has in the market.
Tesla can fluctuate their prices 10% either way, and still have plenty of demand and profit.
And this is in the auto industry, absolutely unheard of.
This just means Tesla are going to be even stronger during a recession.
On top of that it adds concern to consumers that Tesla might raise the price again, along
with the price of oil rising significantly.
It might make people want to get in and lock in a price now, before it goes up to something
even more ridiculous, and the waiting list grows even longer.
Everyone wants an electric car and to be sovereign from oil prices.
Tesla could end up starting some serious consumer FOMO.
By the time the recession is over, inflation
would have been felt more uniformly across the economy, as the invisible hand does its
job.
Meaning that by the time the deliveries for these newly priced Model Ys are happening,
that prices and wages should have caught up accordingly, or at least better adjusted.
Thus resulting in Tesla able to maintain these higher prices, with demand back where it should
be.
Anyway, these price rises are a big enough
story on their own for shareholders, it will be a while until the new prices are realized
in the financials, but we know they are coming.
I just thought this was incredibly clever and is likely to lock in all these orders
over the potential more tumultuous times we might see in the economy.