Could this be the canary in the coal mine?
Wall Street is already unenthusiastic about the auto industry’s prospects given skyrocketing interest rates, an inflation rate higher than it’s been in 40 years and the possibility of an economic recession.
The Model 3 and Model Y’s base prices in China were slashed by 9% by Tesla, according to a Reuters report Monday, potentially igniting a price war. Following Tesla’s recent decision to start offering discounts to consumers who choose its insurance, Monday’s price reductions were revealed on its Chinese website.
The Model 3 saw its price drop to 265,900 yuan ($36,610) from 279,900 yuan ($38,538), while that for the Model Y sport utility vehicle was reduced to 288,900 yuan ($39,777) from 316,900 yuan ($43,632).
The drop in prices imply the demand for automobiles is waning in the world’s largest automotive market, and suggesting competition is about to heat up, and recent numbers prove it. Retail sales in China grew 2.5% in September, lower than the expected 3.3% increase and a big drop from August’s 5.4% sales increase.
It casts a shadow on what has been a very good year for Tesla. It also marks a change in Tesla’s pricing trends as it’s raised prices three times in the past 12 months, including most recently in March.
Numbers look good — for now
Just last week as it posted third quarter revenue of $21.5 billion, net income of $3.3 billion and an industry-best operating margin of 17.2 percent. And Tesla expects to annually increase production by 50% for the foreseeable future.
“We have excellent demand for Q4 and we expect to sell every car that we make for as far into the future as we can see,” Tesla CEO Elon Musk said during the Q3 earnings call.
Yet Wall Street was disappointed as its numbers failed to meet their expectations despite selling 83,135 Chinese-made Model 3s and Model Ys in September — a monthly record for the brand since it started building vehicles in Shanghai in 2019, at a plant running at 93% capacity.
Vehicle deliveries numbered more than 343,800 in the third quarter, up considerably from the nearly 254,700 in the second quarter. The EV maker attributed the lower than predicted number to delivery process issue officials say the company has since corrected. Tesla still plans to deliver at least 450,000 vehicles during the fourth quarter, a massive number that, if achieved, would likely make the concerns disappear. Tesla the automaker ranks as the third most-popular electric vehicle manufacturer in China behind BYD Motor and SAIC-GM-Wuling.
And Tesla could end up selling approximately 800,000 Model Ys in 2022, enough to earn it a spot among the world’s five best-selling vehicles, and the only American vehicle in the top five.
Bumpy road ahead?
But analysts are already bracing for a rocky road ahead as the corporation spoke of “material headwinds” during the quarter.
“Raw material cost inflation impacted our profitability along with ramp inefficiencies from Gigafactory Berlin-Brandenburg, Gigafactory Texas and 460 cell production,” officials noted in a presentation to shareholders. “Also, the U.S. Dollar continued to strengthen compared to all other major currencies in our markets.”
And strong COVID limitations, is diminishing consumption in China, hampering economic consumption.