Analysis Report | Is Tesla the biggest victim of price wars?

On the early morning of January 24th, Tesla released its fourth-quarter earnings for the 23rd year, showing no signs of reversing its declining profitability.

In the fourth quarter of 2023, Tesla achieved operating revenue of $25.17 billion, a YoY increase of 3% and a MoM increase of 7.8%, falling short of market expectations of $25.6 billion. The operating profit was only $2.1 billion, lower than the market expectation of $2.3 billion, with a YoY decrease of 46% and a MoM increase of 16.6%.

Tesla's gross profit margin in the fourth quarter hit a new low since 2019, at 17.6%, a YoY decrease of 6.12 percentage points and a MoM decrease of 0.3 percentage points.

In the fiercely competitive market for new energy vehicles in 2023, Tesla, known as the "price butcher," pushed its price reduction strategy to the extreme, finally achieving its annual sales target of 1.8 million vehicles and setting a new sales record in the fourth quarter. However, the profitability level has returned to the level of 2019. In this regard, Tesla has demonstrated its commitment to the decision of "as long as the economic environment continues to deteriorate, Tesla will continue to lower car prices to ensure sales."

However, the cost is too high.

1. The time for the profitability to rebound has not yet come

The effectiveness of Tesla's price reduction strategy has been difficult to sustain, and the side effects have become apparent in the fourth quarter. In the fourth quarter of 2023, although Tesla suspended the pace of price reduction promotions, profitability still did not improve. Zhitong App Research believes that there are several reasons for this:

First, although the prices of Tesla's products in the Chinese market did not decrease but increased in the fourth quarter, the magnitude of the increase was too low to cover the previous decline.

The prices of Tesla Model Y and Model 3 in the fourth quarter of 2023 increased for four consecutive times, with increases ranging from 1,500 yuan to 14,000 yuan. Moreover, this price increase only applies to the Chinese market (prices in the US market are still increasing), and the largest part of the increase is for the Model Y high-performance version, which has the lowest sales proportion, resulting in no increase in Tesla's per vehicle revenue in the fourth quarter.

In the fourth quarter, Tesla's per vehicle revenue was only $44,500, a YoY decrease of $8,100 and a slight MoM decrease of around $1,000.

Second, although the price of upstream raw material lithium carbonate continued to decline in the fourth quarter of 2023, reducing some of Tesla's cost pressure, the significant price reduction of lithium carbonate had already been completed in the first three quarters, and the reduction in the fourth quarter was minimal.

The average price of battery-grade lithium carbonate in the fourth quarter of 2023 decreased by about 70,000 to 140,000 yuan/ton MoM. Taking the best-selling Model Y conventional model (with a capacity of 55 degrees) as an example, the cost reduction for Tesla's new energy vehicle products was less than 2,000 yuan. The decline in costs is obviously unable to offset the decline in bicycle prices, so Tesla's gross profit per bicycle in the fourth quarter still decreased by 0.04 thousand US dollars to 0.92 thousand US dollars on a MoM basis.

2. FDS is the lifeline of Tesla's automotive business

Currently, the only area where Tesla's automotive business still has room for imagination is FDS. The cumulative total mileage of Tesla FSD test versions has exceeded 800 million kilometers, and the latest V12 version of FSD is just a step away from being customer-facing. Once it is officially launched, it may cause a sensation in the market.

From Tesla's repeated statement that "revenue will ultimately be generated through autonomous driving software rather than car sales," it is valuable to reduce prices to maintain quantity, because vehicles are carriers of FSD. Only by significantly increasing sales volume and FSD penetration rate can profitability be sustained in the future.

Now, Tesla's FSD is at a critical period. At the end of 2023, China officially issued the "Notice on Carrying out Pilot Work on Intelligent Connected Vehicle Access and Road Test," which means that Tesla may be able to access FSD functionality in China as soon as possible, which will greatly benefit Tesla.

Judging from the current level of autonomous driving technology of domestic car companies, except for a few companies such as Wenshi that use Huawei technology and Xiaopeng, which has always focused on autonomous driving, other car companies still need to polish their technology.

3. Achieving the 2023 annual target at the last minute, but pessimistic about sales in 2024

"Sales first, profitability second" was indeed Tesla's strategy throughout 2023, but why did it work in the first half of the year and fail in the second half?

Although Tesla's gross margin and net profit have repeatedly hit new lows in recent years, car sales have continued to reach new highs, and overall revenue has maintained high growth, forming a partial hedge, sacrificing profitability for the scale of sales.

However, in the third quarter, this fragile balance was broken, and Tesla's sales, revenue, and profit all declined simultaneously, which also led Tesla to change its strategy in the fourth quarter.

In the fourth quarter, Tesla launched a wave of four consecutive price increases, urging observers to convert and place orders by transmitting price increase signals to consumers. This method drove Tesla to achieve record sales in the fourth quarter and also achieved the annual target of 1.8 million vehicles at the last minute.

In the fourth quarter of last year, Tesla achieved sales of 485,000 vehicles, a YoY increase of 20% and a QoQ increase of 11.4%.

However, Tesla is not optimistic about sales in 2024.

In Tesla's conference call, the company clearly stated that "the growth rate of production, delivery, and shipment in 2024 may be significantly lower than that in 2023," which deviates from the previous convention of setting a 50% growth target for several years.

Huasheng·Jianzhi Research believes that Tesla's pessimism about sales in 2024 is due to the following reasons: First, the highly anticipated next-generation low-cost model, which is expected to be put into production in the late 2025, is underperforming, while the already launched main new models - the refreshed version of Model 3 and Cybertruck - are also not performing well.

The refreshed version of Model 3 is priced too high, even though it had a price reduction earlier this year, it is still 16,000 yuan more expensive than the old version. With the backdrop of significant price reductions by domestic new energy vehicle companies, the competitiveness of the refreshed version of Model 3 has been weakened, making it difficult for Tesla to drive sales growth in the Chinese market.

Although Cybertruck achieved a pre-order volume of over 2 million vehicles before its launch, its production capacity is increasing slowly, and it will not reach over 125,000 vehicles until 2024. Obviously, this will not have a decisive impact on boosting Tesla's sales.

Second, as Tesla stated in its earnings call, "Chinese car companies are the most competitive in the world," Tesla is being surrounded by numerous excellent car companies in the Chinese new energy vehicle market. Tesla's market share has dropped from 11% in 2021 to the current 7.8%, and this percentage continues to decline.

2024 will be a big year for many domestic new energy participants such as Great Wall, NIO, BYD, and Xiaomi, but for Tesla, it will be a difficult year. Considering that Tesla's sales in China account for more than one-third of its global sales, the more challenging competitive landscape in the Chinese market in 2024 will bring more negative impacts.

4. Slowdown in the growth of energy and service businesses

In addition to its core automotive business, Tesla's other two major businesses - energy and service - continue to show year-on-year revenue and profit growth, but the growth rate has slowed down.

Among them, the energy business, including solar and energy storage, achieved a revenue of $1.4 billion in the fourth quarter of this year, a year-on-year growth of 10%, which is significantly slower compared to the growth rate of 40%-150% in the past five quarters.

In terms of production capacity in the fourth quarter, the energy storage capacity of Tesla's Megapack factory seems to have temporarily reached a bottleneck, but the subsequent capacity expansion is still progressing steadily.

In December 2023, Tesla officially announced the launch of a new large-scale factory project in Shanghai, with an annual production capacity of 10,000 Megapack fixed battery storage systems. As Tesla's first energy storage super factory project outside the United States, it is expected to start construction in the first quarter of 2024 and be put into operation in the fourth quarter. The initial plan for Tesla is to produce 10,000 commercial energy storage batteries, with a storage capacity of nearly 40GWh.

At the same time, Tesla's Lathrop factory in California is also adding a new production line, with production capacity expected to double this year from 20 GWh to 40 GWh. This will greatly strengthen Tesla's strength in the energy storage field and provide momentum for the continued growth of Tesla's energy business.

In addition, the service business, including used car transactions and paid supercharging, is also steadily growing. The fourth quarter revenue reached $2.2 billion, a year-on-year increase of 27%. Currently, Tesla has upgraded its global supercharging stations to over 5,600 and has more than 55,000 supercharging piles. These will be important cornerstones for the continued growth of Tesla's service business.

The minimal effect of Tesla's price reduction, the difficult recovery of profitability, the weak sales growth, and the lack of new models have cast a shadow over Tesla's prospects. In 2024, Tesla, accustomed to rapid progress, may focus on stability.