The effectiveness of price reduction strategy has reached its peak. Can Cybertruck reorganize Tesla's sales? See Zhitong App's research.

In this year of frequent price wars in the new energy vehicle market, Tesla, the price butcher, has undoubtedly taken the strategy of lowering prices to maintain sales to the extreme. In this regard, Musk has truly lived up to his word and demonstrated his commitment to "continuing to lower car prices to ensure sales as long as the economic environment continues to deteriorate."

In the first half of this year, this strategy proved effective. Despite Tesla's gross margin and profits hitting new lows in recent years, the level of car sales and overall revenue continued to maintain high growth, partially offsetting the damage to profitability with an increase in sales volume.

However, in the third quarter, this fragile balance was broken. Tesla's sales and revenue both declined, and the downward trend in Tesla's profitability did not reverse. Tesla's net profit in the third quarter fell below $2 billion for the first time in two years, reaching $1.853 billion, a year-on-year drop of 44% and a MoM decrease of 31.45%. The gross margin hit a new low since 2019Q3, remaining below 20% for three consecutive quarters at 17.9%.

After three quarters of fermentation, the sales growth effect brought about by Tesla's price reduction strategy has been minimal. Can Tesla's highly anticipated new model, the Cybertruck, save Tesla's sluggish sales?

1. Tesla's price reductions can no longer guarantee sales volume

"Sales first, profits second" has indeed been Tesla's strategy throughout the year. From the first half of this year, this strategy has proven effective, with two consecutive quarters setting new historical highs.

However, the effectiveness of Tesla's price reductions is gradually diminishing. Despite Tesla's continued product price reductions to varying degrees in July, August, and September, the results have been unsatisfactory.

In the third quarter of this year, Tesla achieved an overall production of 430,000 vehicles, a year-on-year increase of 17.6% but a QoQ decrease of 10.3%. The sales volume was 435,000 vehicles, a year-on-year increase of 26.5%, but a QoQ decrease of 6.7%. Both production and sales were not satisfactory, ending Tesla's previous five consecutive quarters of record-breaking sales growth.

In addition, Tesla's profitability is also continuing to decline.

In the third quarter of this year, Tesla continued to reduce the prices of its new energy vehicle products by around 3%-6% globally, which has kept the profitability of Tesla's automotive business in a downward trend.

Unlike the continuous positive growth in automotive revenue in the past, in the third quarter of this year, Tesla's automotive sales revenue was $19.136 billion, a QoQ decrease of 7.56%. The profit and gross margin of the automotive business have been in a downward trend for six consecutive quarters, with the automotive gross margin falling below the 20% mark and continuing to decline to 15.8%.

It is not difficult to see that the promotion effect brought by Tesla's price reduction strategy is difficult to sustain. Although Tesla's Model 3 Refresh Edition officially started delivery at the end of October, according to the information displayed on Tesla China's official website, the current delivery time for this car is 6 to 9 weeks, which also makes it difficult for Tesla to make a significant contribution to the sales growth in the fourth quarter.

As of the third quarter of this year, Tesla's global sales volume reached 1.324 million vehicles, still 476,000 vehicles short of the annual sales target of 1.8 million vehicles. The highest single-quarter sales volume before was only 466,000 vehicles. However, in the third quarter of this year, there has been a decrease compared to the previous quarter. Whether Tesla can achieve its sales target this year depends on the fourth quarter, which is the peak season for the automotive market. It will depend on whether the new models and refreshed versions of existing models can drive a breakthrough in sales.

It is certain that the strategy of reducing prices to maintain sales volume is difficult to single-handedly drive Tesla's sales growth. In the future, it will depend on the impact of the Model 3 Refresh Edition on the market, as well as whether the long-awaited Cybertruck can successfully take over the position of the main sales force and bring Tesla back on track.

2. Cybertruck will become a booster for sales growth

Previously, Tesla's car products were mainly focused on sedans and SUVs. The pickup truck segment, where the Cybertruck is positioned, is a first-time attempt.

In China, the pickup truck market has been difficult to compete with mainstream vehicle types due to urban entry restrictions. However, in recent years, with the cancellation of pickup truck entry restrictions in more than 50 cities in Zhejiang, Guangdong, Shandong, Jiangsu, and other provinces, and the continuous introduction of policies to lift restrictions on pickup trucks, the sales of pickup trucks are expected to strengthen.

From 2018 to 2022, the sales of pickup trucks in China benefited from the policy of "lifting restrictions," increasing from 450,000 vehicles to 510,000 vehicles, and the export volume increased from 37,000 vehicles to 125,000 vehicles. The compound annual growth rate was about 85%, and the export proportion increased significantly from 7.7% to 25%, demonstrating the prospects and high market potential of pickup trucks.

However, currently, pickup trucks only account for a mere 2% of the overall automotive market, and the penetration rate of new energy pickup trucks is only about 1%, much lower than the 11.3% of new energy commercial vehicles. The main reason is the lack of new energy pickup truck models. Currently, only established pickup truck manufacturers like Great Wall have launched electric versions such as the Great Wall Pao, Geely's Radar RD6, and Foton's General Electric Edition.

Without the emergence of popular models and strong competitors, it is difficult to further boost the sales of new energy pickup trucks. The appearance of Tesla's popular Cybertruck is expected to continue to ignite the domestic and export markets.

In addition, the United States, as Tesla's home market, has a strong preference for pickup trucks. Pickup trucks account for 20% of the overall automotive market in the United States, and nearly half of the top 10 best-selling models are pickup trucks, with Ford's F-Series being the top-selling pickup truck model.Currently, the new energy pickup truck market is a battleground for American car companies. Whether it's traditional automakers like Ford (with the electric version of the F-150 Lightning), General Motors (with the electric Chevrolet Silverado pickup), and Stellantis (with the RAM 1500 REV electric pickup), or new players in the American automotive industry like Rivian (with the electric R1T pickup), they are all vying for a share of the new energy pickup truck market.

As the world's third-largest new energy vehicle market, with an overall new energy penetration rate of less than 10%, the United States is still in the early stages of development. Therefore, electric vehicle sales in the US continue to grow at a YoY rate of around 50%, indicating vast growth potential in the future. However, while the overall market is booming, Tesla's dominance in the US is not as stable. Tesla's market share in the US has dropped from over 60% to around 45%, reaching its lowest level in history.

It is worth noting that Tesla's Cybertruck does have the potential to become a blockbuster. As of now, over 2 million people have pre-ordered the Cybertruck. Considering Tesla's high conversion rate from orders to deliveries, even if only half of those pre-orders are fulfilled, it would still contribute to sales levels close to the total sales volume of last year (Tesla's overall sales reached 1.31 million vehicles in 2022). The only constraint on sales growth is likely to be production capacity, as the Cybertruck's capacity is only 250,000 vehicles, and it will be difficult to achieve full production capacity in the short term.

In conclusion, whether it is to bring sales back to a high-growth range, restore profitability to normal levels, or solidify its market share, entering the new energy pickup truck market is not an optional choice for Tesla, but a must-do.