Profit and gross margin both plummeted, how much longer will Tesla's post-price-cut aftermath be so devilish? | Jianzhi Research

On the early morning of July 20th, Tesla, the global leader in the new energy vehicle industry, released its second-quarter financial report. Among the key indicators, Tesla's revenue in the second quarter of this year reached $24.927 billion, a year-on-year increase of 47%, setting a new record and surpassing the market's overall expectation of $24.3 billion.

However, Tesla's profit and gross margin continued to decline from the previous quarter. The operating profit was $2.399 billion, a year-on-year decrease of 3% and a quarter-on-quarter decrease of 9.9%. The gross margin was 18.2%, a decrease of 6.8 percentage points compared to the same period last year and a quarter-on-quarter decrease of 1.1 percentage points.

According to Wallstreetcn Research, in the first half of this year, the new energy vehicle market witnessed frequent price wars, and major new players in the industry faced fierce competition. As the initiator of the price war, although Tesla is a dominant player with strong profitability, its ability to engage in price wars is not without cost.

The sharp contrast between the soaring car sales and revenue and the declining profit and gross margin is evident.

After experiencing a simultaneous increase in sales and a decline in profit and gross margin in the first quarter, Tesla made few adjustments in the second quarter. This trend continued the pattern of record-breaking sales and compromised profitability.

It is worth noting that at the beginning of the third quarter, Tesla further reduced the prices of its models, Tesla and Tesla. Clearly, even at the expense of profitability, Tesla has consistently adhered to the strategy of "sales first, profit second" throughout the year.

1. Sales as Tesla's top priority

This year, Tesla's strategy has been clearly revealed. Before new models are fully launched to drive incremental sales, price reduction to maintain sales volume will be an important means for Tesla to achieve its sales target this year.

Looking at the sales situation following Tesla's price reductions earlier this year, it is evident that Tesla's price reduction strategy has been surprisingly effective. In the first half of this year, Tesla achieved an overall production volume of 921,000 vehicles, a year-on-year increase of 63.2% and a quarter-on-quarter increase of 14.3%. The sales volume reached 889,000 vehicles, a year-on-year increase of 57.4% and a quarter-on-quarter increase of 18.7%, setting consecutive sales records for two quarters. Traditional automakers' price reductions usually only support sales for one quarter, after which the effect diminishes. However, Tesla's price reductions have continued to drive sales growth into the second quarter, with the year-on-year and quarter-on-quarter growth rates even surpassing the first quarter when the initial price reduction was implemented.

Last year, Tesla's total sales reached approximately 1.31 million vehicles, slightly below the target of 1.5 million vehicles. However, Tesla is highly likely to achieve its target this year. Historically, the second half of the year is the peak season for the automotive market. Taking Tesla's sales data from last year as an example, the sales volume in the second half of the year increased by 32.6% compared to the first half.

If Tesla continues to maintain its sales growth rate this year, its annual sales are expected to reach around 2 million vehicles, exceeding the sales target of 1.8 million vehicles set by Tesla earlier.

2. Sales have stabilized, but at a cost

Tesla's sales have indeed stabilized, but not without cost.

In the first quarter of this year, Tesla faced criticism from the market due to a significant drop in profit and gross margin. In the second quarter, Tesla's profitability continued to decline, with a stark contrast and discrepancy between the record-high car sales and revenue and the repeatedly low profit and gross margin. Among them, Tesla's largest automotive business was hit the hardest.

In the second quarter of this year, although Tesla's automotive revenue continued to grow positively, reaching $21.3 billion, a year-on-year increase of 45.9%, the profit and gross margin of the automotive business have been in a downward trend for five consecutive quarters, with the automotive gross margin falling below 20%. In addition, due to the significant price reduction of Tesla's products at the beginning of the year, the per-vehicle revenue of Tesla also declined significantly, dropping to $45,700, a decrease of nearly $10,000 compared to the same period last year, and a decrease of approximately $2,000 compared to the first quarter, reaching the lowest point in nearly three years. Furthermore, Tesla achieved an operating profit of $2.399 billion in the second quarter, a year-on-year decrease of 3% and a quarter-on-quarter decrease of 9.9%. Although Tesla's other businesses, such as the energy business, have not only not declined but also grown rapidly (a year-on-year increase of 74%), the performance of the overall profit was affected because the profit of the core automotive business did not increase.

The main reason is that the decline in the price of automotive products is much greater than the decrease in costs. Taking China as an example, the price range of Tesla products has been reduced by about 10%, ranging from 29,000 yuan to 36,000 yuan. The main factor for cost reduction in the first half of this year is the significant drop in the price of raw material lithium carbonate.

Since mid-November last year, the price of battery-grade lithium carbonate has dropped from a peak of 600,000 yuan/ton to a low of 180,000 yuan/ton, and it has basically stabilized at around 300,000 yuan/ton.

Taking the best-selling Model Y conventional model (lithium iron phosphate battery) of Tesla as an example, with a capacity of 60 degrees, 1 GWh of power batteries can meet the needs of 16,700 vehicles. In terms of lithium carbonate, 1 GWh of lithium iron phosphate batteries requires 510 tons of lithium carbonate. Battery-grade lithium carbonate had an average price of around 550,000 yuan/ton, 450,000 yuan/ton, and 250,000 yuan/ton in the fourth quarter of last year, the first quarter of this year, and the second quarter of this year, respectively. This means that the average price of lithium carbonate has dropped by about 300,000 yuan in half a year. When converted to the cost of Tesla's new energy vehicle products, it has decreased by at most 9,000 yuan, far lower than the decline in Tesla's product prices.

3. Energy and service businesses continue to maintain high growth, expected to create a second profit curve

While Tesla's core automotive business is on a downward trajectory, its other two major businesses, energy and service, continue to thrive. Tesla's energy business mainly includes energy storage and photovoltaics, serving both residential (C-end) and commercial (B-end) customers. In the second quarter of this year, the revenue from service business reached $1.5 billion, a year-on-year increase of 74%, far exceeding the automotive business. The growth rate and revenue have reached historic highs, with the gross margin rapidly increasing to 18%, also a record high.

The rapid development of the energy business is also supported by Tesla's emphasis on energy storage. In the long term, Tesla has planned five energy storage factories worldwide, with a total planned capacity of up to 150GWh.

In the short term, with the further increase in production capacity of Tesla's Megapack battery factory in California and the construction of a 40GWh energy storage factory in Shanghai, Tesla's energy business is expected to further grow.

In addition, Tesla's service business is also experiencing stable growth, including the sale of used cars and charging stations.

This year, Tesla officially opened its charging stations to other car manufacturers, including Volkswagen, General Motors, Ford, and other giant automakers, who have chosen to join the cooperation. This means that more car products can access Tesla's charging network, further promoting the development of Tesla's charging station business.

Currently, Tesla's charging station business is showing promising signs. In the second quarter, Tesla's service business revenue reached $2.15 billion, a year-on-year increase of 47%, achieving positive growth for five consecutive months. The gross margin has been continuously increasing since turning positive and has now reached 8%.

4. Will Tesla's strategy of prioritizing sales volume change?

Tesla's gross margin has never fallen below 20% in the past three years, but it has been below 20% for two consecutive quarters this year, with gross margins of 19.3% and 18.2% in the first and second quarters, respectively.

In the short term, Tesla's profitability has clearly been affected, but Tesla does not intend to change its strategy of prioritizing sales volume. As Tesla stated, if the economic environment continues to deteriorate, Tesla will continue to lower car prices to ensure sales.

At the beginning of the third quarter, Tesla once again announced price reductions for its high-end models, offering discounts ranging from 35,000 yuan to 45,000 yuan for the Tesla and Tesla models, with price reductions reaching 5%. Obviously, Tesla is more willing to sacrifice profitability to ensure high sales growth, mainly for two reasons:

On the one hand, although Tesla's gross margin and profit level have experienced two rounds of decline, they are still much better than its competitors such as NIO and Xiaopeng, whose gross margin is close to zero. After all, Tesla's gross margin can still hover around 18%, maintaining a good profit-making effect rather than losing money.

Of course, Tesla's price war not only affects Chinese new energy vehicle companies but also has a more significant impact on American domestic automakers. The average price of new energy vehicles in the United States has continued to decline in the first half of this year, from $61,000 in January to $53,000 in June, a decrease of 13%. Compared to June last year's $66,000, it has dropped by 19.5%.

On the other hand, Tesla's fundamental strategy still adheres to capacity determining sales volume, by continuously increasing the scale of sales of new energy vehicles to strengthen the overall stock level, and then using gradually powerful paid services such as FSD and charging piles to supplement its profitability and gross margin level. In the long run, this is indeed the correct strategy.

However, in the short term, even without considering Tesla's planned super factory in Mexico, the total production capacity of Tesla's four major factories - Fremont Factory in California, Shanghai Gigafactory, Berlin Factory in Germany, and Austin Factory in Texas - is expected to reach 2 million vehicles per year.

The rapid increase in Tesla's production capacity has shortened the delivery cycle in China to about 4 weeks. If the production capacity is not discounted, it is inevitable to reduce prices to maintain sales volume. Therefore, a gross margin below 20% is acceptable for Tesla.

Especially now that Tesla's new models are slow to market and consumers are gradually getting tired of the old models, Tesla's price reduction strategy can not only increase its own sales and benefit consumers but also strike a blow to its competitors, enhancing its competitiveness and market share.

Tesla will certainly not let short-term profit damage affect its future prospects.