Tesla pledges to cut costs amid ‘uncertain’ time

With the release of its Q4 2022 earnings today, Tesla is making it clear to shareholders that it plans to keep cutting the cost of its electric vehicles to withstand “uncertain” times.

If there were a theme to Tesla’s Q4 2022 shareholder letter published today, it would be cost-cutting.

Tesla started out by writing:

As we progress into 2023, we know that there are questions about the near-term impact of an uncertain macroeconomic environment, and in particular, with rising interest rates. The Tesla team is used to challenges, given the culture quired to get the company to where it is today. In the near term we are accelerating our cost reduction roadmap and driving towards higher production rates, while staying focused on executing against the next phase of our roadmap.

The company is making that statement after implementing some massive price cuts across its entire lineup earlier this month.

Investors are worried about the impact on the company’s profitability.

While we won’t know the exact impact until the next earnings report, shareholders do get some hints at the impact from the Q4 2022 results released today.

Tesla confirmed that 51% of the 405,000 vehicles it delivered in Q4 were delivered in December when Tesla started to offer some significant discounts on its vehicles.

Despite half of its deliveries getting discounted, Tesla only took a two-point hit on its automotive gross margin in Q4 – going from 27.9% in Q3 to 25.9% in Q4.

That’s encouraging for shareholders, but the gross margin hit is expected to be much bigger in Q1 since the price cuts are more significant than the discounts Tesla was offering in December 2022.

To further highlight opportunities to reduce costs, Tesla noted that it has been able to reduce its end-of-quarter delivery waves. The 51% of vehicles delivered in the third month of the quarter in Q4 is down from 74% in Q2.

Tesla says that it is working to keep bringing that percentage down for smoother deliveries throughout quarters, which should help with costs.

At the end of its shareholder’s letter, Tesla again reemphasizes that cost efficiency is crucial:

We are particularly focused on vehicle cost during this period of macroeconomic uncertainty, high-interest rates (thus higher cost of vehicle financing) and vehicle price deflation. We continue to focus on cost efficiencies while improving functionality and reliability. While cost-efficient manufacturing of EVs is still rare across most of the industry it is critical for profitability.

Tesla seems confident that it can keep its lead in selling electric vehicles profitably.

Electrek’s Take

I think Tesla is onto something here – especially with that last comment. It is almost a warning to the rest of the industry that if they can’t keep their EV cost down and start selling EVs profitably, they are in real trouble.

Today’s earnings were encouraging for investors with Tesla only taking a two-point hit on gross margins. Q1 will be much worse, but I now think it’s possible Tesla could still maintain something close to 15% gross margin despite the big price cuts.

Most automakers would sell their soul to the devil to get 15% gross margins, especially on electric vehicles.

It adds to my theory that Tesla might have just started an EV price war that it will likely win.