Author: Winslow

Tesla’s Q3 Earnings Report: Will Supply and Demand be Reversed? Will Prices be Reduced? Will it Affect Gross Margin?

For those who have been following Tesla for a long time, you may recall that at the end of August, the waiting time for Model Y and Model 3 delivery on the Tesla official website was reduced to 1-4 weeks. This is indeed an unusual signal, as the last time that customers could receive their orders in such a short time before the end of the quarter was during the “brake-gate” incident in mid-2019, when Tesla was under intense scrutiny and criticism. However, a year has passed, and Tesla now sells more cars globally, including in China, than any other automaker.

Regarding the topic at hand, I personally believe that this reduction in delivery time may be due to short-term impacts of rumors of price reductions rather than a supply and demand issue.

This is because other automakers began offering discounts several months earlier than Tesla and generated expectations of price cuts in the market. Therefore, those who ordered a Tesla car became concerned about the possibility of a price reduction after the end-of-quarter delivery surge, which led them to adopt a wait-and-see strategy. This resulted in the “reversal of supply and demand.”

From another angle, Tesla’s management team in China and Elon Musk have access to first-hand order data, which allows them to anticipate sluggish demand and implement price cuts ahead of time, rather than waiting until the end of August to shorten the delivery time. Therefore, it is more likely that sudden factors caused the delivery intensity to be lower than expected, rather than a demand issue.

The next question is whether prices will be reduced. I personally believe that this is unlikely to happen.We can extend the timeframe a bit and see that China’s national subsidy for new energy vehicles is about to expire at the end of the year, which means that all new energy vehicles will not be subsidized next year (a broadly but not entirely accurate statement is that new energy vehicles with a retail price below 300,000 yuan can currently receive a subsidy of approximately 11,000 yuan before the end of this year). It is already approaching the end of October, leaving only two months before the subsidy is cancelled.

Tesla China has a total of 5 models for sale, of which only 1 is priced below 300,000 yuan – the standard range Model 3 (post-subsidy price of 279,000 yuan).

In other words, only this model is eligible for subsidies, and its sales proportion at Tesla China is roughly between 1/4 and 1/3. If this model cannot receive the subsidy next year, it will face two options: either the on-hand price will increase (if Tesla does not provide a subsidy) or the on-hand price will remain the same (if Tesla provides a subsidy).

Having said so much, what does all of this have to do with whether Tesla will lower its prices in the future? Don’t worry, we need to combine this information with another dimension. We need to step out of the single dimension of time and look at Tesla’s competitors.

Tesla’s most competitive product is probably the standard range Model Y, which accounts for about two-thirds to three-quarters of Tesla’s sales in China and is priced at about 320,000 yuan. Irresponsibly speaking, basically all of the benchmarked competitors for this Model Y are priced under 300,000 yuan, which means they are currently competing with the Model Y while receiving a subsidy of more than 10,000 yuan. If the subsidy terminates next year, other competitors will face the same situation as Tesla’s standard range Model 3 and will either increase the price or keep the on-hand price unchanged (with subsidies provided by the car manufacturers). If competitors choose to increase the price, it will be equivalent to a price reduction by Tesla in disguise.

If competitors choose to provide subsidies, the car manufacturers will probably struggle. Not all car manufacturers have the same substantial profit margins as Tesla. If they provide a subsidy of 11,000 yuan per vehicle out of their pocket, they may face an embarrassing situation where they lose money on every car they sell (really losing money, not marketing jargon).Considering this, I believe that unless Tesla’s management team anticipated a significant decline in orders, there is no reason for them to offer subsidies and reduce prices in the last two months, only to raise them again after subsidies are cancelled next year (as this would be a devastating blow to their profit margin). Compared to reputation loss and extensive price grievances, the benefits gained from this approach are trivial.

Therefore, I personally believe that Tesla is unlikely to make major price cuts at the moment, but small discounts and hardware upgrades are possible. Thus, there is no need to worry about the impact on profit margin.

Looking ahead to next year, it is highly likely that car manufacturers who are currently relying on subsidies will face greater difficulties. Instead, Tesla, which receives comparatively less subsidies, seems to have greater room for maneuver.

All in all, it is best to prepare for tough times ahead by stocking up on supplies.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.