Author | Jing-tai Zhang
Price cut! Price cut! Still price cut! Since Tesla announced the price reduction in early January, it has caused a huge impact on the domestic new energy vehicle market in China, and the most affected are the new car-making forces. Currently, their only way to fight against Tesla is to follow the price cut.
AITO was the first to announce the price cut, with a maximum reduction of up to 30,000 yuan. Then XPeng Motors announced a price cut, with an overall reduction of 20,000 to 36,000 yuan. Later, Leapmotor launched a “Spring Festival special offer” for the C01 model, and those who meet the relevant requirements can enjoy a policy of 5,000 off 30,000 yuan. The latest “indirect price cut” enterprise is NIO, which has promoted and reduced prices for some ES6 and ES8 models for 2022, while there is also a certain discount for ES7 models.
Judging from the current situation, Tesla should be taking the initiative to reduce prices, while the new car-making forces are obviously following passively. But how many customers can be saved in the end?
The impact of Tesla’s large price cut will continue
The reason behind Tesla’s price cut is not complicated. Tesla, which does not talk about discounts, is indeed having difficulty selling, although new energy vehicles are selling very well in the global market.
However, there are also many competitors in Tesla’s market. These latecomers all regard Tesla’s vehicle models as benchmarking competitor products, with slightly superior performance parameters and more favorable prices, thus diverting a considerable portion of consumers.
Especially in the Chinese market, both traditional carmakers and new car-making forces are pushing new products at a fast pace, directly turning the blue ocean market of new energy vehicles into a red ocean market.
For Tesla, which adopts a direct sales model, if it does not reduce prices, the consequence will be a rapid increase in inventory. If the cars cannot be sold, they will be at a huge loss.
Of course, Tesla has enough price-cutting space. As the global car company with the highest single-car gross profit margin, Tesla’s cost control surpasses that of major automakers such as Volkswagen and Toyota, and with the premium of luxury brands, there is still considerable profit even after the price cut. Moreover, price cuts may bring more sales and revenue, which may further increase.
As a matter of fact, Tesla’s global vice president has already come out to explain the reason, which is to adhere to cost pricing. The implicit meaning of this statement is that I control the cost very well and can afford the price cut.The fact also proves that price reductions have directly driven the sales growth of Tesla. Tesla CEO Musk stated on January 25 that the significant price reduction by Tesla created a wave of demand for electric vehicles, addressing concerns that economic weakness would suppress buyer interest.
Tesla’s price reduction trick is indeed ruthless because the slight profit loss caused by the price reduction can be completely offset by the scale effect brought by the growth in sales. Overall, Tesla will still make a lot of money. The latest financial data shows that in 2022, Tesla achieved a 16.8% operating profit margin, doubled its net profit, and is strongly leading the global automotive industry with a record of 1.31 million new deliveries, making it the undisputed leader in the electric vehicle industry. The fourth quarter of 2022 is Tesla’s 14th consecutive profitable quarter, achieving the highest ever operating income, revenue, and net profit in a single quarter.
However, for a group of newcomers in the auto industry who still have high cost control and low production and sales scale, this is undoubtedly cruel.
Tesla’s prices have fluctuated all along, sometimes going up, sometimes going down. Maybe one day Tesla might raise its prices again, then the pressure on its competitors will be reduced. But from the current situation, Tesla will probably only continue to reduce its prices.
The reason is also very simple: there is still a large space for the reduction of Tesla’s production costs. According to Musk, in addition to the mass-produced 4680 battery that will lower costs, the improvement in the design and materials of the car body will further reduce costs. Overall, the maximum drop in Tesla’s production cost in the future is expected to be 54%.
A single price reduction is enough for the newcomers in the car industry to be put in a difficult position. If Tesla continues to reduce prices several more times, there may not be many companies that can withstand such an impact.
Follow or not follow the price reduction: A dilemma for the newcomers
From the current situation, there are two attitudes among newcomers in the car manufacturing industry towards Tesla’s price reduction. One is to follow with the reduction, represented by AITO AITO and XPeng Motors, two automotive brands that are currently in a situation of increasing revenue without increasing profits.On January 30, Siles disclosed that it is expected to achieve revenue of 33.5 billion to 35 billion yuan in 2022, a year-on-year increase of 100.38% to 109.36%. The net loss attributable to the parent is expected to be 3.5 billion to 3.95 billion yuan, and the non-recurring net loss attributable to the parent is expected to be 3.85 billion to 4.3 billion yuan.
The growth in sales of new energy vehicles is the main reason for the revenue growth of Siles, especially since the AITO WENJIE series was officially delivered in March 2022, with a cumulative delivery of more than 75,000 units.
Before the price cut, AITO WENJIE did not increase revenue and profit. After the price cut, there must be a substantial increase in sales volume in order to turn losses into profits. However, the delivery volume of AITO WENJIE in January 2022 was only 4,475 units, a month-on-month decrease of nearly 55.9%. Although January is a traditional off-season for car sales, such a large decrease obviously did not see the promotional effect brought by the price reduction.
In 2022, NEZHA, Ideanomics, and NIO took the top three spots in the annual sales of new forces in car-making, while XPeng was squeezed out of the top three, with a cumulative delivery volume of 120,800 units, a year-on-year increase of 23%, and the lowest growth rate among major new forces in car-making. Not only the unit selling price is not as good as NIO and Ideanomics, but the sales growth is also weak, far from the sales target set earlier.
As for XPeng’s financial data, it is also not optimistic. According to the financial report released by XPeng in Q3 2022, its operating income in Q3 was 6.82 billion yuan, a year-on-year increase of 19.3%; its auto sales revenue was 6.24 billion yuan, an increase of 14.3% year-on-year; and net loss was 2.38 billion yuan, an increase from a 1.59 billion yuan loss in the same period last year.
In January, XPeng’s sales were 5,218 units, a month-on-month decrease of nearly 53.8%, also not reflecting the promotional effect brought by the price reduction.
Following the price cut is obviously to reduce the impact of Tesla’s price reduction on sales, but from the current situation, the effect achieved by the two new car-making forces is limited.
Representative of those not following the price cut is Ideanomics. Surprisingly, Ideanomics performed well, achieving a monthly sales volume of 15,141 units in January, the only company in the new forces of car-making with sales of more than 10,000 units. Although there was also a decrease on a month-on-month basis, the magnitude was only 28.7%. However, there are very few new forces of car-making that can maintain both price and sales volume like Ideanomics.
It is not difficult to find that there should be room for price reduction in the overall cost of new forces’ vehicles. However, the high expenditure on sales costs has reduced their space for price reduction. Compared with the competitors like Tesla, who do not do any marketing, advertisement, or any brand ambassadors, the new forces may suffer losses by following price reduction, while not following it may cause a continuous decline in sales and endanger survival, thus being caught in a dilemma.
Are there any other solutions besides price reduction?
Price reduction is only a means, not a good solution. What other better strategies can the new forces adopt? It is not difficult to find that the new forces, not the traditional automakers, are the hardest hit by Tesla.
Taking BYD, the global champion of new energy vehicle sales in 2022, as an example, its passenger car sales in January exceeded 150,000 units, a year-on-year increase of 57.8%. Due to the complete withdrawal of national subsidies in 2023, BYD also decided to adjust the official guide prices of relevant models from January 1, 2023, with an upward adjustment range of 2,000 to 6,000 yuan.
It can be seen that BYD is less affected by the price reduction of Tesla, and the reason is not difficult to find. Thanks to its core component supply system of the entire industry chain, BYD’s cost control ability may be second only to Tesla, especially the blade battery, even supplying for Tesla.
Currently, the selling price range of BYD Han EV is between 219,800 and 3.318 million yuan, while the selling price range of Model 3 produced in China is between 265,900 and 349,900 yuan. Even though the former has a price increase and the latter has a price reduction, BYD Han EV still has some cost-effective advantages.
Obviously, the control of core technologies and supply chains are the key weapons for automakers to combat Tesla, and the new forces urgently need to make up for their shortcomings in this regard.
Among the new forces, XPeng Motors and Sciener AITO OutSpace are the most sensitive to Tesla’s price reduction because these two new forces, like Tesla, focus on intelligence. Their product price ranges are similar to Tesla’s, and the impact of Tesla’s price reduction on them is the greatest, but their products do not have a particularly obvious advantage in intelligence compared with Tesla.In the homogeneous and competitive market, having no differentiation equals having no competitiveness, therefore, apart from cost control, differentiated products are another key factor for car companies to compete.
In 2023, it will be a year when new car makers and Tesla meet in the market, leaving them with limited time to compete.
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.