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Tesla uses its profits as a weapon in an electric car price war

DETROIT — Tesla Inc makes more money for each car it sells than any of its global competitors. Now, CEO Elon Musk is using that superior profitability as a weapon in the electric car price war he has started.

Tesla, once one of the biggest losers in the auto industry, has over the past year built a lead over most of its major rivals in terms of profit per vehicle. Reuters Industry data analysis shows.

Tesla made $15,653 in gross profit per vehicle in the third quarter of 2022 — more than double that volkswagen AG, four times the equivalent at Toyota Motor Corporation and five times more than Ford Motor Co, according to a Reuters analysis.

For most of this year, Tesla has joined rivals in aggressively raising the prices of its most popular vehicles, such as Model Y SUVs. Shortages of semiconductors and other materials have caused auto production to fall, allowing companies across the industry to focus on more profitable models and record high profits, even as sales grow. sales decreased.

Tesla’s decision to reverse course and use its manufacturing cost advantage to lower prices is now challenging the profit-on-volume strategies that automakers have established such as GM has pursued since the 2008 financial crisis, and doubled during the pandemic.

To control production costs, Tesla has invested heavily in new manufacturing technologies – such as the use of large castings to replace small metal parts. Tesla brought the battery manufacturing and other parts of the internal supply chain, and standardized vehicle design to improve economies of scale.

Using production cost advantages to finance price reductions has a long history in the auto industry.

Henry Ford discount on my Model T at the beginning of the 20 Century as his innovative mass production system accelerated. During the 1980s and 1990s, Toyota used the cost advantage offered by its lean manufacturing system to offer features at a price that Detroit automakers struggled to keep up with. Now, Toyota is restarting its strategy under pressure from Tesla.

growth in tram demand outstrips the overall market in the United States and globally in 2022. That has encouraged automakers to push EV prices higher. Ford raises electric car prices F-150 40% increase in 2022.


But analysts are warning the global EV market could soon have more production capacity than demand.

By 2026, demand for electric vehicles in North America will reach about 2.8 million vehicles per year, said Warren Browne, industry forecaster. However, EV plants in North America will have the capacity to assemble more than 4.5 million vehicles, bringing overall capacity utilization to just under 60%, he said.

In ChinaThe central government’s end to subsidies is accelerating the battle for market share among rivals in the world’s largest electric vehicle market.

“Tesla has used the nuclear solution to bully weaker, low-margin players” in China, said Bill Russo of Automobility, an industry consultant in Shanghai.

Startups like China’s Xpeng Inc have benefited from Tesla’s price hike. Now, Xpeng is cutting prices in China — but with less financing time than Tesla. Xpeng reported a gross profit of $4,565 for the third quarter and a net loss of $11,735 a vehicle, according to company data analyzed by Reuters.

“We hope more people can access smart vehicles as we make our cars more and more affordable,” Xpeng said in a statement.

Vietnamese EV startup Vinfast said on Thursday it will use promotion price against Tesla.

China’s electric vehicle market leader BYD Co Ltd announced a price increase effective January 1 after Beijing phased out its electric vehicle subsidy. So far, BYD has not responded to Tesla’s latest China sale. However, BYD’s gross margin of $5,456 per vehicle gives BYD more headroom in the price war than VWToyota or GM.

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