Tesla promises to cut costs in ‘uncertain’ time


With the release of fourth-quarter 2022 results today, Tesla is making it clear to shareholders that it plans to further reduce the cost of its electric vehicles to weather “uncertain” times.

If Tesla’s Q4 2022 shareholder letter released today had a theme, it would be cost cutting.

Tesla began writing:

As we head into 2023, we know there are questions about the near-term implications of an uncertain macroeconomic environment, and rising interest rates in particular. The Tesla team is used to challenges given the culture required to get the company to where it is today. In the near term, we are accelerating our cost reduction roadmap and targeting higher production rates while we remain focused on executing the next phase of our roadmap.

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

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

While we won’t know the exact impact until the next earnings report, shareholders can get some indication of the impact of the fourth quarter 2022 results released today.

Tesla confirmed that 51% of the 405,000 vehicles it shipped in the fourth quarter were delivered in December, when Tesla began offering some significant discounts on its vehicles.

Despite discounting half of its supplies, Tesla saw its automotive gross margin decline just two points in the fourth quarter — from 27.9% in the third quarter to 25.9% in the fourth quarter.

That’s encouraging for shareholders, but the gross margin collapse is likely to be much larger in the first quarter as the price cuts are more significant than the rebates Tesla offered in December 2022.

To further highlight cost-cutting opportunities, Tesla noted that it was able to scale back its quarter-end delivery waves. The 51% of vehicles delivered in the third month of the quarter in Q4 are down from 74% in Q2.

Tesla says it’s working to lower that percentage further for smoother quarterly deliveries, which should help with costs.

At the end of its letter to shareholders, Tesla reiterates that cost efficiency is key:

We are particularly focused on vehicle costs at this time of macroeconomic uncertainty, high interest rates (hence higher vehicle financing costs) and deflation in vehicle prices. We continue to focus on cost efficiency while improving functionality and reliability. While cost-effective manufacturing of electric vehicles is still rare in most industries, it is critical to profitability.

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

Electrek’s take

I think Tesla is onto something here — especially with that last comment. It’s almost a warning to the rest of the industry that unless they keep their EV costs down and start selling EVs profitably, they’re in for real trouble.

Today’s earnings were encouraging for investors as Tesla suffered just a two-point slump in gross margins. Q1 is going to be a lot worse, but I now think it’s possible that Tesla could still hold close to a 15% gross margin despite the big price cuts.

Most automakers would sell their souls to the devil to achieve 15% gross margin, especially on electric vehicles.

That complements my theory Tesla may just have started an EV price war that it’s likely to win.

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