Is Tesla discovering its own ‘new normal’?

Chart: NASDAQ

The Tesla share price has dropped by 45% since the end of December on the back of a series of negative news stories and announcements.  In most listed companies this would be a source of huge concern, but despite the fall, the market capitalisation of the company remains over seven times greater than that of Toyota, and Elon Musk continues to demonstrate the robust attitude to the media and investors that we have become used to over the years.  It’s only a couple months since I last wrote about Tesla, but there has been so much in the news in recent days about the maker of the world’s best-selling BEV in 2023, that it merits further comment

The negative stories include some that directly relate to the quarterly reporting of the sales and financial performance of the business, so a share price fall would be expected under these circumstances.  Bearing in mind the fact that in using a direct sales model, Tesla cannot massage the numbers at the end of each quarter through wholesaling product to dealers as other car companies can, so a 9% decline in revenue year-on-year, partly related to the well-publicised price cuts, and the balance to delivery volumes down by a similar amount.  This is the first time that quarterly sales volumes have been down since the pandemic, and various reasons were cited by the company, including factory upgrades, disruption to shipping through the Red Sea and an arson attack on the Berlin factory that closed it for a number of days.

Perhaps the Tesla ‘bulls’ in the stock market buy that story, but if the issues were all about restricted supply, how could you still manage to produce 46,000 more cars than you actually sold?  Despite the very high profile price cuts, Tesla is having to deal with balancing demand and supply, and doing so in a less than ideal manner in my view.  This is not the only area where Tesla is being forced to adjust to having intense competition in the BEV space.  Despite historic claims by Musk that they would never spend a dollar on advertising, Tesla set up a marketing department for the first time last year (before including them in the mass lay-offs in the last week in a typical Musk flip-flop).  However, they did spend real money on digital advertising last year, even if this was a relatively trivial US$6.4 million.  Billboard advertising was spotted at Tokyo Hamada airport last November – another first.

For several years, Tesla had a monopoly position – if you wanted a semi-premium BEV then you had to buy a Tesla.  There were enough early adopters (and government incentives) around to keep pushing relentlessly for more volume every year, and finding customers at list price.  Yes, there was always an end-of-quarter push, but a momentum developed, such that Musk declared an ambition in 2020 to sell 20 million vehicles by 2030 – double the size of Toyota today.  This also allowed Tesla to avoid expensive model upgrades every few years like traditional manufacturers, although in truth there were many changes under the skin both in hardware and software to improve the product and cut costs.  The direct sales model worked well, as customers were looking for Tesla, rather than the other way round, and consistently poor customer service didn’t seem to cause any issues, any negative voices being largely drowned out by the many Tesla fans.

For as long as Elon Musk leads the company, then I think Tesla will always remain a bit of a maverick, but the market will force them to become more ‘normal’ or at least to face most of the normal challenges that all car companies face.  The US$25,000 car project was abruptly cancelled less than three weeks ago, but then seems to have been reinstated in some form with a stock market filing last night that promised to bring forward “more affordable” models – leading to an immediate 10% jump in the share price.  It seems inevitable that the product offer must be broadened, and more formal mid-life refreshes like the recent one on the Model 3 will become normal.  When the Chinese are bringing out new models almost more frequently than Tesla adjusts their prices, consumers (not only in China but elsewhere) are not going to be convinced to buy a car that looks just like the model from four or five years ago.

The Tesla see-saw on pricing is confusing for customers, but ultimately damaging for the company.  One reason why Hertz walked away from holding Tesla in their fleet was the self-inflicted damage done to the residual values by huge and visible price cuts.  This is an issue for all leasing companies and funders who value stability in residual values more than the value itself.  One of the positive attractions of the franchise model is that dealers can absorb some of the ebb and flow to balance supply and demand.  There is a cost to this within the dealer margin and variable marketing spend, but it is much less transparent to the market and therefore has less effect on residual values.  I’m not saying that Tesla will sign up franchised dealers, but that is what their Chinese rivals are doing, and Tesla will find it increasingly tough to compete using a direct model and current ‘blunt instrument’ pricing models.  We still believe that with their growth, it will make sense to switch to agency, and perhaps it is an opportunity for Musk to deploy some of his much-hyped AI expertise to develop the best dynamic pricing model in the industry to support that network, supported by a U-turn on advertising to make sure that prospective customers know about the current promotions.

The other two areas which feature prominently in Musk’s strategic objectives are digital services generally and autonomy (“Full Self Driving” and robo-taxis) specifically.  Based on my own experience, Tesla does have an edge here, and because Musk is a risk-taker, he will deploy these new capabilities earlier than other manufacturers might consider prudent.  At some point Tesla might face (another) massive law suit either for misrepresentation or personal injuries, but on the other hand, his Chinese competitors are deploying similar capabilities, and taking similar risks.  Arguably Tesla can’t afford to let Tesla slip behind after all the hype over the years, so this may be an area where Tesla will continue to push ahead of the pack.

Overall, I see Tesla becoming more similar to other manufacturers.  Relentless growth will not continue.  Product cycles will become shorter.  Distribution models will converge with competitors.  Price promotions will become less transparent.  Customer service will have to improve.  Digital services and autonomy will remain leading edge, but not transformative due to legal and user resistance.  As a consequence of all of this, there will be more variability in business results, and surely some of the hot air has to come out of the share price?

 I would promise not to return to the Tesla topic for at least six months, but as Musk is so unpredictable, who knows what will emerge that demands comment