Tesla’s way of playing, not hardware to make money. Tesla has turned into a “price butcher” again. A confirmed email shows that Tesla owners who pick up a Model Y or Model 3 during September 16-30 can get an 8,000 yuan subsidy if they buy insurance in the store. Take the Model 3 rear-wheel drive version’s guide price of 279,900 yuan, for example, the price is 271,900 yuan after including the insurance subsidy.
What is different from the past is that so far almost no rival car companies have followed through with the reduction in vehicle prices.
Relative to its competitors, Tesla is able to reduce prices because of its different business strategy and different playing style. Even if the price is reduced, it can still maintain a high gross margin.
According to Zhang Ming, who works for a head “new force in car manufacturing”, domestic car companies have low gross margins, weak bargaining power to suppliers, and profit models that do not support price cuts, so it is difficult to follow.
“(Price reduction) is the norm for Tesla”, Tesla can make money by selling software. In addition, Tesla’s ability to continue to reduce costs, it is also difficult for other car companies to reach – in addition to the cost-cutting effect of self-research of core components, including the ability to “gouge” costs from day-to-day operations, such as Tesla never buy commercials in the media.
Tesla does not rely on “hardware” to make money
According to the semi-annual report, Tesla’s profit per vehicle exceeds $10,000, and it is still clutching more than $18 billion in cash or cash equivalents, while its debt is down to less than $100 million.
Behind these figures, Tesla’s gross margin in Q1 this year has reached 32.9%.
Li Hao, an automotive analyst, believes that Tesla can continue to reduce costs because of the core (parts) self-research model it built, such as pure visual autopilot through artificial intelligence, “which can reduce a lot in sensor costs”.
According to CITIC Securities spent 2 months dismantling the Model 3’s findings, Tesla has mastered core technologies in core components such as the autopilot chip, 4680 large module battery, and body one-piece die-casting.
This makes Tesla completely different from most of its competitors – the latter need to purchase chips through chip giants such as Nvidia and Qualcomm, and even have to buy third-party technology companies for their autopilot systems.
The economies of scale have also driven down costs – Tesla has produced more than 3 million vehicles cumulatively worldwide, including more than 1 million at its Shanghai mega-factory.
Shenwan Hongyuan Securities research shows that Tesla’s gross margin was -2.0% in Q1 2018, which became 17.6% in Q3, due to lower amortization costs after the capacity climb.
In contrast to the scale effect formed by Tesla, “Ui Xiaoli” only accumulated 100,000 units delivered last year, and are still in the stage of losing money selling cars.
In addition, Tesla’s business model is significantly different from most car companies. Tesla’s operating strategy is not focused on hardware to make money.
Tesla launched the FSD system (Fully Self-Driving System) in 2015, which was priced at $2,500 and is currently priced at $15,000 (in North America) after experiencing several price increases.
But Musk believes that the price of the FSD system is still “ridiculously low” and said it could rise to $100,000.
Tesla’s 2021 earnings report showed that the business, including self-driving software, achieved revenue of more than $3.8 billion.
A Morgan Stanley analyst report released last year concluded that by the end of the 1920s, Tesla’s revenue from selling software will exceed that from hardware businesses such as selling cars.
In the new car companies, the intelligent driving systems of brands such as Xiaopeng and Ideal are generally provided free of charge to users, which prevents them from gaining revenue from user subscriptions.
Zhang Ming, who works for the “new power”, said BYD also engages in vertical integration of components, bargaining power of suppliers, and good car sales, but the gross margin is not high (13.5% in the first half of the year), “the profit model remains largely at the level of selling cars “.
Cost reduction is “gouging” out
The difference between Tesla and other car companies is that they never advertise.
Public information shows that from January to July this year, the global automotive advertising business spending was $4.8 billion, in which Tesla did not spend a penny.
On the contrary, Toyota and other car company giants have spent a lot of money on single-vehicle advertising.
Musk said that advertising is to engage in marketing, while he prefers to put money into product development.
In addition to not advertising, Tesla’s cost reduction is also reflected in the level of daily operations. One of the most prominent points is that, unlike the vast majority of car companies, Tesla hardly holds any launch events. Sometimes Tesla may hold a delivery ceremony, but it is chosen to be inside the factory.
Chinese car companies are also currently using launches as the main way to communicate their brands. For example, when Azera held its first NIO Day, it reportedly spent 80 million yuan – with eight chartered planes, 60 high-speed rail cars, and several five-star hotels – to host users and media.
Even the Chengdu Auto Show at the end of August this year was not attended by Tesla.
According to the “2017 Shanghai Auto Show Invitation Book”, the price of a standard indoor booth for domestic exhibitors is 1,800 yuan/㎡, so 500 square meters is 900,000 yuan, which does not include various expenses such as erection, vehicle transportation and staff.
But Tesla is not completely excluded from such large events, and this year participated in the service trade fair.
Li Hao, an automotive analyst, said that companies reduce costs, in fact, are a little bit of gouging out.
When Tesla suffered a financial crisis in 2019, Musk’s cost-cutting plan included a review of every expenditure – as long as it was not necessary in relation to the sale and delivery of vehicles.
This use of funds may have carried over into all aspects of daily operations as well.
At one point in 2019 Tesla China’s PR staff said that the media experience to test drive the Model 3 would be for three days – when most car companies were offering the media five days to test drive.
Chinese car companies can not catch up with Tesla?
According to Bai Yiyang of China Merchants Bank International’s Research Department, it is difficult for Chinese car companies to catch up with Tesla, “direct production costs, parts prices, amortization of intangible assets, etc., can’t catch up”.
He pointed out that Tesla already has a technology and brand moat, as well as the ability to continue to reduce costs, “can continue to improve the localization rate and production process.
In addition to the “software-defined car” business model, Tesla continues to optimize the production process, including improving the localization rate, so that its costs can continue to decline. At present, the localization rate of domestic Tesla has exceeded 95%.
This allows Tesla to maintain a high gross margin even if the price is reduced.
According to him, most car companies can only achieve (production line) flexible production, but Tesla has achieved the optimization of the production process to reduce costs.
Xu Lide, former assistant president of Bosun Auto and supply chain expert, said that Chinese car companies are currently unable to catch up with Tesla’s ability to continuously reduce costs, mainly because of two reasons: first, Tesla belongs to the global layout, which Chinese car companies are currently unable to achieve; second, Tesla’s strong supply chain planning ability.
In his view, the ideal state of the supply chain is that the capacity, quality, process and other indicators of suppliers can match the demand of the OEM.
“When the host plant’s demand is too small and the gap between the scale of the supplier’s capacity is too large, there is no bargaining power (in terms of procurement) and vice versa.”
Tesla is able to provide huge demand and of course has greater bargaining power, “including quality, process, materials, price and logistics cycle, etc.”
Publicly available information shows that when Tesla announced the construction of a new super factory in Berlin, Germany, battery giant Ningde Time also landed its first overseas factory in Erfurt, central Germany – the former being one of the latter’s key customers.
This means that Tesla has a huge attraction for suppliers.
Newly built cars “live and die by volume”
Lin Ming, a former technical expert at PSA (Peugeot Citroen Group, now Stellantis) and a researcher on new energy vehicles, believes that the core reason for Tesla’s price cut lies in its eagerness to expand its sales scale, as “volume determines life and death”.
He said, from the supply chain point of view, Tesla did not do BYD level of the whole industry chain penetration and control, the most prudent choice, in this case, is to quickly make the scale bigger and then gradually enhance the penetration rate of similar areas such as electric cores.
When the scale of expansion, Tesla will be regarded as the mainstream customer, the application of technology can even become the industry standard, which allows it to obtain stronger bargaining power.
At this point, suppliers are even willing to use ultra-low prices or lose money to do matching for Tesla, because with Tesla’s huge demand as backing, they can get orders from other car companies.
“Tesla can get a lower purchase price than all its rivals as long as it makes the volume big enough.”
He took 21700 cells as an example, some large power battery suppliers at home and abroad to the lowest offer to car companies, completely unable to meet Tesla’s requirements, may be more expensive than Tesla’s (procurement) cost price of at least 20%.
“This is very scary”, Lin Ming thinks, which shows that as Tesla’s supporting enterprises, these suppliers are willing to supply at ultra-low prices “because they know Tesla can hold up that volume”.
Tesla uses this scale advantage to get ultra-low quotes that its competitors can’t enjoy, which is enough to protect profit margins.
Lin Ming finally stressed that scale advantage is not only reflected in cost reduction, but is also crucial to the formation of standards (in the electric vehicle industry), for example, autonomous driving requires the precipitation of a large amount of data, and the more user data, the better it is for advancing machine learning.
“So, after achieving a certain degree of leadership in technology, Tesla is not very eager for quick returns from the capital market as opposed to rapidly expanding the scale of users.”
