Earlier this month, we looked the September sales for the auto industry and Tesla’s slowing year-over-year unit growth. Tesla’s 3Q 2023 earnings call focused on the adverse impact of higher interest rates on the ability of consumers to be able to afford a Tesla car. Tesla also missed expectations for Q3 production--which we foretold using our visitation data--which they blamed on plant upgrades. We suspect that all of these dynamics are interwoven, although management noted that they would still hit the prior target of 1.8M units produced for the year. Hitting and delivering the 1.8M number would imply an acceleration in Q4 2023 to 462K deliveries from 451K in Q3.
For Q3, electric vehicles (EVs) were 7.9% of all new car sales. Tesla had 50% market share, followed by German manufacturers as shown in the chart from Cox Automotive below. In Q3 2023, 14 new EV models that did not exist one year ago were in the mix, including Chevrolet Blazer and Silverado EVs. U.S. manufacturers have been behind schedule and the UAW strikes are going to hurt. Japanese manufacturers won’t enter the scrum in force until 2025-2026.
For Tesla to realistically sell more units in Q4 2023 during a higher interest rate environment and more competitive market, prices would need to drop further. Prices can come down if costs come out (i.e., Q3 plant upgrades) and margins compress. For the year, Tesla’s automotive gross margins will have fallen from 28% to under 19% as average selling prices (ASPs) have fallen from $52K to under $41K. Costs have also come down from $38K per unit to $33K, but the $5K cost reduction is far less than the $11K price reduction. Thus, the margin compression. In June, Green Cars marked the Model Y Long Range’s MSRP at $65,990. That Model Y’s current MSRP is $43,990. Wow! That’s deflationary. Kelley Blue Book reports that the average price paid for an EV (all brands) in September was $50,683, down from more than $65,000 a year ago. Readers will strongly recognize that the Federal Reserve's objective of achieving its targeted inflation rate of 2%, involves pushing new and used auto prices lower--Tesla is doing its part.
On its earnings call, Mercedes Benz CFO Harald Wilhelm said, “EV is a very competitive space...with price discounts...of more than 30%, some of the traditional players selling best vehicles below the pricing level of internal combustion engine vehicles (ICE) with variable costs probably sitting above...I would say this is a pretty brutal space...[O]n the EV side of things, this is extremely competitive these days.”
GM also reported its Q3 2023 results this week. The press release quotes CEO Mary Barra as saying, “We are also moderating the acceleration of EV production in North America to protect our pricing, adjust to slower near-term growth in demand, and implement engineering efficiency and other improvements that will make our vehicles less expensive to produce, and more profitable.” On the strikes, GM removed its 2023 financial guidance citing uncertainty around the UAW strike. GM commented that the strike cost the company about $200M in Q3 2023, $600M in Q4 2023 thus far, and is now running at about a $400M per week profit impact including the expanded strike at GM’s Arlington factory on Oct. 24 which produces several of GM’s profitable SUVs. Trucks and SUVs represented the bulk quarter’s unit growth. In terms of the quarter and KPIs, after making adjustments for the strikes and the EV start-up losses, we estimate that the North American ASP was $43,305, up +$300 year-over-year, whereas production costs were roughly flat at $30,500 year-over-year. That puts its average contribution margin at $5,660 per unit sold. By contrast, Tesla’s is $11,300 per unit sold and management said that figure was going lower in the near term.
With the Ford/United Auto Workers agreement, we expect agreements to come fast with GM and Stellantis given that these two won’t want to be at an inventory disadvantage (both new units and aftermarket care) to Ford. On its quarterly update, CEO Jim Farley noted that, “A great product is not enough in the EV business anymore. We have to be totally competitive on cost. Tesla actually gave us a huge gift with the laser focus on cost and scaling the Model Y. They set the standard, and we are now making real progress on our second and third cycle EVs that are in the midst of being developed today, as we get closer to the introduction. While our Gen 2 EVs we're targeting to deliver an EBIT margin comparable to ICE by 2026, the dynamic changes in the market, pricing, adoption rates, regulations are forcing us to further reduce the cost of our EVs. The key levers to deliver this competitive cost structure are scaling, vertical integration and batteries.” And on demand he observed, “EVs are still in high demand...the pricing is much lower and there's a lot of overcapacity in the middle of the market. For us, I think our EV strategy and our ICE strategy is to go after customers we know really well. And so, on our ICE and hybrids very much of a loyalty target. And in the case of EVs, in many of the same segments, but a conquest strategy. And I would say we feel very confident on that strategy because Ford has a great reputation in those segments like full-size truck or pickups, or vans, commercial vehicles, or three row crossovers. But our products are not substitutional, because the customers we're going after are different.”
Group-1 Automotive, whose business is 50% new/50% used on a unit basis also reported Q3 2023 results this week. (Most of Group-1’s profits come from parts & service and financing & insurance.) Striking in the results was a -19% decline in gross profit per new vehicle sold from last year ($4,295 versus $5,690). However, that reflects more a rebalance of supply and demand. In Q3 2019 when supply and demand were more normalized, the figure was $1,770. And so, the Fed is winning here as well. Competitor AutoNation is 70% larger in vehicle sales, but Group-1 has a parts & services business that is 40% larger on a relative basis; service drives visits. That and a greater exposure to Texas appear to be what is driving greater visits (below). Texas was an outperforming market for Q3, and Texas is 45% of Group-1’s visits vs. only 18% for AutoNation. Demographically, the two chains are similar, but with AutoNation having a higher average household income at $98K versus $94K.