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Autos: Tesla’s Challenging Pop Star Moment

Thomas Paulson
Apr 5, 2024
Autos: Tesla’s Challenging Pop Star Moment

Pop stars eventually age with newer sensations stealing the limelight, while that aging star has to work to remain relevant by refreshing their repertoire and look. A few extraordinary stars have done this successfully, Cher, Travolta, or Sinatra come to mind. Tesla is a pop star, having the electric vehicle (EV) stage largely to itself with stunning new songs (car models, in this example) that were genre-defining. However, 2023 was the year that legacy brands and new companies introduced a large number of new models, which compelled Tesla to lower prices to remain competitive (higher interest rates were also impactful). Additionally, the “roof” on early EV adopters seemed to have been reached with many only halfway there buying a hybrid as part of their transition. Hybrid vehicle sales soared, and many brands swapped EV manufacturing capacity for hybrid vehicles while pricing below Tesla on these models. The weighting of hybrid sales weighting as a percentage of new vehicle sales (8.6%) has now exceeded the EV weighting (6.9%) for seven straight months. Lastly, the lower prices for new Tesla models have disrupted their resale prices, leaving some owners underwater (including Hertz who made a huge bet on the brand). The lower resale prices as well as high repair costs and higher accident incidents were a huge dent for the brand. In response, Tesla turned to advertising, which it had previously shunned (and which contributed to its industry-leading profit margins) to reestablish its own narrative (a campaign that has just begun).  

The chart below shows that we are still running meaningfully below pre-pandemic levels, with new vehicle sales for March were at 15.4M units on a seasonally adjusted annual rate (SAAR) basis. Incentives continue to ramp at $3,150 per vehicle (all types) versus $1,543 last year per industry analysts. More are likely to come, for example, this week Hyundai increased its incentive for the IONIQ 5 from $5K to $7.5K and Ford, last month, cut prices on the Mach 2 by $8,100. Inventory was at 48 days supply, appreciably above last year’s 35 days. On a year-over-year basis, sales for the month were up +4%, with hybrids up +31% and EVs up +6%. Tesla’s sales were down 14%, putting it at 50.7% share of EVs compared to 62.6% last year. Honda was up +12%, Toyota up +23%, and Volkswagen up +16%. We suspect that the pace of industry sales reflects the improved buying conditions--more money-on-the-hood and more hoods on the lot (i.e., inventory).

While incentives are up, consumers are also choosing smaller models which cost less, driving compact sales as shown in the figure below from Cox Automotive.


Source: Cox Automotive Q1 2024 Industry Insights and Sales Forecast

California is the most penetrated state for EVs at 27%, and so that’s the market to look at to better understand Tesla’s status as a pop star. Consumer traffic via Placer is a combination of window shoppers, new car buyers, and repair/service. (Tesla venues in Placer are showrooms and repair/service locations. By contrast, for legacy brands like Ford, venues are repair/service locations). And so, the declines for the Ford venues in California, which we show in the figure below, could reflect less service this year because of last year’s surge. (It could also reflect fewer buyer visits as well.)

Tesla’s top 15 showroom venues (15 out of 56) in California are still performing well in visits, up 20% year-over-year. This suggests that as a result of the price cuts and “sales”, Tesla is attracting visitors to the showrooms for “tire kicking” and test drives. However, new car buyers are choosing the alternatives (Curiosity in the Cyber Truck could also be a driver).

With March sales in the books, Tesla reported quarterly deliveries on a global basis of 387K, representing a -20% decrease from Q4 2023 and -8% from Q1 2023. (This was a company that was planning for 50% annual unit growth for years to come at this time last year.) While Tesla stated that the Red Sea attacks and an arson attack in Germany impacted deliveries, those would not have been relevant to the U.S. where its production facilities are in Fremont and Austin. The soft March results also follows soft January and February results, raising concerns that Tesla needs to ramp up design for refreshed models (a new model isn’t expected until 2025) and that margins may move from industry-leading to industry-average. Another weighing concern is that the brand may have lost some consumer love given Elon Musk’s other interests--the brand and Tesla’s manufacturing prowess are two of its most valuable assets. Looking at PersonaLive customer segmentation data for Tesla's dealership captured market in California over the last six months versus the year-ago period (below), we're surprised by the extent of the changes. The segments showing large drops are more moderate-income, culturally diverse visitors, while the strong gains are the more affluent segments.

Looking at Placer data for Tesla's Fremont Factory, the intensity of shifts worked has slowed since July (we first flagged the slowdown in September) as the slowing pace of deliveries followed a downshift in the second half of 2023. We see a similar dynamic at Austin, where shifts worked peaked in August 2023 and slid for the remainder of the year. The uptick in January and February likely reflects the new production of the Cyber Truck (the ramp started in December). Incidentally, we have begun to see sporadic instances of Cyber Trucks in Southern California.

We see a similar dynamic at Austin, where shifts worked peaked in August 2023 and slid for the remainder of the year. The uptick in January and February likely reflects the new production of the Cyber Truck (the ramp started in December).

Where does all of this put auto retail? Well, consumers are still spending, but scrutinizing that spend to make sure they make the right choice in brand, technology, and service. These should increase the profile of the dealership, allowing them to compete for sales through the knowledge and empathy of their sales force, the convenience, quality, and reputation of their aftermarket service, and the depth and dollars-on-the-hood of inventory. This increased influence of the dealer was evident in Ford's recent announcement that they will build more hybrids. As it relates to Tesla’s “pop star moment”, it looks like some new breakout hits are sorely needed. Elon Musk has repeatedly demonstrated that when it's called for, we can do anything. And so, we’ll be closely watching to see if Musk can pull a Cher, Travolta, or Sinatra. What can they do near term? Late this week, Tesla announced a $7K price reduction on the Model-Y

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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