Over the past several weeks there’s been a lot of news around the internal combustion engine (ICE) to electric vehicle (EV) transition, including Tesla’s charge that they are going all in on unit market share, profits be darned. To our ears, this sounded like taking a play from the “Apple playbook".
Apple's full ecosystem allows the company to capture a significant portion of a device’s full life cycle of value, including iTunes, Appstore, payments, and other features. That long and profitable tail is what Tesla wants to capture on each car sale. On its Q1 earnings call, Elon Musk said, “We've taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin…we do believe we're like laying the groundwork here, and that it's better to ship a large number of cars at a lower margin, and subsequently, harvest that margin in the future…” This was not what Tesla’s legacy OEM competitors were hoping to hear. For Q1 2023, Tesla’s average selling price declined 11% which dropped its unit profit margin from $14.8K to $8.2K. At this stage, Tesla makes very little margin on its Services & Other revenue (only $115M in margin on $1.9B in revenue during Q1 2023), which is for non-warranty after-sales vehicle services and parts, paid Supercharging, sales of used vehicles, retail merchandise, and vehicle insurance revenue. Said differently, Tesla needs a bigger app store and user base to make meaningful profits from Services & Other.
As of last December, iPhones accounted for 52.5% of the smartphones in use in the U.S. because its phones better retain their appeal versus Android, and as such, live longer lives. That 52.5% market share is stunning given how central and dominant the smartphone is to all of our lives. What’s more important to you, your car or your iPhone and all it does for you? We find ourselves hard pressed to answer the question, but its probably our iPhone. If that’s right, the “car” in Elon’s eyes has a lot of opportunity for evolution and enhancement, especially if he can make vehicles and brand that retains their appeal.
So where are legacy OEMs at with their unit economics and transition? (Recall we did a deep dive on the industry a month ago.) GM expects to sell around 400K EV units in the U.S. during 2023-2024 versus the 21K sold in Q1 2023 with a focus on affordable SUVs and trucks as shared in the slide below. As part of that, GM CEO Mary Barra on its Q1 call announced, “Work also continues to transform our assembly plant in Orient Township, Michigan to build the GMC Sierra EV and the Chevrolet Silverado EV. We have progressed so far, that it's now time to plan to end the Chevrolet Bolt EV and EUV production, which will happen at the very end of the year. When Orient EV assembly reopens in 2024 and reaches full production, employment will nearly triple, and we'll have a company-wide capacity to build 600,000 electric trucks annually. We'll need this capacity because our trucks more than measure up to our customers' expectations…”. This development has positive implications for commercial real estate in the region.
GM is also going to make a much higher contribution margin, or penny profit, on the Sierra and Silverado compared to the Bolt given the higher ASP ($50K+ compared to $28K+). (The Bolt also had a series of issues, including battery fires, which led to a slowdown in sales.) GM expects to double EV volumes in 2H 2023 compared to 1H 2023 and to have fully ramped its Lordstown battery factory at the end of the year.
On the macro, GM said that they had a strong April, with management raising its profit guidance for the year. GM CFO Paul Jacobson said the company doesn’t feel the need to match price cuts in the EV market after the recent price reductions by Tesla. “We feel good about where we’re priced right now,” Mr. Jacobson said. To conclude, GM is using its playbook from the early-20th century in its competition with Ford and the Model-T, which is to provide consumers with greater choice than what Tesla offers.
Vehicle sales for March showed a continued improving trend following last year’s supply chain and inventory challenges. March sales were up 19.3% MoM from February 2023 level with solid unit volumes which at 1.37M were at the highest level seen since May 2021. We anticipate new car sales for the year to be in the 14.5-15.0M range, up from 13.7M in 2022. Tailwinds to higher sales include increased dealership inventory levels, a high level of new models arriving at dealerships this year, and the return of incentives. For March, inventories were at their highest level since April 2021. The headwind to sales is the persistent weak supply of Japanese models. Dealer inventory levels for the Japanese brands were only 27 days of supply versus 61 days for the Detroit 3.
Honda and Toyota have had two major headwinds over the past three years. First, their production was massively impacted by shortages resulting in them not being able to put units on dealership lots. Honda hopes to be beyond the shortages over the summer which will allow them to return to pre-COVID production levels; they are currently running 10% below 2019. In the U.S., Toyota is running 5% below 2019’s level. Second, they had outsized market share in California prior to COVID; over the past three years, California has seen significant EV adoption (EVs were probably 28% of new car sales in the state during Q1 2023) and the Japanese don’t have an EV product. Toyota has just now prioritized getting EV models to market, making it a 2025-2026 reality at best. Honda has partnered with GM on two large models (likely an SUV and pickup) slated for the 2H 2024. However, it won’t have a complete global EV platform until 2026. Honda’s three plants in Ohio are to be converted to EV production sites in due time. (Remember our Mid-Central Electric Valley theme.)
The gap in Honda’s (and Toyota’s, and Nissan’s) product portfolio is what Tesla, GM, Vinfast, and Fisker (among others) are trying to quickly fill and command. How this shows up in consumer interest in the brands can be seen in Placer data. Below we contrast Tesla with Honda, and we use AutoNation as a benchmark of overall consumer interest in purchasing a new car. In California over the past six months, Tesla has typically been outperforming Honda by 15 percentage points. (The spike in visits to Tesla in January and July was in response to its price cuts.) When looked at versus 2019, Tesla has typically outperformed Honda by 40 points in California. On that basis, Honda has lagged AutoNation by 3 points. Said differently, the market is moving in size and we will be watching closely to see if Tesla becomes the next Apple. At the moment, it’s Tesla’s race to lose.
