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Tesla and the ICE/EV Transition: Musk Takes the Gloves Off

Thomas Paulson
Jan 27, 2023
Tesla and the ICE/EV Transition: Musk Takes the Gloves Off

  • Tesla reported better-than-feared Q4 2022 results this week. However, the "new" news was CEO Elon Musk reporting that reaching 2M units in production and sales was an achievable stretch goal for 2023, and that the widely reported upon price cuts were a tactic to do so (also making the unit contribution margins and transition difficult for its competitors--Tesla sells about 40% of its production in the U.S.). As such, those price cuts are seen as not temporary and with increased production, there is maneuverability for them to move lower. True capitalism is at play here and the consumer wins, the environment wins, and Federal Reserve Chair Jerome Powell must be gleeful as lower prices will ripple across the entire new and used car markets. Moreover, dealerships and showrooms are going to be very busy over the next two years given more new models, lower prices, and the $7,500 tax credit.
  • For context, with the lower prices on Teslas and the credit, the Models 3 and Y are now well within the $40K-$55K range where 25% of industry volume is sold in the U.S. and the Standard Model 3 with credits is $37K, or sub-$40K where 40% of the volume is sold.
  • Musk noted, “The most common question we've been getting from investors is about demand. I want to put that concern to rest. Thus far in January, we've seen the strongest orders year-to-date than ever in our history. We currently are seeing orders at almost twice the rate of productionbasically, price really matters. I think there's just a vast number of people that want to buy a Tesla car but can't afford it. These price changes really make a difference for the average consumer…and it's always been our goal at Tesla to make cars that are affordable to as many people as possible so I'm glad that we're able to do so. Yes, I think it's a good thing, all things considered.”
  • What’s next? Musk teased that there could be a sub-$30K priced model coming. The Chevy Bolt starts at around $27K.
  • The other "new" news is that Reno, NV that will get the new production in the U.S. with Tesla expanding its battery plant there to also produce vehicles (Recall that we have been saying that a new location would be announced this year). Moreover, from Musk's comments, it sounds like if 1H 2022 goes well, another U.S. plant location may be identified by year end.
  • One of our major stories from 2022, was that 2023 is going to be year that EV market was going to evolve from a Tesla story to a Battle Royale between all participants as legacy brands finally brought their electric SUVs and trucks to market. The Royale has begun.
  • The hammer that Tesla will use in this Royale is its superior manufacturing prowess. Tesla will generate over $100M in automotive revenue for 2023, and the gross margin per unit contribution is still expected to be an attractive 28% (representing $16K in gross profit). None of the legacy OEMs will have positive unit contributions on their EVs this year. For perspective, in 2022 BMW’s unit contribution from internal combustion engines (ICE) vehicles was $8.7K on over $130B in automotive revenue and the gross margin is 15%. Additionally, BMW’s unit figure is flattered by more aftermarket parts. Even compared to Porsche’s figures of 20% ($20K), Tesla’s figures are impressive. The Model S goes for around $100K and Tesla’s contribution margin on that is likely around $30K+, or 50% higher than on a Porsche 911 or Taycan.

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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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