Tesla Makes a Promise to Its Customers

The manufacturer of premium and luxury electric vehicles is facing soaring prices for raw materials such as nickel and cobalt.

Elon Musk and Tesla  (TSLA) – Get Tesla Inc. Report face challenges that don’t seem to end.

The same challenges affect the entire automotive sector and even businesses beyond.

The biggest of these difficulties is the profound disruptions caused to supply chains by the COVID-19 pandemic. This pandemic has prompted countries to take restrictive measures, such as lockdowns, to prevent further spread. Car manufacturers have therefore had to temporarily close factories located in badly affected areas. Their suppliers have also been impacted, causing a shortage of spare parts and chips needed to assemble some models. 

After months of stabilization, the resurgence of COVID-19 in China this year prompted Beijing to impose a new lockdown on Shanghai, a city where many car factories, including Tesla’s, are located.

Several Price Increases for Tesla Vehicles

And as if things weren’t already difficult, there was the Russian invasion of Ukraine at the end of February. This war has led to soaring prices for raw materials such as nickel, cobalt and palladium needed in the development of batteries for electric vehicles. Unsurprisingly, this explosive cocktail of world events has led to higher costs for car manufacturers, which are also facing an increase in the cost of labor. 

As a result, most automotive groups have therefore decided to pass these costs on to consumers by raising car prices. The imbalance between supply and demand due to low inventories has led to a real spike in vehicle prices.

After having regularly increased the prices of its vehicles in 2021, Tesla had taken a kind of break at the start of the year. But in March, the Austin, Texas automaker started raising prices again. In April, Musk’s group carried out a new price hike on long-range vehicles.

In June, however, the company made a further price increase on almost all models. The Model 3 sedan, Long-range version, saw its price increase by $2,500, from $54,490 to $57,990. As for the Model Y SUV/crossover, it saw the prices of the different variants increase: The Model Y long range went from $62,990 to $65,990, an increase of $3,000. The Model Y performance, for its part, saw its price climb by $2,000, from $67,990 to $69,990.

The price increase of the Model S luxury sedan had risen sharply. The price of the dual motor all-wheel drive version has risen from $99,990 to $104,990, up $5,000. The price hike was $6,000 for the Model X luxury SUV, including the dual motor-all Wheel drive long. Its price rose from $114,990 to $120,990.

These various price increases have allowed Tesla to increase its profit margins. In the first quarter of 2022, the world’s leading automotive group, by market capitalization, posted an adjusted EBITDA margin (margin before interest, taxes, depreciation and amortization) of 26.8%, up from 17.7% a year ago. 

Musk Says Tesla Could Lower Its Prices

GM’s adjusted EBIT margin (margin before interest and taxes) was 11.2%, down 2.4 percentage points from a year ago. Ford’s adjusted EBIT margin is 6.7% compared to 10.8% in the first quarter of 2021. Basically, Tesla is significantly more profitable than Ford and GM. 

Tesla also reported a first quarter net income of $3.31 billion. That’s a 658% jump from the first quarter of 2021. By comparison, GM recorded a net profit of $2.93 billion in the first quarter, down 3.04% compared to the first quarter of 2021. Ford, for its part, has gone into the red when the group, led by Jim Farley, announced a net loss of $3.1 billion from January to March.

Unlike rival Rivian  (RIVN) – Get Rivian Automotive Inc. Report, which faced protests from customers after raising prices this year, Tesla has yet to register any protests or anger from its customers. But Musk is aware that inflation, now at levels not seen in 40 years, is likely also affecting Tesla customers, as a potential recession looms.

The billionaire has just made a decision. It is more of a promise than a decision. The tech titan says Tesla could lower its prices. It all started with a question from a Twitter user.

“Any plans to down the price of cars after pandemic or supply chain matters?” the user asked.

“If inflation calms down, we can lower prices for cars,” Musk responded.

Reactions to this announcement were anything but enthusiastic.

“Or you could just lower prices for cars,” commented one Twitter user.

“They were expensive before inflation climbed, nice try to control a narrative,” another added.

“In other words, you’re never lowering prices,” said another user.

The Federal Reserve has started to aggressively raise its rates to fight inflation but economists doubt that it will come down in the coming months.

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