Car Wars: China vs Tesla

[albaby1]

@btresist

Tesla finally produced enough vehicles in 2023 that they were able to cut prices to increase marketshare in the major markets.

Exactly. They increased their market share - but they reduced their prices to do it. Nearly all companies have that option. That’s why demand curves slope downward. If you reduce your prices, you can sell a larger quantity. If you make more product, you have to reduce prices to sell the extra quantity (other things being equal). That is the common state for most companies.

That doesn’t mean they have material unmet demand at current prices, or that their current prices are set higher than the market-clearing price (which would show up in excessively high margins). If they had significant unmet demand at then-current prices, they could have just sold more cars without lowering prices. Given that Tesla has adjusted their prices (ie. lowered them) at times to clear demand, their current wait times for vehicles in Europe aren’t especially long, and that their most recent profit margins were in line with what industry leaders have routinely achieved without subsidies, it’s less likely now that there is significant unmet demand for the Model Y.

Again, it’s only one quarter. Maybe Tesla’s margins will spike up again to be sufficiently higher than the subsidies to indicate unmet demand for the Y at current pricing. We’ll have to see. But there’s not much in the market data to suggest that Tesla could significantly increase the size of the Euro BEV market at their current prices just by pumping up their output.

[btresist]

@albaby1

Exactly. They increased their market share - but they reduced their prices to do it. Nearly all companies have that option.

Here is what you are missing. Tesla is the only company that can reduce its BEV prices low enough to substantially gain market share (against all vehicle types) and still make a profit on its BEV sales.

This is what they demonstrated in 2023 even in the hyper competitive Chinese market. No one else can say that with the possible exception of BYD.

So for Tesla, gaining market share in a sustainable way (i.e., profitably) is primarily a matter of supply. It can do this even while spending far more on R&D (per car) than one else. This is important because it suggests that it will be very difficult for any other company to catch up to Tesla’s technological advantages. Tesla substantially increased R&D spending from Q1 to Q2 this year, which contributed to its decline in operating margins.

@albaby1

Again, it’s only one quarter. Maybe Tesla’s margins will spike up again to be sufficiently higher than the subsidies to indicate unmet demand for the Y at current pricing.

I have to admit that I am not all that concerned about stuff that happens at quarterly time scales. Tesla announced weeks ago that their gigafactories would shutdown at various times this quarter for upgrades. Deliveries will undoubtedly be impacted, but so what?

More important in my mind to future sales are whether the charging infrastructure continues to expand and their AI/FSD development. And it is worth remembering that Tesla is selling all its cars with minimal advertising.

As for subsidies, I think those help Tesla’s competitors far more than Tesla. It made competitors offerings cheap enough that Tesla had to drop the prices of some of its most expensive vehicles to qualify for the incentives. Subsidies also contributed to Tesla sharing its charging network and is probably causing less efficient battery supplies for its US cars as these have to be made in the US. Take away the incentives and while Tesla might be selling fewer cars, the margins would probably be higher and its advantages over competitors greater.

[albaby1]

@btresist

Here is what you are missing. Tesla is the only company that can reduce its BEV prices low enough to substantially gain market share (against all vehicle types) and still make a profit on its BEV sales.

I’m not missing it - I just don’t think it’s particularly important. Again, most companies in most industries have the choice to reduce their profit margins to increase supply. That’s the typical situation. What’s unusual is the ability to significantly increase product supplied without having to cut your prices.

@btresist

As for subsidies, I think those help Tesla’s competitors far more than Tesla.

They help the margins of everyone that qualifies equally. If there’s a 25% subsidy for BEV’s (as in Norway), then everyone who sells a BEV can charge a higher price for that car than they could in the absence of the subsidy - and that higher price point increases profits.

That makes it particularly relevant to the point we were discussing - whether Tesla is (or could be) driving BEV adoption in Europe. Tesla right now supplies less than 20% of the BEV market - the overwhelming majority of BEV’s are made by other manufacturers. I don’t agree this is due to supply constraints. Tesla had to significantly cut prices in order to sell their output at the now-higher levels. That resulted in a profit margin that is: i) very similar to that of leading ICE auto manufacturers; and ii) not much higher than the level of subsidy available across their markets (if at all). Which suggests that there isn’t a vast reservoir of untapped demand at current prices that Tesla could increase Model Y and 3 sales into.

The bigger picture implication is that BEV demand in Europe may not be especially strong - even for Teslas. ICE sales are climbing - and while BEV sales are climbing also, that rate of growth is moderating. Green advocates have argued (and hoped, I think) that there was an inexorably fast “S-curve” of adoption for BEV’s - that once adoption got past 10% or so market share, it would move very quickly to around 70-80% (as happened in Norway). If that doesn’t happen - if consumers don’t react to seeing 10-20% of the market go EV by stepping up their desire for EV’s - then that has some significant implications for the evolution of the auto market. And for Tesla as well - I don’t think their business plans anticipate a world where BEV market share were to stall out at niche levels, rather than continuing to climb quickly to most of the market.

[buynholdisdead]

@albaby1

I’m not missing it - I just don’t think it’s particularly important. Again, most companies in most industries have the choice to reduce their profit margins to increase supply. That’s the typical situation. What’s unusual is the ability to significantly increase product supplied without having to cut your prices.

I guess you haven’t heard the saying “Your margin is my opportunity”. It is not typical it is a key advantage. Business’s that can do it and still stay cash flow positive are a great investing opportunity. It is what is referred to as a “moat”. You can argue the point but not to admit it seems flawed.

Andy

[albaby1]

@buynholdisdead

I guess you haven’t heard the saying “Your margin is my opportunity”. It is not typical it is a key advantage. Business’s that can do it and still stay cash flow positive are a great investing opportunity. It is what is referred to as a “moat”. You can argue the point but not to admit it seems flawed.

To a first order of generality, nearly every business in every industry has a positive profit margin. Sure, there are always some businesses that are experiencing economic problems, or on their way to failure. But the general state of affairs is that businesses will generate a positive return on capital and generate some profits. Which means, of course, that nearly every business has the opportunity to cut prices to increase product supplied - it just would cost them a hit to their margins. That is pretty typical.

What’s not typical are outsized margins relative to industry peers. When Tesla’s operating margins rose to north of 15%, it created the possibility that Tesla does have some atypical advantage. But if their margins continue to track those of conventional automakers going forward, it’s hard to see that in the data.

[buynholdisdead]

@albaby1

To a first order of generality, nearly every business in every industry has a positive profit margin. Sure, there are always some businesses that are experiencing economic problems, or on their way to failure. But the general state of affairs is that businesses will generate a positive return on capital and generate some profits. Which means, of course, that nearly every business has the opportunity to cut prices to increase product supplied - it just would cost them a hit to their margins. That is pretty typical.

You are being generic Albaby, but what you don’t realize is that Tesla is not a generic company. They are the leader in their field and proving it with their innovative production facilities. You can keep giving out generalities but they have nothing to do with what Tesla is doing. Just like Amazon they are squeezing out the profits from their competition. You want to point to Toyota but Toyota is basically an Ice company. They haven’t even really dipped their toes into EV. I suspect you have been arguing against Tesla from the start and here we are, a company with a marketcap of 774 billion.

Andy

[Leap1]

@buynholdisdead regardless of the market cap entirely, I really do not like taking part in this sort of conversation. I wont do so here either.

The idea of an endless stream of verbiage where one person does not get it to me is not an education in legal matters.

[albaby1]

@buynholdisdead

You are being generic Albaby, but what you don’t realize is that Tesla is not a generic company. They are the leader in their field and proving it with their innovative production facilities.

I’m not claiming that Tesla is a generic company. And not just because few large companies are “generic” (Wal-Mart isn’t a generic retailer, Toyota isn’t a generic automaker [and neither is VW], Google isn’t a generic software company, etc.). I’m just pointing out that having a profit margin, and having the ability to increase market share by lowering prices at the cost of reducing that profit margin, is an extraordinarily common feature of companies. So whatever makes Tesla unique isn’t that.

I’m well aware that Toyota is an ICE company. That’s why I’m drawing the comparison. If Tesla still generates profit margins that are significantly higher than an ordinary ICE company, then that’s a data point that they might indeed be doing something particularly remarkable with their production facilities. Or more to the point I was discussing with btresist, that they might be doing something that would let Tesla supply more product to the European market to hasten the conversion from ICE to BEV’s. If they are posting margins close to what they were doing during the pandemic era, then they could easily do that.

But it looks like Tesla’s margins aren’t going to hit those levels. We’ll know more soon - but Q2 came in at 18.1%, under the “floor” of 20% core auto gross margins Tesla had guided towards. Q3 is expected to be the same. Their operating margins aren’t much higher than the amount of subsidies that are provided to BEV’s.

Those margins are certainly higher than what incumbents are making on their BEV’s - but they’re in line with what the incumbents get on their ICE businesses, and (again) are not much bigger than the subsidies. Which indicates that Tesla doesn’t have a whole lot of slack unmet demand at current prices that would allow them carte blanche in expanding. It also indicates that in a “normal” mature BEV market - no pandemic supply chain problems and lots of market participants - Tesla’s competitors have squeezed Tesla’s profits down. Again, we’ll see if that’s just a short-term phenomenon, or whether their margins rebound.

[buynholdisdead]

@albaby1

I’m just pointing out that having a profit margin, and having the ability to increase market share by lowering prices at the cost of reducing that profit margin, is an extraordinarily common feature of companies. So whatever makes Tesla unique isn’t that.

Yes it is, They can do that because their manufacturing process is unique. It is just like I said about Amazon. A company that can stay a float while lowering margins is a unique company. Especially if they can do it while driving others out of business. Amazon proved it, Buffett preaches it. Like I said, that gives them a moat as the low cost producer.

@albaby1

ut it looks like Tesla’s margins aren’t going to hit those levels. We’ll know more soon - but Q2 came in at 18.1%, under the “floor” of 20% core auto gross margins Tesla had guided towards. Q3 is expected to be the same. Their operating margins aren’t much higher than the amount of subsidies that are provided to BEV’s.

A quarter or two isn’t going to prove anything. Tesla has used their margins to the advantage of the company. You think they have to do it, I think they are using it as a tool. They are managing their margins, we will have to wait years to see how this plays out.

Andy

[buynholdisdead]

@Leap1

@buynholdisdead regardless of the market cap entirely, I really do not like taking part in this sort of conversation. I wont do so here either.

The idea of an endless stream of verbiage where one person does not get it to me is not an education in legal matters.

In order to actually keep your promise Leap you would have had to ignore this string and not responded in the first place.

Andy

[albaby1]

@buynholdisdead

They can do that because their manufacturing process is unique. It is just like I said about Amazon. A company that can stay a float while lowering margins is a unique company. Especially if they can do it while driving others out of business.

I guess I don’t see the uniqueness. Any company that has a positive profit margin has the ability to lower their prices without going out of business. And they would increase their product supplied to the marketplace as well. And as far as I can tell, Tesla hasn’t driven their competitors out of business. The only companies that failed were a few startups that had built barely a handful (if any) of vehicles - meanwhile, there’s more companies offering EV’s today than two years ago, with Toyota and Honda starting to enter the fray.

It’s funny how people can have different perspectives on things. I don’t see Tesla’s price cuts as them choosing to use their margin to their advantage. I saw it as them being forced to cut prices to clear inventory. They had huge pricing power during the pandemic, when supply chain disruptions kept competitors from bringing product to market. But as soon as that was over, and other automakers had inventory in stock, Tesla’s inventories ballooned and they were forced by their competition (both EV and ICE) to slash prices to clear inventory.

[Leap1]

@buynholdisdead

In order to actually keep your promise Leap you would have had to ignore this string and not responded in the first place.

I thought you were learning about the law. There were no promises out of me.

[buynholdisdead]

@albaby1

It’s funny how people can have different perspectives on things. I don’t see Tesla’s price cuts as them choosing to use their margin to their advantage. I saw it as them being forced to cut prices to clear inventory. They had huge pricing power during the pandemic, when supply chain disruptions kept competitors from bringing product to market. But as soon as that was over, and other automakers had inventory in stock, Tesla’s inventories ballooned and they were forced by their competition (both EV and ICE) to slash prices to clear inventory.

Ahhh that makes sense Albaby. I think they did it as a competitive advantage and you see it as a weakness. Only time will tell. But if they do get FSD to run and drop the price of their vehicle to the cost of making it, what will you think then? A FSD subscription model on top of an automotive production model could be very powerful.

Andy

[Goofyhoofy]

@buynholdisdead

and drop the price of their vehicle to the cost of making it

That will never happen, simply because people would buy it at that price and Tesla would make no profit, ever. Yes, some percentage of people would “subscribe” to FSD, but then you would have to make that “profit per car” back over the lifetime of the subscription, and then also make up for those people who don’t take the subscription, which percentage would only be a guess. Whatever it is, the “paying customers” would have to make up for the non-paying ones, which means pricing the subscription higher than if it were included in the profit margin of the car in the first place.

It’s worth mentioning that FSD is going to come with plenty of its own costs: liability for accidents if the first and most obvious, but there is going to have to be a building or two full of software engineers updating code, improving security against the ever improving hackers, adding new options, and so on. It’s not as though once it’s done it’s done. It hasn’t been for Microsoft, for Google, for Amazon, for Apple, or for anybody else. Why would this be different?

Some of these ideas that float around are just loopy. Nobody’s going to own a car. They’re all going to look like toasters. Tesla will give away cars at cost. I mean, yes of course there are going to be changes, and big ones - but over a long time frame, that’s just how it works.

[buynholdisdead]

@Goofyhoofy

That will never happen, simply because people would buy it at that price and Tesla would make no profit, ever. Yes, some percentage of people would “subscribe” to FSD, but then you would have to make that “profit per car” back over the lifetime of the subscription, and then also make up for those people who don’t take the subscription, which percentage would only be a guess. Whatever it is, the “paying customers” would have to make up for the non-paying ones, which means pricing the subscription higher than if it were included in the profit margin of the car in the first place.

I like your word of never and then go on to explain how it could happen. So now we are at it might not happen. At least you are not one of the never never’s.

@Goofyhoofy

Some of these ideas that float around are just loopy. Nobody’s going to own a car. They’re all going to look like toasters. Tesla will give away cars at cost.

Right like people will fly, people will walk on the moon, and the human race will be on Mars. Just plain loopy. But loopy is how mankind moves ahead. If it weren’t for the loopy ones the rest of us would still be living in caves and questing for fire.

Quest For Fire

Andy

[btresist]

@albaby1

I guess I don’t see the uniqueness. Any company that has a positive profit margin has the ability to lower their prices without going out of business.

Companies A and B both sell $50K BEVs. Market research indicates that both could double their market share by reducing the price to $40K. Company A calculates that it would lose $9,000 for every car sold at the lower price. The more efficient Company B finds that while its margins would decrease, it would still make $2000 profit per vehicle.

Which company is better positioned to go after BEV market share?

“Uniqueness” is not found in generalities but in the specifics. What makes Tesla unique is the quality of the product and the way it is made. It makes a profit selling BEVs. That is currently unique.

[albaby1]

@btresist

Companies A and B both sell $50K BEVs. Market research indicates that both could double their market share by reducing the price to $40K. Company A calculates that it would lose $9,000 for every car sold at the lower price. The more efficient Company B finds that while its margins would decrease, it would still make $2000 profit per vehicle.

Which company is better positioned to go after BEV market share?

Well, in that hypothetical, it would be the mythical one. You know - the company making a high enough gross margin (north of 35%) that they could lower their price by 20% and still have a positive operating margin on that car? No company like that exists in the real world - and no company in the real world has (or had) enough room under their margins to do anything like that. They’d be foolish to do this, of course - since dropping their operating profit to $2K means they’re actually producing the car at a loss without the $5-7K of subsidies they’re getting, so the going concern of the company would depend on those subsidies staying in place.

Plus, if we’re constructing an analogy, it wasn’t that long ago that Company B was losing $9K per car as well. That happens in the first stages of ramping up BEV production. But over time, the battery supplies and factories get up to scale, they get a design platform in place specifically designed for BEV’s, and that margin gets better. Since Company B makes tons of money selling ICE cars, it has more than adequate resources to get through those initial phases.

Oh - and don’t forget Company C! You know - they’re the company that was flooding the world’s largest BEV market with cars at $40K and also making a profit. You see, that was a major factor in why Company B lowered their prices - they were starting to face large inventory buildups over time as Company C was pumping out product in that other market. Slashing prices doesn’t help Company B double their market share there.

I don’t think that there’s any debate that Tesla’s profit margins at their very peak (Q1-Q3 2023), juiced up from the pandemic’s distortions on the market, were awesome - and Tesla had plenty of room to cut from there in order to defend and/or pick up market share (either in China or Europe). But they’ve played that card already. They can’t play it again from a lower margin.

Which is my point. If Tesla’s margins have fallen to levels where they are close to those of incumbent ICE automakers, they won’t have the ability from here to do anything like what Company B does in your hypothetical.

@btresist

It makes a profit selling BEVs. That is currently unique.

I mean, except for all the automakers that are competing against it in China that make profits selling BEVs. And since China is (or will be by Q4) their largest and most important market, that matters a lot. It will matter more if (or as) they ramp exports to Europe.

[buynholdisdead]

@albaby1

Which is my point. If Tesla’s margins have fallen to levels where they are close to those of incumbent ICE automakers, they won’t have the ability from here to do anything like what Company B does in your hypothetical.

Except if they add another Revenue stream which has higher margins. You are just thinking of what all the other auto companies are doing, not what Tesla is doing. They have many more Revenue streams in the works.

Andy

[btresist]

@albaby1

Since Company B makes tons of money selling ICE cars, it has more than adequate resources to get through those initial phases.

The Chevy Volt, Nissan Leaf, and VW e-golf are older than the Model 3. How long do those “initial phases” last for OEMs? Just curious.

@albaby1

Slashing prices doesn’t help Company B double their market share there.

And yet:

" Tesla Inc (NASDAQ: TSLA) reported that its EV sales rose 9.3% YoY in August, with its market share of the Chinese EV market almost doubling from July as sales were boosted by lowered prices and increased production at its Shanghai plant." Tesla Doubles China Market Share While Its Chinese EV Rivals Expand To Europe

@albaby1

I mean, except for all the automakers that are competing against it in China that make profits selling BEVs.

Aside from BYD, who also gets a lot of revenue from selling hybrids, what companies in China make profits from selling BEVs?

https://www.fitchratings.com/research/corporate-finance/few-chinese-ev-makers-are-profitable-despite-volume-boost-13-09-2022

[Goofyhoofy]

@buynholdisdead

Right like people will fly, people will walk on the moon, and the human race will be on Mars. Just plain loopy. But loopy is how mankind moves ahead. If it weren’t for the loopy ones the rest of us would still be living in caves and questing for fire.

Discontinuous changes do happen, obviously, and yet they’re nearly always a product of slow, methodical improvement of older technologies. The first iPhone was just an updated iPod Touch, which was merely an improvement on the original & nano.

People flew before the Wright Brothers, they just used gliders, not power. Smaller engines enabled the combination of technologies, yet it took another 20 years before anything meaningful happened in the space.

The V2s launched in 1944, and we got TelStar in 1964 and to the moon in 1969. Slow improvement.

The internet existed in 1969, although it only connected a few universities. You and I didn’t get to play with it for 30, maybe 40 years. In 1969 it was probably not a meaningful investment strategy, even though it would go on to change everything , you see?

@buynholdisdead

I like your word of never and then go on to explain how it could happen. So now we are at it might not happen. At least you are not one of the never never’s.

I will say it will be “never” that Tesla gives away its cars for no margin. Never ever, except in times of economic distress when the company posts no profit but desires to keep the factories operating rather than liquidated. Ford, GM, et. Al. Have gone through such times, but “never” on purpose.

FSD will come true, someday. Possibly tomorrow, possibly a decade from now or beyond. We see the first baby steps now, with self-driving taxis in a couple of cities, going through the growing pains of any incipient technology. Tesla is exceptionally well positioned to take advantage of this, given that they are already profitable and are on a path to achieve it. That doesn’t mean there is any validity to the thesis that “they are going to give the cars away”, nor, in my view, that people are going to give up their ownership and jump immediately to the Tesla-Taxi service. (Is it possible something like this could happen over 50 or 100 years? I suppose, but I find it as unlikely as people giving up their washing machines “because they are in use only a few hours a week.”)