After a year-long &#34;global price war,&#34; Tesla's gross margin has dropped from 25% in the same period last year to 18.2% in Q2 of this year, significantly squeezing its profitability. However, Tesla still seems confident.
On Wednesday local time, during Tesla's Q2 earnings call, the company stated that it will continue to lower prices during this &#34;turbulent period.&#34; In other words, if interest rates continue to rise, Tesla will continue to lower prices.
Tesla told analysts:
<blockquote>
Sometimes it seems like the world economy is collapsing, but the next day everything seems normal again. I really don't know what's happening. We are in a turbulent period.
</blockquote>
After Tesla made these comments, its stock price fell more than 4% in after-hours trading, but it remained relatively flat compared to the previous close.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e087359b-e14b-4b62-b7d4-7048c82cda47.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e087359b-e14b-4b62-b7d4-7048c82cda47.png"/>
<h2>&#34;Value for Volume&#34; Strategy Strengthens Tesla's Dominant Position</h2>
Since the end of last year, Tesla has lowered prices multiple times in the United States, China, and other major markets, and implemented more discounts and incentives to reduce inventory and cope with increasing competition and economic uncertainty.
The &#34;value for volume&#34; strategy has indeed been effective, with the company's Q2 revenue and profits exceeding expectations, and deliveries reaching a record high.
However, at the same time, the significant price reductions have put pressure on Tesla's automotive gross margin.
According to calculations by Reuters, in the second quarter, Tesla's automotive gross margin, excluding regulatory credits, dropped from 19% in Q1 to 18.1%. In comparison, this figure was 26% a year ago.
In January, Tesla's CFO Zachary Kirkhorn stated that his automotive profit target for this year was 20% (excluding regulatory credits).
However, in the face of generally slowing demand for electric vehicles and expanding inventory, it has been difficult to maintain this target, and Kirkhorn canceled this forecast in April.
According to data released by Tesla, the company's global market inventory is currently at 16 days, higher than 15 days in the previous quarter and 4 days a year ago.
The financial report shows that Tesla's overall gross margin in Q2 was 18.2%, the lowest in 16 quarters, compared to 19.3% in Q1 and 25% in the same period last year.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/5bb8d642-8ddd-4c70-a205-df5c1ccbcc4f.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/5bb8d642-8ddd-4c70-a205-df5c1ccbcc4f.png"/>
Despite the impact on profitability, Tesla still states that it will sacrifice profit margins to drive sales growth.
In response, analysts from Wedbush stated in a report:
<blockquote>
Multiple rounds of significant price reductions have put Tesla in an advantageous position after building its electric vehicle fortress, and now it will further monetize it.
Wall Street Journal previously mentioned that the Tesla Model Y became the best-selling car globally in Q1 2023, replacing the Toyota Corolla, which had held this position for many years. This is also the first time an electric vehicle has become the global sales champion.
</blockquote>
Tesla reiterated its expectation to deliver approximately 1.8 million vehicles this year but warned that production in the third quarter will slightly decrease due to factory upgrades.
It is worth mentioning that in the crucial Chinese market, Tesla is facing increasing competition from local car manufacturers due to the lack of new models. Tesla may have to continue lowering prices to attract customers.
Analysts believe that new models like Tesla's can also help maintain sales growth. However, this highly anticipated electric pickup truck may not be available on a large scale until next year.

TSLA

"After multiple rounds of significant price reductions, Tesla has gained an advantageous position after building its electric vehicle empire, and now it will further capitalize on it."

Last year 25%, this year 18.2%! Tesla's "global price war" still has a lot of confidence.