Tesla may lower prices in ‘turbulent times’, says Musk

July 19 (Reuters) – Tesla ( TSLA.O ) Chief Executive Officer Elon Musk signaled on Wednesday that he would cut prices for electric vehicles again in “turbulent times,” even as his all-out price war on automaker rivals squeezes the company’s own margins.

The company has cut prices several times in the U.S., China and other markets since late last year, and has increased discounts and other incentives to reduce inventory as it tries to hedge against competition and economic uncertainty.

“One day it looks like the world economy is going down and the next day it’s doing great. I don’t know what’s going on,” Musk told analysts on a conference call. “We are in, I would call it, turbulent times.”

Tesla shares, which were mostly flat after hours, fell nearly 5% after Musk’s comments.

The big price cuts have pressured Tesla’s vehicle gross margin, a closely watched indicator in the industry, but Musk said Tesla would sacrifice margin to boost volume growth.

He reiterated that on Wednesday: “I think it makes sense to sacrifice margins in favor of making more vehicles,” adding that if macroeconomic conditions remain unsustainable, Tesla will have to cut prices.

For example, Tesla this year cut U.S. prices for its Model Y long-range version by a quarter to $50,490.

Tesla’s quarterly vehicle gross margin, excluding regulatory credits, fell to 18.1% in the second quarter from 19% in the first quarter, according to Reuters calculations. That was in line with Street estimates, but a far cry from the 26% it reported a year ago.

Tesla reported a cumulative gross margin of 18.2% in the April-June period, the lowest in 16 quarters.

Earlier, Tesla said in a statement that it was focusing on cost reduction and new product development, adding that “the challenges of these uncertain times are not over.”

“Several rounds of aggressive price cuts have put Tesla in a strong position after building its EV stronghold, and it is now poised to further monetize its success,” Wedbush analysts said in a note.

Tesla reiterated its expectations to deliver about 1.8 million vehicles this year, but said production would slow slightly in the third quarter due to planned downtime for factory upgrades.

“It’s a fine line,” said Thomas Martin, a portfolio manager at Global Investments, which owns Tesla shares.

“They’re trying to get prices right so they can create demand for units, and then they want to run their factories as efficiently as they can … They don’t want to build that inventory.”

Lower pricing coupled with government tax incentives for EV buyers in the United States and elsewhere pushed Tesla’s deliveries to a record 466,000 vehicles worldwide in the April-July period, but dragged down its profits.

However, on an adjusted basis, Tesla earned 91 cents per share, with non-core income and mostly tax revenue of $24.93 billion. Analysts were expecting earnings of 82 cents per share, according to Refinitiv.

FSD license

Musk said on the call that Tesla is in talks with a major original equipment manufacturer to license its “fully self-driving” (FSD) software, but did not name the company. He had previously said the company was open to licensing the driver-assistance system.

FSD does not make the car autonomous and requires driver supervision, and Tesla remains under regulatory protection following several accidents involving its vehicles.

Last year, Musk said the world’s most valuable carmaker would be “worth essentially zero” without achieving full self-driving capability.

Tesla’s stock got a big boost this year after Ford Motor ( FN ), General Motors ( GM.N ) and other automakers and EV charging companies said they would adopt Tesla’s charging technology.

The company’s stock has risen 60% since the first such deal on May 25. It’s up 138% so far this year, helped by expanded federal credits for Model 3s and investor enthusiasm for artificial intelligence.

The company said on Wednesday that lower raw material costs and government tax incentives have helped lower costs per vehicle, but costs have increased driven by cyberdrug, AI projects and a decline in production of 4680 battery cells. Making affordable and compelling EVs.

Tesla received $150 million to $250 million in tax benefits in the second quarter, while similar benefits came from lower raw material costs such as lithium and aluminum.

Tesla said it has made “significant progress” in improving the yield of its 4680 cell production lines, increasing production by 80% in the second quarter from the first quarter in Texas.

In 2020, Musk unveiled plans to produce Tesla’s own EV batteries, the “4680” cells. But the automaker has struggled to meet Musk’s goals for cell production and efficiency.

Tesla says production of its long-delayed electric pickup Cybertruck is on track for early deliveries this year.

Reporting by Akash Sriram in Bengaluru and Hyunjoo Jin in San Francisco; Additional reporting by Abirup Roy, Peter Henderson and Joe White, Writing by Sayantani Ghosh, Editing by Peter Henderson, Matthew Lewis and Sam Holmes

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