Musk Optimistic About Price Cuts Amid Economic Uncertainty
Tesla's CEO Elon Musk is gearing up to reduce the prices of electric vehicles once again, should the economy hit a rough patch. His confidence stems from a windfall of tax credits offered by the Biden administration. During these tumultuous times, Musk believes it is justifiable to compromise margins to produce more vehicles. However, news of potential price cuts led to a near 10% fall in Tesla's shares on Thursday, as investors fear the ongoing erosion of the company's margins.
Tax Credits Bolster Tesla's Competitive Edge
Despite the concern over Tesla's margins, the company gains a substantial competitive advantage from tax credits associated with battery manufacturing. These credits could potentially place Tesla ahead of its rivals who manufacture fewer batteries, as indicated by an analysis of Tesla's Q2 results by Reuters.
Subsidies and Price Cuts - Tesla's Winning Strategy
Since late last year, Tesla has been cutting prices in the United States, China, and other markets. This includes the Model Y, currently, the world's top-selling vehicle, which is now 20% cheaper in the U.S. than it was in Christmas 2022. Factoring in the $7,500 Biden tax credit, the price reduction totals 35%. This strategic blend of subsidies and price cuts has led to a 35% boost in Tesla's U.S. sales for Q2 compared to the same period last year, according to data from Cox Automotive.
US Government Subsidies Counterbalance Tesla's Price Cuts
The battery tax credits offered by the Inflation Reduction Act have provided a subsidy of approximately $900 to $1,400 on every Tesla sold in the U.S. during Q2. Additionally, Tesla gained $600 per vehicle from selling regulatory offsets to other manufacturers to meet emission standards. These combined U.S. government subsidies have significantly offset the $2,500 price cut in the quarter for the long-range Model Y.
Tesla's Battery Production Credits Lead the Pack
Tesla, producing batteries in collaboration with Panasonic in Nevada and expanding its production in Texas, has emerged as the largest recipient of battery production credits under the Inflation Reduction Act. The consultancy Benchmark Mineral Intelligence projects that Tesla and Panasonic will collect around $1.8 billion in production credits this year, far outstripping the expected $480 million for General Motors and its battery supplier, LG Energy Solution.
Musk Calls for Removal of Subsidies Despite Tesla's Benefit
Even as Tesla profits from these tax credits, Musk has expressed criticism towards President Biden and many of his policies, advocating for the removal of subsidies. Despite this stance, Tesla's CFO, Zach Kirkhorn, anticipates booking between $150 million and $250 million in battery credits each quarter this year, a figure expected to rise with Tesla's increased battery production.
The Impact of Tax Credits on Tesla's Profit Margin
While many analysts exclude the regulatory credits Tesla collects from other automakers from calculations, they do consider the Biden manufacturing credits when assessing its underlying profit margin. Tesla's automotive gross margin, excluding the regulatory credits, dropped to 18.1% in Q2, down from 26% the previous year.