Tesla uses its profits as a weapon. This is how

Tesla has started a price war using its profitability as a weapon where the EV maker is consecutively reducing the prices of its electric cars to lure
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Tesla is waging a price war against other EV makers with continuous price reduction.
Tesla is waging a price war against other EV makers with continuous price reduction.

Tesla seems to have waged war in the increasingly competitive electric car market, where large legacy players and rising EV startups aim to grab a chunk of the pie. The US electric car manufacturer has, in the recent past, reduced the pricing of its vehicles by up to 30 per cent across the global markets in an attempt to boost its slumping sales. In this strategy, Tesla is using its high profitability as a weapon. The car brand has sky-high profit margins, which allows it to reduce prices significantly, while other EV manufacturers are not in a similar position. Reuters reports that Tesla is leveraging this advantage to retain its supremacy in the global electric car market.

The report further stated that Tesla CEO Elon Musk started the EV price war using the auto company's superior profitability as a weapon, which could significantly affect other manufacturers in the segment. It claims that Tesla can earn up to several times more by selling one vehicle than large car brands like Volkswagen, Toyota or Ford.

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A Reuters analysis reveals that Tesla earned $15,653 in gross profit per vehicle in the third quarter of 2022, which was more than twice as much as Volkswagen AG and four times the per vehicle profit of Toyota. Also, this was five times more than Ford's per-vehicle profit earnings. While Tesla's business model is noticeably different from any other major car brand, as the former opts for direct sales, compared to other automakers' business through dealers.

This means they are not exactly comparable, as other car brands are liable to pay a share of their revenue to dealers, while Tesla doesn't have to do that. However, the high-profit margin because of lower production costs definitely allowed it to announce consecutive price cuts in the recent few months. These price cuts have a fair chance of translating into a higher number of orders and a continuation of expansion for the brand. At the same time, this strategy could put other manufacturers in a difficult situation, depending on their potential to reduce prices.

In the second half of last year, Tesla's estimated order backlog decreased consistently and significantly to less than 100,000 electric cars at the end of December 2022. The automaker pushed for more production volume, helping it to roll out more cars and reduce the waiting period for its consumers.

First Published Date: 22 Jan 2023, 09:33 AM IST
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