Cost-cutting and improving affordability were at the forefront of Tesla Inc. executives mind as the electric-vehicle manufacturer discussed its third-quarter earnings Oct. 18. The Tesla team has reduced the price of its vehicles multiple times this year in an attempt to entice more customers. However, the efforts weren’t enough to meet investors’ expectations as the company posted revenues of more than $23.3 billion and delivered more than 435,000 vehicles during the quarter.
But CEO Elon Musk and his team held firm to its guidance of 1.8 million vehicles delivered for the full year. So far, they have delivered just over 1.3 million vehicles, meaning deliveries would have to climb slightly this quarter to meet that goal.
Musk pointed to vehicle cost as the primary driver of lack of sales, saying that what most car buyers were paying attention to is the monthly payment.
“I just can’t emphasize again how important cost is. It’s not an optional thing for most people; it is a necessary thing. We have to make our cars more affordable," he said.
CFO Vaibhav Taneja said the focus on monthly costs for customers inevitably affected Tesla’s numbers down the income statement.
“We’ve tried to offset such adjustments via focus on reducing costs,” he said. “However, there is an inherent lag in cost reductions, which in turn impacts margins.”
Tesla’s gross profit margin dropped significantly this quarter, 17.9% compared to 25.1% in Q3 2022. The company’s cost per vehicle in Q3 was $37,500 versus $39,400 in the prior-year quarter. The cost has come down, but Musk called his teams’ line-by-line cost reduction method “a grind.”
“I mean first approximation, if you’ve got a $40,000 car, and roughly 10,000 items in that car, that means each thing, on average, costs $4. So in order to get the cost down, say, by 10%, you have to get $0.40 out of each part on average. It is a game of pennies,” he said.
Affordability was also a concern with the Cybertruck, which Tesla workers began producing earlier this year. Deliveries are set to begin on Nov. 30, although Tesla executives haven’t yet named their price. When the Cybertruck was first announced in 2019, its starting price was $40,000 with deliveries starting in 2021, but due to inflation and interest rates rising, it will likely be higher now.
Musk said it will require “immense work” to not only get the price down, but make the vehicle cash-flow positive; he estimated doing so could take up to 18 months. He later also added that he expects to sell 250,000 Cybertrucks a year by 2025.
Interest rates are also a concern in the build out of a planned Mexico gigafactory. Tesla teams are working on infrastructure and factory design but Musk said executives are waiting to go “full tilt” until they have a better sense of the global economy.
“Interest rates have to come down,” he said. “If interest rates keep rising, you just fundamentally reduce affordability. It is just the same as increasing the price of the car. So I just don’t have visibility into it. If you can tell me what the interest rates are, I can tell you when we should build the factory.”
Tesla reported earnings after the closing bell Oct. 18. The following afternoon, its shares (Ticker: TSLA) were down more than 9% to about $220, which cut the company’s market capitalization to about $700 billion. Over the past six months, the stock is still up about 20%.