Tesla may continue to cut 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 again on electric vehicles in “turbulent times”, even as his wide-ranging price war against automaker rivals squeezes the company’s own margins.

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

“One day the world economy seems to be falling apart, the next day it’s fine. I don’t know what the hell is going on,” Musk told analysts on a conference call. – We are in, I would call it, turbulent times.

Tesla shares, which had been largely flat after hours, fell nearly 5% after Musk’s comments.

The big price cuts have squeezed Tesla’s auto industry gross margin, a closely watched indicator in the industry, but Musk has said Tesla will sacrifice margin to drive volume growth.

He said it again on Wednesday: “I think it makes sense to sacrifice margins in favor of making more vehicles,” adding that if macroeconomic conditions were not stable, Tesla would have to lower prices.

As an example, this year Tesla cut US prices of its Model Y long-range version by a quarter to $50,490.

Tesla’s quarterly auto 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 earlier.

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

Earlier, Tesla said in a statement that it is focusing on reducing costs and on developing new products, and that “the challenges of these uncertain times are not over.”

“Several rounds of aggressive price cuts have put Tesla in a position of strength after building its EV castle and is now set to cash in on its success,” Wedbush analysts said in a note.

Tesla reiterated its expectations to achieve deliveries of about 1.8 million vehicles this year, but said third-quarter production would slow slightly due to planned downtime for factory upgrades.

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

“They’re trying to get the prices right so they can generate the demand for the units, and then they like to run their factories as efficiently as they can … they don’t want to build up these inventories.”

Lower prices, along with government tax breaks for electric car buyers in the US and elsewhere, drove Tesla’s deliveries to a record 466,000 vehicles in the April-July period globally, but ate into profitability.

Still, on an adjusted basis, Tesla earned 91 cents per share, due to non-core revenue and mostly revenue of $24.93 billion. Analysts had expected a profit of 82 cents per share, according to Refinitiv.

FSD LICENSE

Musk said during the call that Tesla was in talks with a major original equipment manufacturer to license its “full 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 is under regulatory safeguards after a series of crashes involving the vehicles.

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

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

The company’s shares have risen 60% since the first such deal on May 25. So far this year, it’s up 138%, also helped by extended federal credits for Model 3s and investor excitement over artificial intelligence.

The company said on Wednesday that lower raw material costs and government tax credits helped reduce the cost per vehicle, but that it saw an increase in operating costs driven by the Cybertruck, AI projects and the production ramp of 4,680 battery cells that are key to making cheaper and more compelling electric cars.

Tesla benefited from $150 million to $250 million in tax credits in the second quarter, it said, while receiving similar benefits from lower costs of raw materials such as lithium and aluminum.

Tesla said on Wednesday it had made “remarkable progress” in improving the yield of its 4,680 cell production lines and increased production in Texas by 80% in the second quarter from the first.

In 2020, Musk unveiled a plan to produce Tesla’s own EV batteries called “4680” cells. But the automaker has struggled to meet Musk’s production and performance targets for the cells.

Tesla said production of its long-delayed Cybertruck electric pickup remained on track for first deliveries this year.

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

Our standards: Thomson Reuters Trust Principles.