Wed, October 18, 2023
Tesla China-made Model 3 vehicles are seen during a delivery event at its factory in Shanghai
By Abhirup Roy and Ben Klayman
SAN FRANCISCO (Reuters) - Tesla on Wednesday joined General Motors and Ford in being cautious about expanding electric vehicle production capacity, citing economic uncertainties and underscoring fears of a slowdown in demand.
Tesla CEO Elon Musk said he was worried that higher borrowing costs would prevent potential customers from affording its vehicles despite substantial price cuts, and that he would wait for clarity on the economy before ramping up its planned factory in Mexico.
"People hesitate to buy a new car if there's uncertainty in the economy," Musk said on a post-earnings call where he also talked about "paycheck-to-paycheck" pressures on American workers. "I don't want to be going into top speed into uncertainty."
Musk's comments, which sent Tesla shares down more than 4% in after-market trading, come after warning bells from other automakers and EV startups.
GM said on Tuesday it would delay production by a year of Chevrolet Silverado and GMC Sierra electric pickup trucks at a plant in Michigan, citing flattening demand for EVs.
Detroit peer Ford said last week it would temporarily cut one of three shifts at the plant that builds its electric F-150 Lightning pickup truck. The automaker in July slowed its EV ramp-up, shifting investment to commercial vehicles and hybrids.
EV startup Lucid on Tuesday reported a near 30% plunge in third-quarter production and only a marginal increase in deliveries despite big discounts, raising worries about demand for its Air luxury sedan.
Amazon-backed Rivian, which makes electric pickup trucks and sport utility vehicles, also disappointed investors this month when it shied away from raising its full-year production forecast despite stronger-than-expected third-quarter numbers.
"It does highlight that there could be a slowdown in EV (demand) in the near term," said Tom Narayan, global autos analyst at RBC Capital Markets. "But it has more to do with pricing and affordability than a rejection of EVs."
Narayan said he expected this to be a "dip" that improves as prices of EVs fall and lower-priced variants are available.
Automakers have billions of dollars in EV-related investments riding on how the next several quarters play out. Worries about slowing demand have been rising just as companies come to grips with supply chain constraints that wrecked production plans.
Reuters reported in July that the U.S. market was not growing fast enough to prevent unsold EVs from stacking up at some auto dealerships.
To prevent demand from waning, market leader Tesla, with industry-leading profit margins, has been the first and most aggressive in slashing prices, forcing others to follow suit and squeezing margins.
But Musk said higher financing costs due to rising interest rates meant to fight stubbornly high inflation in some cases almost entirely offset the price reductions, making consumers looking to shift away from gas-guzzling vehicles wary.
"If interest rates remain high ... it's that much harder for people to buy the car. They simply can't afford it," Musk said, adding he would "accelerate" expansion of the Mexico factory if interest rates come down.
That is not expected in the United States until June 2024, based on current market estimates, with recent robust economic data suggesting the central bank might leave interest rates higher for longer.
(Reporting by Abhirup Roy in San Francisco and Ben Klayman in Detroit; Editing by Jamie Freed)
Tesla CEO Musk raises alarm on interest rates, hesitates on Mexico factory
Hyunjoo Jin, Akash Sriram and Joseph White
Updated Wed, October 18, 2023
By Hyunjoo Jin, Akash Sriram and Joseph White
(Reuters) -Tesla CEO Elon Musk said on Wednesday that he was concerned about the impact of high interest rates on car buyers, adding the electric vehicle maker was hesitating on its plans for a factory in Mexico as it gauges the economic outlook.
After the company missed Wall Street expectations on third-quarter gross margin, profit and revenue, Musk said he was cautious about going "full tilt" on the Mexico factory.
"If the macroeconomic conditions are stormy, even the best ship is still going to have tough times," he said in a shift in tone from a year ago, when he said Tesla was "recession resilient."
Shares in the company fell more than 4% in after-hours trading on Wednesday. They had closed down 4.8%.
Tesla has managed to maintain demand with a series of price cuts, but Musk spent much of the call voicing concerns about further expansion, saying that he was afraid rising interest rates would make cars unaffordable.
The price of the popular Model Y SUV was "almost unchanged" for consumers even after Tesla's price cuts, Musk said, accounting for higher financing costs.
The automaker in March announced plans for a new factory in Mexico's northern state of Nuevo Leon that the state government estimated would cost more than $5 billion, though Tesla has yet to share a capital cost forecast.
Pressed for details on the factory, Musk said: "I am scarred by 2009 when General Motors and Chrysler went bankrupt."
He also said there would be "enormous challenges" in reaching volume production for Tesla's long delayed Cybertruck pickup and making it cash flow positive.
PRICE CUTS
Tesla's aggressive price cuts this year have battered its gross margin, particularly in China where it faces stiff competition from local automakers.
The company is trying to survive the price war it started, mopping up any global demand for electric cars even as high interest rates and lower price tags at some rivals mute EV sales. Some analysts have said it may need to cut prices further to achieve its annual production target.
In the third quarter ended September, gross margin fell to a more-than four-year low and the company signaled it would keep cutting production costs to boost profits.
Still, it stuck to its annual production target of 1.8 million cars, a sign that the price cuts were buoying demand to an extent.
"The big question is if this is just a blip, or signs of a bigger shift among consumers as rising interest rates and a weaker economic backdrop discourage consumers from making big-ticket purchases," said Jesse Cohen, senior analyst at Investing.com.
Its stock has more than doubled this year after a slump last year as investors bet the company will fare better than rivals in an uncertain economy and get a long-term margin boost from its self-driving software. But the shares are still about 40% lower than its record high reached in 2021.
MARGIN FALLS
Tesla's gross margin dropped to 17.9% in the quarter ended September, compared with 25.1% a year earlier, when it had yet to start cutting prices. In the second quarter, Tesla had posted a gross margin of 18.2%.
Wall Street had on average expected Tesla to post a margin of 18.02%, according to 21 analysts polled by Visible Alpha. According to LSEG data, an average of 17 analysts polled expected 18.25%.
Automotive gross margin, excluding regulatory credits - a closely-watched figure - fell to 16.3% in the third quarter from 18.1% in the second quarter.
Margins fell despite a roughly $2,000 per vehicle reduction in raw material costs in the past quarter.
Tesla said its margin had taken a hit from the underutilization of new factories and an increase in operating expenses driven by its upcoming Cybertruck model as well as spending on artificial intelligence and other projects.
Revenue in the third quarter rose 9% to $23.35 billion, compared with analysts' estimates of $24.1 billion. That marked the slowest pace of growth in more than three years.
Its average revenue per unit declined by nearly 11% from a year earlier.
On an adjusted basis, Tesla earned 66 cents per share. Analysts had expected a profit of 73 cents per share, according to LSEG data. It was not immediately clear if the numbers were comparable.
Tesla said its energy business, which sells solar panels and batteries, as well as its services business, had become a meaningful contributor to profit with more than $500 million in combined gross profit in the quarter.
(Reporting by Akash Sriram in Bengaluru, Hyunjoo Jin in San Francisco and Joe White in Detroit; additional reporting by Abhirup Roy; Writing by Sayantani Ghosh; Editing by Sriraj Kaluvilla, Deepa Babington and Jamie Freed)
Tesla’s electric vehicle factory in Mexico could be delayed
Noi Mahoney
Wed, October 18, 2023
Tesla CEO Elon Musk said high U.S. interest rates are hurting car sales and could cause longer lead times for the company’s planned factory in Monterrey, Mexico. (Photo: Shutterstock)
Tesla CEO Elon Musk said the company’s Gigafactory Mexico project is facing pressure from interest rates and the global economy.
During the company’s third-quarter earnings call with analysts Wednesday, Musk said the company is currently laying the groundwork for construction of the factory near Monterrey, Mexico.
In March, Tesla (NASDAQ: TSLA) announced plans to build a $5 billion assembly plant near Monterrey, where the company will produce a new line of electric vehicles. Musk previously said the EV plant would start production in 2025.
“For Mexico, we’re working on infrastructure and factory design in parallel with the engineering development of the new production [line] that we will be manufacturing there,” Musk said. “I think we want to just get a sense for what the global economy is like before we go full tilt on the Mexico factory. I’m worried about the high interest rate environment that we’re in.”
Aiming to keep inflation under control, the Federal Reserve has raised interest rates 11 times since March 2022, from 0.25% to the current rate of 5.5%.
Musk said high U.S. interest rates are affecting vehicle sales across the country.
“For the vast majority of people buying a car, it’s about the monthly payment, and as interest rates rise, the proportion of that monthly payment that’s interest increases naturally,” Musk said. “If interest rates remain high, or if they go even higher, it’s that much harder for people to buy a car, they simply can’t afford it.”
Austin, Texas-based Tesla reported third-quarter total revenue of $23.4 billion, missing analysts’ estimates of $24.06 billion. The company also reported adjusted earnings per share of 66 cents, versus analysts’ estimates of 74 cents.
A Wells Fargo analyst asked Musk for clarification about Tesla not going “full tilt” on Gigafactory Mexico unless the economy is strong and whether the company could achieve it s projected 50% compound annual growth rate without the plant.
“We’re definitely making the factory in Mexico. We feel very good about that, we put a lot of effort into looking at different locations and we feel very good about that location. And we’re going to build it and it’s going be great,” Musk said. “The pressure is really just about the timing …and I’m going to be a broken record on the financial front, it’s just that the interest rates have to come down.”
Musk said he still has “PTSD” from 2007-08, when Tesla was on the brink of financial collapse.
“I apologize if I’m perhaps more paranoid than I should be,” Musk said, “because that might also be the case because I am. I have PTSD from 2008 — 2017 through 2019 are not perfect either. That was very tough going. So you know, the auto industry is also sort of cyclic. It’s because people tend to hesitate to buy a new car if there’s uncertainty in the economy.”
Click for more FreightWaves articles by Noi Mahoney.
Tesla China-made Model 3 vehicles are seen during a delivery event at its factory in Shanghai
By Abhirup Roy and Ben Klayman
SAN FRANCISCO (Reuters) - Tesla on Wednesday joined General Motors and Ford in being cautious about expanding electric vehicle production capacity, citing economic uncertainties and underscoring fears of a slowdown in demand.
Tesla CEO Elon Musk said he was worried that higher borrowing costs would prevent potential customers from affording its vehicles despite substantial price cuts, and that he would wait for clarity on the economy before ramping up its planned factory in Mexico.
"People hesitate to buy a new car if there's uncertainty in the economy," Musk said on a post-earnings call where he also talked about "paycheck-to-paycheck" pressures on American workers. "I don't want to be going into top speed into uncertainty."
Musk's comments, which sent Tesla shares down more than 4% in after-market trading, come after warning bells from other automakers and EV startups.
GM said on Tuesday it would delay production by a year of Chevrolet Silverado and GMC Sierra electric pickup trucks at a plant in Michigan, citing flattening demand for EVs.
Detroit peer Ford said last week it would temporarily cut one of three shifts at the plant that builds its electric F-150 Lightning pickup truck. The automaker in July slowed its EV ramp-up, shifting investment to commercial vehicles and hybrids.
EV startup Lucid on Tuesday reported a near 30% plunge in third-quarter production and only a marginal increase in deliveries despite big discounts, raising worries about demand for its Air luxury sedan.
Amazon-backed Rivian, which makes electric pickup trucks and sport utility vehicles, also disappointed investors this month when it shied away from raising its full-year production forecast despite stronger-than-expected third-quarter numbers.
"It does highlight that there could be a slowdown in EV (demand) in the near term," said Tom Narayan, global autos analyst at RBC Capital Markets. "But it has more to do with pricing and affordability than a rejection of EVs."
Narayan said he expected this to be a "dip" that improves as prices of EVs fall and lower-priced variants are available.
Automakers have billions of dollars in EV-related investments riding on how the next several quarters play out. Worries about slowing demand have been rising just as companies come to grips with supply chain constraints that wrecked production plans.
Reuters reported in July that the U.S. market was not growing fast enough to prevent unsold EVs from stacking up at some auto dealerships.
To prevent demand from waning, market leader Tesla, with industry-leading profit margins, has been the first and most aggressive in slashing prices, forcing others to follow suit and squeezing margins.
But Musk said higher financing costs due to rising interest rates meant to fight stubbornly high inflation in some cases almost entirely offset the price reductions, making consumers looking to shift away from gas-guzzling vehicles wary.
"If interest rates remain high ... it's that much harder for people to buy the car. They simply can't afford it," Musk said, adding he would "accelerate" expansion of the Mexico factory if interest rates come down.
That is not expected in the United States until June 2024, based on current market estimates, with recent robust economic data suggesting the central bank might leave interest rates higher for longer.
(Reporting by Abhirup Roy in San Francisco and Ben Klayman in Detroit; Editing by Jamie Freed)
Tesla CEO Musk raises alarm on interest rates, hesitates on Mexico factory
Hyunjoo Jin, Akash Sriram and Joseph White
Updated Wed, October 18, 2023
By Hyunjoo Jin, Akash Sriram and Joseph White
(Reuters) -Tesla CEO Elon Musk said on Wednesday that he was concerned about the impact of high interest rates on car buyers, adding the electric vehicle maker was hesitating on its plans for a factory in Mexico as it gauges the economic outlook.
After the company missed Wall Street expectations on third-quarter gross margin, profit and revenue, Musk said he was cautious about going "full tilt" on the Mexico factory.
"If the macroeconomic conditions are stormy, even the best ship is still going to have tough times," he said in a shift in tone from a year ago, when he said Tesla was "recession resilient."
Shares in the company fell more than 4% in after-hours trading on Wednesday. They had closed down 4.8%.
Tesla has managed to maintain demand with a series of price cuts, but Musk spent much of the call voicing concerns about further expansion, saying that he was afraid rising interest rates would make cars unaffordable.
The price of the popular Model Y SUV was "almost unchanged" for consumers even after Tesla's price cuts, Musk said, accounting for higher financing costs.
The automaker in March announced plans for a new factory in Mexico's northern state of Nuevo Leon that the state government estimated would cost more than $5 billion, though Tesla has yet to share a capital cost forecast.
Pressed for details on the factory, Musk said: "I am scarred by 2009 when General Motors and Chrysler went bankrupt."
He also said there would be "enormous challenges" in reaching volume production for Tesla's long delayed Cybertruck pickup and making it cash flow positive.
PRICE CUTS
Tesla's aggressive price cuts this year have battered its gross margin, particularly in China where it faces stiff competition from local automakers.
The company is trying to survive the price war it started, mopping up any global demand for electric cars even as high interest rates and lower price tags at some rivals mute EV sales. Some analysts have said it may need to cut prices further to achieve its annual production target.
In the third quarter ended September, gross margin fell to a more-than four-year low and the company signaled it would keep cutting production costs to boost profits.
Still, it stuck to its annual production target of 1.8 million cars, a sign that the price cuts were buoying demand to an extent.
"The big question is if this is just a blip, or signs of a bigger shift among consumers as rising interest rates and a weaker economic backdrop discourage consumers from making big-ticket purchases," said Jesse Cohen, senior analyst at Investing.com.
Its stock has more than doubled this year after a slump last year as investors bet the company will fare better than rivals in an uncertain economy and get a long-term margin boost from its self-driving software. But the shares are still about 40% lower than its record high reached in 2021.
MARGIN FALLS
Tesla's gross margin dropped to 17.9% in the quarter ended September, compared with 25.1% a year earlier, when it had yet to start cutting prices. In the second quarter, Tesla had posted a gross margin of 18.2%.
Wall Street had on average expected Tesla to post a margin of 18.02%, according to 21 analysts polled by Visible Alpha. According to LSEG data, an average of 17 analysts polled expected 18.25%.
Automotive gross margin, excluding regulatory credits - a closely-watched figure - fell to 16.3% in the third quarter from 18.1% in the second quarter.
Margins fell despite a roughly $2,000 per vehicle reduction in raw material costs in the past quarter.
Tesla said its margin had taken a hit from the underutilization of new factories and an increase in operating expenses driven by its upcoming Cybertruck model as well as spending on artificial intelligence and other projects.
Revenue in the third quarter rose 9% to $23.35 billion, compared with analysts' estimates of $24.1 billion. That marked the slowest pace of growth in more than three years.
Its average revenue per unit declined by nearly 11% from a year earlier.
On an adjusted basis, Tesla earned 66 cents per share. Analysts had expected a profit of 73 cents per share, according to LSEG data. It was not immediately clear if the numbers were comparable.
Tesla said its energy business, which sells solar panels and batteries, as well as its services business, had become a meaningful contributor to profit with more than $500 million in combined gross profit in the quarter.
(Reporting by Akash Sriram in Bengaluru, Hyunjoo Jin in San Francisco and Joe White in Detroit; additional reporting by Abhirup Roy; Writing by Sayantani Ghosh; Editing by Sriraj Kaluvilla, Deepa Babington and Jamie Freed)
Tesla’s electric vehicle factory in Mexico could be delayed
Noi Mahoney
Wed, October 18, 2023
Tesla CEO Elon Musk said high U.S. interest rates are hurting car sales and could cause longer lead times for the company’s planned factory in Monterrey, Mexico. (Photo: Shutterstock)
Tesla CEO Elon Musk said the company’s Gigafactory Mexico project is facing pressure from interest rates and the global economy.
During the company’s third-quarter earnings call with analysts Wednesday, Musk said the company is currently laying the groundwork for construction of the factory near Monterrey, Mexico.
In March, Tesla (NASDAQ: TSLA) announced plans to build a $5 billion assembly plant near Monterrey, where the company will produce a new line of electric vehicles. Musk previously said the EV plant would start production in 2025.
“For Mexico, we’re working on infrastructure and factory design in parallel with the engineering development of the new production [line] that we will be manufacturing there,” Musk said. “I think we want to just get a sense for what the global economy is like before we go full tilt on the Mexico factory. I’m worried about the high interest rate environment that we’re in.”
Aiming to keep inflation under control, the Federal Reserve has raised interest rates 11 times since March 2022, from 0.25% to the current rate of 5.5%.
Musk said high U.S. interest rates are affecting vehicle sales across the country.
“For the vast majority of people buying a car, it’s about the monthly payment, and as interest rates rise, the proportion of that monthly payment that’s interest increases naturally,” Musk said. “If interest rates remain high, or if they go even higher, it’s that much harder for people to buy a car, they simply can’t afford it.”
Austin, Texas-based Tesla reported third-quarter total revenue of $23.4 billion, missing analysts’ estimates of $24.06 billion. The company also reported adjusted earnings per share of 66 cents, versus analysts’ estimates of 74 cents.
A Wells Fargo analyst asked Musk for clarification about Tesla not going “full tilt” on Gigafactory Mexico unless the economy is strong and whether the company could achieve it s projected 50% compound annual growth rate without the plant.
“We’re definitely making the factory in Mexico. We feel very good about that, we put a lot of effort into looking at different locations and we feel very good about that location. And we’re going to build it and it’s going be great,” Musk said. “The pressure is really just about the timing …and I’m going to be a broken record on the financial front, it’s just that the interest rates have to come down.”
Musk said he still has “PTSD” from 2007-08, when Tesla was on the brink of financial collapse.
“I apologize if I’m perhaps more paranoid than I should be,” Musk said, “because that might also be the case because I am. I have PTSD from 2008 — 2017 through 2019 are not perfect either. That was very tough going. So you know, the auto industry is also sort of cyclic. It’s because people tend to hesitate to buy a new car if there’s uncertainty in the economy.”
Click for more FreightWaves articles by Noi Mahoney.
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