While Toyota can rely on sales of gasoline or hybrid cars to survive, Tesla cannot. For Elon Musk, the price sinking war is either won or bankrupt, there is no 3rd way.

Business Insider (BI) said that billionaire Elon Musk has provoked a “price suppression” war that makes the entire electric car industry lose, even the founder’s Tesla empire itself cannot win.

In the context of more and more players entering the electric vehicle market, Tesla has decided to lower prices by an average of 25% across all its product lines to gain market share. The Tesla Model 3 dropped from $48,000 to $44,380, and the Model S from $130,000 to $96,380.

“I’ve never seen a car company that isn’t going to sell its warehouse to close and cut prices by more than 20% a year. Never,” Mark Schirmer, director of research firm Cox Automotive, admitted to BI.

Elon Musk’s strategy is extremely clear when boosting sales by lowering product prices, slowing down the reach of competitors in the market or even “scaring” or forcing closures because they run out of money for fledgling startups.

But the situation is not as Elon Musk wants. Falling prices did not cause sales to increase as a tough economy forced people to tighten their spending, and demand for electric vehicles was not as high as expected.

Even the number of electric vehicles delivered to Tesla customers in the third quarter of 2023 will decrease. Its revenue also fell while its profit margin eroded because of its price reduction strategy, from 25.1% in the third quarter of 2022 to just 17.9% in the same period today.

Even Elon Musk’s “scare” of competitors out of the industry did not succeed when Tesla’s market share in the US still dropped from 62% to only 50% today.

At this point, the truth about an electric car company without backing business, like Toyota can still sell gasoline and hybrid cars, of Tesla is gradually revealed.

In addition, disregarding traditional marketing, instead of explaining the high price to customers, further pushes Elon Musk into a foreseen white-loss gamble.

Is the gamble about to lose?

According to BI, the scariest scenario in the electric vehicle market today is that the demand for this product is not as high as people mistakenly believe. In other words, Elon Musk is waging a self-inflicted war of profits for a market that is not growing as strongly as it should, while competitors continue to jump into this “piece of cake”.

“If you want to sustain the price war, you have to be sure you can afford growth and stable profits first. This is a continuous, persistent war and must be fought to the end. So you will have to calculate everything carefully in advance to win,” said Professor John Zhang of the Wahrton School.

Contrary to this view, many experts believe that a price war will only cause everyone to lose if there is no one who really has superior resources.

An electric vehicle industry whose business cannot be profitable will only gradually decline when companies do not have enough capital to invest in technology development but only pay attention to reducing product prices.

Normally, a price sinking war would have a floor when limited by costs and industry-wide technology. Ironically, the electric vehicle industry is experiencing daily changes in technology as well as production costs because this is a new area that is being researched and developed.

So no one can predict where the floor will be, and so the battle to keep prices down as long as businesses survive.

With Elon Musk, this billionaire chose an imperfect time to provoke a price war.

While traditional auto rivals can rely on sales of gasoline or hybrid cars, such as Toyota, which made record profits last quarter, to survive no matter how electric it is, Tesla can’t afford it.

Simply put, this price war of Elon Musk is either won or bankrupt, there is no other way. While Toyota, Ford, GM… It is possible to choose alternative models such as Hybrids or even develop a new technology to continue to dominate the market.

Losing faith in Elon Musk

BI said that Elon Musk’s lowering car prices to keep market share is a sign of “desperation” to hold on to glory for Tesla. The most obvious evidence is that the third-quarter financial report caused “frightful” for many people.

Tesla’s revenue fell short of Wall Street’s expectations, while its cash flow fell from $3.4 billion in the same period last year to just $848 million today.

Worst of all, Tesla’s gross profit margin, a key measure of a company’s profit after deducting expenses, has fallen. This has made investors who once believed that Elon Musk’s empire will continue to be profitable, starting the crisis (Horrified).

In the past 2 years, although Tesla has not added many new cars, its profit margin has still increased the strongest in the auto industry.

This has strengthened the thesis of investors who believe that this electric car company is not just a traditional car company like Ford or GM but deserves the same stock value as technology corporations like Apple.

Naturally, Elon Musk is keen to manipulate investor psychology to keep the image of Tesla as such, a car company but valuable as a hot growth technology corporation, thereby making it easier to attract capital.

Ironically, it is because of the desire to keep this hot growth image that Elon Musk has to try to lower production costs and reduce prices to increase sales, thereby helping Tesla achieve its target profit.

Sadly, while Tesla tried to lower prices, sales didn’t go up as expected, and costs went up. Its third-quarter report showed that “Fixed Asset Costs” rose to a one-year high, reaching $2.4 billion compared to $1.8 billion in the same period last year.

According to BI, if prices still fall, eroding profits but costs go up, no Wall Street investor can trust Elon Musk anymore.

So far, the Tesla founder has not specified when the money will run out to end this price war, or when profit margins will increase again. Even the new Cybertruck pickup electric truck project doesn’t know a specific delivery date.

However, Elon Musk has repeatedly told investors that prices need to fall further, thereby causing profits to continue to erode and along with that is the patience of investors.

“Discounts are essential. We have to make electric cars cheaper so people can buy them,” Musk said.

The only hope in Elon Musk’s third-quarter financial report gave investors was autopilot, a technology that is expected to compensate for Tesla’s price cut.

However, this technology is considered to have many bugs, is not safe enough and does not know when it will be fully applied. Not to mention how much “exactly” this technology will compensate for the company’s profits is not taken into account.

As a result, Tesla’s stock price fell 15% immediately after reporting third-quarter earnings.

Out of life?

Tesla’s story, while striking, also reflects a more worrying reality of the electric vehicle industry as a whole: the market’s transition from gasoline cars to electric has not been as smooth as many expected.

To be sure, electric cars will gradually disappear in the U.S. under the administration’s strategy, but the task is not as easy as many people believe.

First, the application of new technology will take a lot of time to popularize, adjust production methods, infrastructure, services, habits …

What’s more, the global economy is struggling and customers are becoming more price sensitive. While the average price of electric vehicles has dropped from $65,000 last year to $53,633 as of July 2023, it’s still higher than the average price of $48,451 for gasoline cars.

BI said that while other major automakers such as Ford, GM or BMW can flexibly survive any stage of the electric vehicle transition, Tesla does not.

“Ford has been able to balance production of gasoline, hybrids and electric cars to accommodate transition periods at a level that no other competitor has,” Ford Chief Financial Officer John Lawler said proudly.

“Elon Musk provoked a price war and I don’t think there’s anything he can do other than that. This billionaire has nothing new to compete with traditional big car corporations. He said the problem wasn’t a shortage of demand. But I’ve been in the industry for years and I’ve never seen anyone cut prices so sharply without weak demand,” said Schirmer, director of Cox Automotive.

Elon Musk’s goal of devaluing the entire market is extremely clear, but many car companies are neither satisfied nor willing to join this fight when they understand that they will go nowhere.

“We have no interest in lowering prices for market share. That’s not our strategy,” BMW CEO Oliver Zipse said bluntly.

Foreseeable failure

“Elon Musk doesn’t need to cut prices so quickly, in the end, he’s just delaying his competitors. If it were smarter, instead of lowering prices, Elon Musk could explain how expensive Tesla’s costs are worth to consumers,” said Navdeep Sodhi, director of consultancy Sodhi Pricing.

In 2008, when the crisis hit, Hyundai was researching how not to lower prices and still help customers buy cars. They found that customers’ biggest fear at the time was getting fired. So the company launched a promise that anyone who buys a Hyundai car and is laid off can sell it to the company.

This is an extremely effective marketing campaign that helps Hyundai not reduce prices and survive the crisis, but Tesla is notorious for disregarding traditional advertising methods when Elon Musk thinks that the demand for electric cars is strong enough that the company does not need to waste on this.

Apparently, Elon Musk didn’t realize traditional marketing could explain to customers why Tesla products are so high and why they’re worth it.

According to Sodhi, billionaire Elon Musk needs to promote how Tesla electric cars can save customers in the long run, how the total cost savings compare to gasoline cars.

Building the electric vehicle market is a marathon, not a sprint. Therefore, while Tesla has only been profitable since 2021 but sinks into losses, it is likely that investors will shift capital to other directions.

Worse, although Tesla may reduce prices to maintain its position in the short term, it will affect the brand reputation in the long run.

Professor Zhang of the Wahrton School said a consumer accustomed to buying an electric car for $40,000 would never pay $60,000 for the equivalent product unless other factors came into play.

In a price war, the company could convince a few more people to buy cars today but would sacrifice millions of dollars in future sales because it would be difficult to raise prices again.

That’s not to mention second-hand buyers with a $60,000 price tag for Tesla’s electric vehicles when they feel betrayed by asset depreciation. In China, many car buyers have come to Tesla offices to protest against lower prices.

However, Elon Musk does not want to think much about the future when this founder is in desperate need of money as well as sales. Automobile manufacturing is an expensive industry, and if it fails to sell, the fortunes of Tesla and Elon Musk will turn extremely quickly. As a reminder, most of Elon Musk’s wealth is now in the form of Tesla stock.

“If you have an auto plant that makes something but doesn’t sell it, you’re going to lose heavily,” Schirmer warned.

Out of the U-turn

According to BI, Tesla wants to maintain a healthy business, it needs to attract new customers in addition to Elon Musk fans and rich people who want to enjoy strange products. The mid-range segment will need to be targeted with marketing tactics to advertise why the high price is worth it for Tesla electric cars.

However, the difficulty here is that Elon Musk will not be able to build a global automaker without stable cash flow, which Toyota, Ford or traditional automakers are doing extremely well.

The Tesla founder himself once admitted that his company almost went bankrupt because he burned too much money between 2008 and 2018.

Obviously, dampening each other’s prices during tough economic times is too big a challenge for Tesla as it has never faced this problem.

Despite having the advantage of being at the forefront, small scale and gaining the trust of investors and Elon Musk fans, Tesla is gradually showing up as an ordinary car company with the usual difficulties in the car industry.

Promises of self-driving taxis, artificial intelligence technology, Twitter’s X super app or SpaceX’s space industry have done little to boost Tesla’s current electric vehicle sales.

With increasingly expensive production costs, increasing competition, and shareholders accustomed to huge profits, the erosion of profits is unacceptable to Tesla.

The question is, if this situation continues, how long will investor persistence last? Will fans’ trust in Elon Musk remain when Tesla is about to lose the gamble?