By Akash Sriram
April 9 (Reuters) – Tesla investors said the company’s plan to develop a smaller, lower-cost EV, which was reported exclusively by Reuters, might boost volumes and address slowing demand, but at the cost of already strained margins.
The likely move also reflects the Elon Musk-led company’s efforts to tackle intensifying pressure in key markets, particularly China, where lower-cost rivals are gaining ground, and where the new model is likely to be produced first.
“Demand, not supply, is the bottleneck,” said Scott Acheychek, COO of ETF-issuer REX Financial, adding that a lower-cost model could help boost deliveries and factory utilization.
“If Tesla can hold mid-teens margins while increasing volume, the operating leverage works, but the risk is margin dilution.”
SLUMPING DEMAND AND RISING INVENTORY
That pressure on demand is already visible. Tesla produced more than 50,000 vehicles than it delivered in the latest quarter, its widest gap in at least four years, signalling weakening demand and rising inventory.
The loss of U.S. incentives has added to the strain. The $7,500 federal EV tax credit, a key support for demand, has been phased out under policy changes backed by President Donald Trump.
Adding to Tesla’s challenges, Chinese rivals such as BYD offer cheaper models and are expanding in Europe, threatening the company’s market share.
A lower-cost model is needed for Tesla to stay competitive in markets such as China and Europe, where pricing pressure is intense, said Tesla investor Shawn Campbell, adviser at Camelthorn Investments.
Tesla has already tried to address affordability. Late last year, it introduced cheaper “Standard” versions of its Model 3 sedan and Model Y SUV, priced up to $5,000 below the “Premium” variants, partially offsetting the loss of tax credits.
PRESSURE ON MARGINS
Tesla’s automotive margins have already come under pressure following discounts, raising concerns about how far it can push downmarket without hurting profitability further.
The “Standard” variants could support demand after the loss of tax credits, but analysts say these variants may weigh on margins. Tesla is set to report first-quarter results on April 22.
The company scrapped plans for a cheaper vehicle in 2024 and shifted focus to self-driving technologies, robotaxis and humanoid robotics in pursuit of higher-margin, software-driven revenue.
However, Tesla’s vehicle sales have declined for two consecutive years, weighing on cash flow from its core automotive business that funds those capital-intensive bets. Some analysts now expect a third straight year of declining sales.
Investors say a new model could boost demand, but may end up eating into margins.
“A new model could boost volumes and factory utilization, but would likely squeeze margins as Tesla prioritizes market share,” said Mamta Valechha, an analyst at British wealth manager Quilter Cheviot.
(Reporting by Akash Sriram in Bengaluru; Editing by Anil D’Silva)
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