With Tesla's disappointing third quarter financial report, which saw a 44% drop in net profit, Wall Street leaders and professionals began to criticize Musk for launching an electric vehicle price war that Tesla could not win.
Under increasing pressure from new competitors, Tesla has lowered the average price of its models by about 25% in the past year. Model 3 dropped from $48000 to $44380. Meanwhile, the luxury car Model S plummeted from a high of $130000 to $96380. To put it mildly, this is an unusual business strategy.
Mark Schirmer, Public Relations Director of Cox Automotive, said, "In the history of the automotive industry, I can't think of any brand that would reduce prices by 20% annually without going bankrupt. Tesla hopes that lower prices can increase sales, slow down competitors' growth, and even completely drive some of them out of the market
But that's not the case. Lower prices did not translate into higher sales. Tesla actually saw a decrease in the number of cars delivered to customers in the third quarter. Revenue is declining, and the company's once lucrative profit margin has also been squeezed, dropping to 17.9% in the third quarter, compared to 25.1% in the same period last year.
At the same time, competitors have not been driven out of this industry. Tesla used to dominate the electric vehicle industry, but its market share in the United States has dropped from 62% at the beginning of the year to 50% today.
Even worse, public interest in electric vehicles has not grown as rapidly as car manufacturers had expected. This means that Tesla has started a long and protracted battle.
If you engage in a price war, you must ensure that you have sufficient sales to increase and maintain profitability, "said John Zhang, a marketing professor at Wharton School
Wall Street experts warn that price wars are impossible to win - they are a bottom-up competition that will only stifle the profitability of the entire industry. In an industry where basic technology and production costs are rapidly changing, no one can determine where the bottom is.
And regardless of winning or losing, Musk chose a bad time to provoke a dispute. As traditional car manufacturers walk the tightrope towards the future of electric vehicles, they can rely on the sales of traditional internal combustion engine vehicles to provide them with a safety net. But Tesla does not have a safety net. For Musk, either electrification or bankruptcy.
Musk is launching a price war, "Schirmer said." I do think he has no choice because he doesn't have any real new things to compete with other companies. It's not because he has demand issues. But I've been in this industry for a long time, and I've never seen anyone lower prices without demand issues
A failed battle
If the short-term purpose of Tesla's price reduction is to maintain its market share and sell more cars, then this is not feasible. Meanwhile, in the long run, this move may harm Tesla.
Zhang said that when companies play with prices, they are playing with customer expectations. Once consumers get used to paying $40000 for a standard electric car, they won't go back to $60000. In a price war, you may encourage more people to purchase from you today, but you will sacrifice millions of dollars in future sales.
Then there are all customers who have paid $60000 in the past. If they know they can wait a few months before making a purchase, they can save thousands of dollars, which has a negative impact on brand loyalty.
But Musk did not consider the future. He needs to make money from the price reduction, and he needs it now. Manufacturing cars is an expensive business, and if price cuts do not bring more demand, Tesla's fate may soon change. Schirmer said, "If you have a factory that produces products but you don't have sales, you will lose a lot in the automotive industry
Rationally speaking, he doesn't need to lower prices so quickly. He can only delay competition. If Musk is smart enough, he won't lower prices. On the contrary, he should prove the rationality of costs