Elon Musk’s playbook for Tesla to survive recession: Cut costs drastically, engage competitors in price war

In a conference call discussing Tesla’s fourth-quarter results, with Tesla executives, Elon Musk outlined his plan to reshape the economics that electric vehicle makers follow, in order to survive what Musk believes to be a “serious” recession. Musk’s plan is to cut costs on everything, ranging from parts to logistics, and to keep the pressure on competitors by engaging them in a price war.

The idea again is to play on the margins that Tesla has on every car it sells. It was because of these margins that Tesla was able to offer discounts of up to 20 per cent on all its cars. The announcement of that discount was practically the first shot in an upcoming price war.

This is coming at a time when Tesla is expanding its production facilities in Berlin, Germany, and Austin, US. However, the idea is to increase the in-house production of batteries and other components as well, as that would allow Tesla to leverage the scale and get better yield, thus saving costs.

Tesla will also adopt other methods to cut costs, warned CFO Zachary Kirkhorn, adding that Tesla will be trying to tackle increased costs that cropped up because of multiple years of COVID-related instability.

Musk plans to run Tesla’s factories in a much leaner fashion – this would mean keeping fewer materials in inventory, cutting shipping and logistics costs and negotiating lower prices for components. Tesla also plans on cutting costs by redesigning certain elements of battery and electric motor systems, and by removing features that owners are not using. 

Bill Russo, founder of China-based consultancy Automobility, said Tesla had already made gains in cost competitiveness by driving simplified hardware designs for its electric vehicles, taking a page from consumer electronics manufacturers.

“You can offset some of the margin hit from pricing with massive scale and simpler electronic architecture,” Russo said. “This is how they are trying to win the game.

Meanwhile, the cost of lithium in EV batteries – the single most expensive component – will be higher in 2023 than last year, Kirkhorn said, a pressure that will hit Tesla’s rivals that are still losing money on EVs harder.

“My guess is if the recession is a serious one, and I think it probably will be but I hope it isn’t, that would lead to a meaningful decrease in almost all of our input costs,” Musk said. “So we expect to see deflation in our input costs, which would likely then lead to, yes, better margin.”

Tesla forecasted it would sell 1.8 million EVs this year, which would mean sales growth of about 37 per cent. That annual number could be as high as 2 million vehicles barring an external shock, Musk said.

Tesla said on Tuesday it would invest more than $3.6 billion to expand its Nevada factory complex and to increase the output of battery cells so that it could produce enough there to power 2 million vehicles annually.

In the final quarter of last year, Tesla produced an average profit of roughly $9,100 per vehicle sold, a decrease of 6 per cent from the third quarter but still far higher than its well-established rivals. For instance, Toyota Motor Corp’s profit per vehicle sold was more than seven times lower than Tesla’s.  

Bringing costs down is also key to the next phase of Tesla’s expansion, which Musk hinted the company would detail at its investor day in March: plans for an affordable EV that analysts have expected to be priced below $35,000.

Tesla reportedly intends to release an updated Model 3 sedan later this year under the code name “Highland,” with an emphasis on lower production costs, according to Reuters.

In the fourth quarter, the company’s average cost per car, taking into account all of its expenditures, was close to $44,000.

“Price is really important. I believe that a sizable percentage of individuals desire to purchase a Tesla but are unable to do so “explained Musk.

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