Even as it reported record earnings this past week, electric carmaker Tesla, Inc. (TSLA) is already reorganizing its business strategy to boost profits. Two recent reports—one relating to its pricing tactics in China and another about a pivot in retail sales experience—provide clues to Tesla's business strategy. Together, they could set the direction for the car company's future earnings reports.
- Tesla is lowering the price of its cars in China to garner market share.
- According to reports, the company is also planning to overhaul its retail sales strategy to emphasize online sales.
- Together, these strategy changes could have a major impact on its future earnings.
Cheaper Teslas in China
A substantial portion of Tesla's deliveries this past quarter occurred in China. Almost all of them were for Model Y—its compact SUV. Amid increased competition from cheaper original equipment manufacturers (OEMs), the company has reduced the car's price in China to boost sales. That strategy contrasts with Tesla's approach in the United States, where it has raised prices on its Model 3 and Model Y cars about a dozen times in the past year alone, according to a Reuters report.
This Tesla playbook is not a new one. The company reduced prices on several of its models after launch in the United States, only to hike them subsequently. It is likely that Tesla is following a similar strategy in China.
But the company might have to play a long game there. Gene Munster from Loup Ventures estimates that the company's cars are three times the cost of a typical electric vehicle (EV) made in China. "Price of Teslas in China will be below rest of the world for the next decade," he told Reuters.
China accounted for slightly more than half of all electric car sales last year. Consulting firm McKinsey has predicted that it will remain the biggest market for electric vehicles, reaching 9 million by 2030, in the years to come.
Tesla has already become an important player in the Chinese market. By the middle of last year, the company's China sales accounted for nearly a quarter of the overall figure, according to McKinsey. Its Model 3 was the single best-selling premium battery-operated electric vehicle model in China in the same year. Some analysts say China is the "linchpin" to Tesla's earnings.
While reduced prices may help Tesla garner market share in China, they also have the potential to crimp its margins. The Palo Alto, California-based company will have to carefully balance sales volumes for its cars with production costs. It has plenty of leeway to play around in that arena. According to analysis by Guosen Securities released in January this year, a Model Y produced at Tesla's Shanghai Gigafactory has a 29.4% gross profit margin. The Model S, according to the same report, has a gross profit margin of approximately 40%.
An Online Sales Experience
The other big change occurring at Tesla is related to its sales division. According to a report in online publication Electrek, the company is planning to overhaul its sales experience by emphasizing an online sales experience over offline sales. As part of this strategy, it will get rid of expensive showroom space, instead renting out inexpensive space in mall parking lots, warehouses, and "other locations" for test drives and delivery of its cars.
A Tesla central virtual store will be primarily responsible for sales. Online advisors at the store will coordinate the sales experience, from enabling potential buyers to unlock cars for test drives to ensuring physical delivery of a purchased car, virtually. The move will help Tesla cut down on expensive real estate rent. Electrek states that the company plans to use those savings to open car delivery centers in less expensive areas.
Tesla had already announced this sales plan, with accompanying store closures and layoffs, earlier in 2019. But it held off on getting rid of its real estate as it focused on growing its market and business in China. Tesla's operating expenses have ballooned in recent years as it expands its geographic footprint. During its most recent quarter, they were $10.6 billion, up 86% from the previous year. A virtual sales strategy will help the company expand without incurring significant costs to its bottom line.