Tesla’s Q1-2023 Financial Performance-Signs of an Audacious Strategy (2024)

Tesla reported Q1-2023 financial performance that more than ever reinforces an ongoing strategy of fueling sales and output growth over profitability. Such a strategy has continued supply chain, production and new product introduction implications in the quarters to come.

Highlights of the latest financial performance included a 24 percent increase in total revenues to $23.3 billion, with net income conversely declining 24 percent to $2.5 billion.

Business broadcasting network CNBC pegged total revenues associated with the automotive segment being $19.96 billion, up 18 percent from last year’s equivalent quarter.

Earlier this month, Supply Chain Matters highlighted operational performance in the quarter which included total global-wide vehicle deliveries amounting to a 36 percent year over year increase from that of Q1-2022. Sequentially, vehicle deliveries were 4 percent higher than the final quarter of 2022.

CEO Elon Musk indicated to equity analysts: “We’ve taken the view that pushing for higher volumes and fleet is the right choice here versus a lower volume and higher margin.” In parallel, the EV automaker reportedly has been slashing prices in an effort to maximize market share while making it difficult for new market entrants to garner the margins required to ramp-up their new vehicle production. Operating margins in the latest quarter were reported as 11.4 percent, down from 19.2 percent in the year earlier quarter. Automotive margins were not reported by the company forcing equity analysts and business media to calculate their own numbers. That stated, Tesla’s margins remain the envy of automotive competitors whose margins average in single digits.

The business media’s perspective reflects the notions of nervous investors who are perceiving that this commitment to volume growth over profit is testing their patience for higher returns. The includes a series of recent price reductions on certain vehicles.

Both Bloomberg and the Wall Street Journal have noted that the EV producer has lowered prices for existing vehicles between 14 percent and 25 percent. The base price of certain models of the Model 3 sedan are now below $40,000 for the first time. The Wall Street Journal reported that Tesla vehicles sold at an average of $46,000 in Q1, down from an average of $52,000 in the year-earlier quarter. The Model Y sport utility vehicle was reported by Tesla to be the best selling EV in both Europe and the United States. This vehicle has a reported current starting price of upwards of $47,000 compared to upwards of $65,000 last year.

Production and Supply Chain Strategy Implications

As our readership is acutely aware, production and supply chain strategy must be aligned with a company’s overall market growth and business strategy objectives.

This automaker’s report to investors clearly highlights an objective of increased production volumes to meet market demand coupled with ongoing product and manufacturing process innovations.

Of the four existing volume production sites, Fremont California, Austin Texas, Shanghai, China and Berlin, Germany, Austin and Berlin are not currently optimized for available capacity at the present time. Hence, there is some upside capacity to take advantage of.

As we have highlighted in various prior Tesla quarterly performance commentaries, there remains a “hockey stick” pattern of quarterly output and vehicle logistics delivery performance with more vehicles being skewed and delivered in the final month of a quarter. This is likely because of continued material shortages or component delays and remains an opportunity for improvement.

From an overall inventory perspective, Global Vehicle Inventory (days of supply), were reported as 13 days at the end of Q1-2023, compared to 3 days in the year earlier period, a noted 400 percent increase. This is an area that bears added observation as to whether overall vehicle demand levels increase in the coming quarters.

Supply chain cost inflation remains a challenge for the automotive sector itself and that includes Tesla. The report to investors in the latest quarter indicates higher raw material, commodity, logistics and warranty costs as an ongoing challenge to margins.

A senior operations leadership change in the works with Tom Zhu, Tesla’s head China Chief being promoted to take direct oversight of the electric carmaker’s U.S. assembly plants as well as sales operations in North America and Europe, in addition to China is a positive step from our lens in addressing production and supply chain improvement efforts.

What is capturing more interest or perhaps concern from the financial investment community is Tesla’s current line-up of mature, previously introduced models compared to what competitor’s will introduce to global markets over the coming months. This is the key trigger point for market demand in the coming quarters.

Another is that Tesla does not have a stellar performance record regarding the reliability of new production introduction timetables and production ramp-up. As an example, the Tesla Cybertruck pickup, announced in November of 2019 is now planned to be initially produced at the Austin facility starting in Q3-2023.

The market anticipates that Tesla will introduce a new concept car in the near future but there is no publicly announced timetable. The Model 3, first introduced as the EV for the mass market in 2017, while undergoing a number of hardware and software performance improvements over the years is not fresh in the minds of EV shoppers. Competitors clearly see this as a market opportunity, but Tesla’s ongoing volume output and corresponding price reduction strategies are a means to have competitor’s re-think their own timetables and expected margin strategies. In its reporting, Bloomberg Businessweek specially indicated: “Musk wants and needs to obliterate Rivian Automotive Inc. and Lucid Group, Inc.”

Our reader takeaway is that this Tesla narrative remains an example of how production, supply chain and new product introduction strategy and capability fosters a bold and ever changing business strategy. Keep you eye on this space.

Bob Ferrari

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