Tesla is beginning to behave like the Detroit Three carmakers during their most desperate days.
Why it matters: By pumping incentives and slashing prices, the electric car manufacturer is signaling that it prioritizes vehicle deliveries and cash generation over margins.
- Analysts expect the hit to profits will be evident in next week's Q2 results.
- But longer term, Tesla also risks alienating loyal customers and destroying its considerable brand equity — problems Detroit is all too familiar with.
What's happening: A dizzying string of recent price adjustments on Tesla cars is a sign of internal chaos over how to deal with shrinking U.S. incentives, aging model lines and pressure to boost deliveries, Bloomberg reports.
- This week's $6,410 price cut on a fully loaded performance edition of the Model 3 sedan was a "bitter pill to swallow" for Tesla loyalist Laurence Blau, who paid $68,400 for the car less than three weeks ago, per Bloomberg.
- Nobody likes to know they overpaid, especially when it comes to cars.
- Tesla, which sells direct to consumers rather than through franchised dealers, prides itself on pricing transparency.
- In a quarter-end push, Tesla also offered bonuses to employees to hit sales targets.
- It worked: Tesla surprised skeptics with a record 95,200 deliveries in the second quarter.
Flashback: Detroit's efforts to 'move the metal' in the past didn't end well.
- In the aftermath of 9/11, GM's "Keep America Rolling" campaign helped restore consumer confidence and keep factories humming.
- Its 0% financing and employee pricing offers began an era of winning sales with expensive incentives.
- The tactics pulled ahead natural demand but masked high labor costs and other problems.
- To cover those high fixed costs, Detroit kept overproducing cars and slapped big discounts on the hood — until eventually the industry collapsed in 2009.
Today, Tesla has its own motivations to pump up sales, even if it means sacrificing profits, writes Barclay's automotive analyst Brian Johnston in a note to clients.
- With future capital raises likely (maybe as soon as next year), it's important to show growth to potential investors.
- Tesla also makes money selling regulatory credits to other carmakers, so the more cars it sells (even at a loss), the more revenue it makes from credit sales.
- Since 2010, Tesla has reaped nearly $2 billion in revenue from selling regulatory credits to competitors that need to offset sales of their own polluting vehicles.
What to watch: Tesla reports its second-quarter financial results on July 24.
- The outlook remains tough: As demand for more expensive Tesla models S and X wanes, Tesla's average selling prices will keep declining, making it that much tougher to achieve profitability.
