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What the EV price war means for carmakers

The world's largest auto-maker remains unconvinced about an EV pure-play approach
February 7, 2023
  • Ford joins Tesla on the discounting front
  • Toyota calls for a diversified production approach

There can be few stocks that have generated as many column inches as Tesla (US:TSLA) over the past couple of years. Increasingly, the focus appears to be on the exploits of its chief executive rather than the company’s production rates and shaky debt profile. Elon Musk has become the most prominent figure in the US auto industry since visionary auto executive Lee Iacocca, but his long-term influence is likely to be much greater.

Shareholders in the electric vehicle (EV) manufacturer may have felt aggrieved by the amount of time, money and effort Musk dedicated to the capture of the Twitter social media platform. The feeling persists that he is spreading himself rather too thinly and that the deal represents an unnecessary distraction from his flagship business, to say nothing of the class action lawsuits that followed in its wake.

Tesla’s share price has more than halved, hitting its peak in the fourth quarter of 2021, the point at which valuations for a raft of heavy weights in the broader “tech” space clicked into reverse. Long-term holders of the stock can take solace in the knowledge that its market value has still risen by 809 per cent over the past five years, and that the shares are now in uptrend after an impressive fourth-quarter performance gave Tesla its most profitable year on record.

That would have been welcome news for Musk despite his ongoing legal wrangles. But recent developments in the EV space provide food for thought. Tesla has been the standard-bearer for the industry, at least in western economies, but the hurdles faced by automakers are becoming more apparent as the take-up of EVs accelerates.

 

EV price war

Tesla’s stock has rallied since it announced the decision to cut the price of its Model Y and Model 3 units. The move would have been irritating for anyone who had purchased one of the models prior to the announcement and it seems to have triggered a potential price war. Ford Motor Company (US:F) has followed suit, at least in the US, by reducing the cost of its flagship EV – the Mach-E – by an average of 5.85 per cent. Ford also confirmed that it was expanding production capacity for the Mach-E by 67 per cent, meaning that it will produce 130,000 vehicles for customers in North America and Europe throughout 2023.

While all this was happening, Toyota Motor Corp’s (JP:7203) chief executive, Akio Toyoda, the great-grandson of the company’s founder, announced that he was stepping down after 13 years at the helm. The reins of the world's largest automaker are being handed over to Lexus chief Koji Sato, who will oversee the development of Toyota’s first dedicated EV platform.

Critics of the company have said that it has been slow to respond to market dynamics, but bosses at Toyota believe that persistent shortfalls of key EV inputs (primarily lithium) mean that a diversified production approach with a long-term focus on hybrid vehicles provides the most practical means of attaining meaningful carbon emission reductions, while keeping motorists on the road.

If you share Toyota’s view that supply constraints of critical inputs will worsen as EV adoption accelerates, then industry peers – at least those who have committed to an all-electric future – could find themselves in trouble. And that’s without factoring in other practical considerations linked to charging infrastructure and renewable power generation. Unfortunately, politicians still seem content with arbitrary timeframes on electric adoption.

Committed as Musk is to the development of EV technologies, a diversified production approach wouldn’t phase him, either. Indeed, he has openly called on governments to support further investment in the oil industry. But Toyota’s stance on looming supply constraints underlines why the vertical integration of many of Tesla’s production steps, not least of which its in-house software development, holds long-term advantages over the field.

Analysts at UBS believe that Tesla and the leading Chinese EV manufacturers derive significant benefits over legacy automakers in terms of their cost structure, meaning that “it will be difficult for Ford, GM (US:GM) and Volkswagen (DE:VOW) to make money with their EVs in this highly competitive segment”.

Whether Ford and Tesla’s recent moves on pricing will prefigure a wider “price war” remains to be seen, but automakers are bound to scramble for market share if electric adoption gathers pace. So, until there is a shake-out in the market, the combination of rising input prices and the need to stay competitive will put the squeeze on margins.

The auto industry, for one reason or another, has been in a state of flux for four years or more. But a combination of government diktats and resource scarcity could precipitate far greater disruption – and perhaps attrition within the sector – in the years ahead.