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MarketWatch First Take: Tesla’s margins shrink despite ’embarrassing’ price increases, putting Elon Musk in a tough spot

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Even as Telsa Inc. “Technoking” Elon Musk said the electric-vehicle maker’s current prices are at “embarrassing levels,” the company on Wednesday still reported its lowest automotive gross margins in more than a year amid decades-high inflation, putting Musk in a difficult situation.

Musk has made offering electric vehicles at lower prices part of his “master plan” for Tesla
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but has struggled to do so, with a $35,000 version of the Model 3 quickly disappearing after the car made it through “production hell.” Tesla has increased prices regularly in recent years, as components have increased in price amid rapid inflation worldwide.

“We’ve raised our prices quite a few times,” Musk said on a conference call Wednesday afternoon. “They’re frankly at embarrassing levels. But we’ve also had a lot of supply-chain and production shocks and we’ve got crazy inflation. So I am hopeful — this is not a promise or anything, but I’m hopeful that at some point we can reduce the prices a little bit.”

But reducing the cost of cars seems unlikely as Tesla faces shrinking margins even with the higher prices. Tesla executives told investors on the call that costs from Shanghai shutdowns were to blame for the drop in gross margins to 27.9%, down 46 basis points from year-ago margins of 28.4% and down sequentially from 32.9% in the prior quarter. Tesla’s Shanghai factory shut down temporarily in the second quarter due to China’s restrictive zero-COVID policies, but it finally resumed manufacturing on April 19, after a 22-day pause, according to Electrek.

Musk also said that issues in Shanghai were the main reasons Tesla sold the bulk of its bitcoin
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holdings in the second quarter, even though it seemed to take a loss on the trade. Musk said he was concerned about the liquidity of the company, given the factory shutdowns.

Despite all those issues, Tesla was still able to report results that were above Wall Street expectations. Its shares rose 1.5% in after-hours trading, as Tesla executives said that the second half has potential to be a record-breaking one thanks to production records in Fremont and Shanghai. They cautioned, though, that unseen developments could get in the way.

“I do want to emphasize this is obviously subject to force majeure, things outside of our control,” Musk said. “The past two years have been quite a few force majeures, and it’s been kind of supply-chain hell for several years.”

It wouldn’t take a force majeure to doubt that Tesla will reduce its prices, however. Musk has a habit of promising things, such as low prices, full self-driving, etc., that don’t come to fruition.

Musk is promising to start producing the Cybertruck, an electric pickup truck, next year with a starting cost of $40,000, according to the Kelly Blue Book, and a top cost of $70,000. But the version of that vehicle that Tesla showed off three years ago seems unlikely to make money at those prices, which were promised to consumers who plunked down $100 apiece by the thousands for the right to buy the vehicle. Now, Musk will have to decide whether to increase prices on a long-awaited and delayed product or suffer the wrath of Wall Street for poor margins.

Musk may have a vision of making electric vehicles affordable and within reach of more people, but with all the costs and other issues surrounding their manufacture, plus a potential recession looming, there is probably no going back on pricing. Musk will have to choose between providing the margins investors paying a premium for Tesla stock require and living up to his grandiose goals to price electric cars for the masses, and there is no easy answer.

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