The Future of Tesla: A Reality Check on Their Current Struggles
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Chapter 1: Tesla's Current Predicament
Recently, I overheard a conversation at a charging station where someone remarked, "Tesla is in quite a predicament at the moment." This is perhaps the understatement of the decade. Tesla is grappling with disappointing sales figures, exacerbated by the recall of all Cybertrucks due to a potentially dangerous throttle issue. In an effort to cut costs, the company has also reduced its workforce by 10%, slashed prices for its Full Self-Driving (FSD) software to achieve revenue goals, and significantly lowered the prices of its electric vehicles (EVs) globally in a frantic attempt to meet sales targets in an increasingly competitive market. To add to the turmoil, Tesla's stock has plummeted by around 40% this year. Furthermore, the company has hinted at canceling the highly anticipated, more affordable Model 2 EV, choosing instead to concentrate on robotaxis, despite the self-driving technology being far from ready for such a venture. This has led many investment firms to downgrade their forecasts for Tesla, with some even advising clients to sell their shares. All these factors culminated in Tesla's Q1 earnings for 2024 being 55% lower than those of Q1 2023, marking the worst quarter since 2012. At first glance, it appears that Tesla is facing a steep decline. But is that the whole story?
Let's delve into those disappointing Q1 figures. What led to such poor performance?
Once upon a time, Tesla was the most profitable EV manufacturer globally, with profit margins exceeding 30% in 2022. However, by the end of 2023, that margin dwindled to 17.6%, and in Q1 2024, it plummeted further to a mere 16.4%. While this figure is not the lowest in the automotive sector, it is alarming for a company of Tesla's stature.
This downturn began a few years ago when Tesla ignited an EV price war by drastically reducing car prices to compete with new entrants like ID4, ID3, Ioniq 5, Ioniq 6, and Polestar 2. Since then, the company has continued to cut prices in pursuit of sales targets, even halving the cost of FSD, which has eroded its overall profit margin. Unfortunately, this strategy hasn't yielded the desired results, as Tesla's global sales are currently 9% lower than last year. The lack of sales growth to offset these price reductions has led to a significant drop in revenue.
So, why are consumers turning away from Tesla?
In 2022, Tesla stood alone as the top choice for an EV that offered a reasonable range and charging speed at a competitive price. Now, however, a multitude of options are available, boasting superior ranges, faster charging times, enhanced build quality, better design, and improved performance—all at a lower price than Tesla. Why would anyone choose a Tesla?
The company had hoped the 4680 battery, announced in 2020, would provide a significant cost advantage and faster charging, but that promise has yet to come to fruition. Additionally, Tesla's self-driving technology was expected to be fully functional by now, justifying the higher price and attracting more customers. However, it currently lags behind systems from competitors like Audi and Mercedes, falling short of the full self-driving capabilities that were anticipated. This stagnation has allowed rival manufacturers to catch up and even surpass Tesla.
Consumers are increasingly aware that Tesla has not fulfilled its promises. There is a growing sentiment that the company has not become the industry leader it aspired to be, leaving many customers frustrated and searching for alternatives.
While it might seem that Tesla's primary competitors, such as BYD and Hyundai, are also struggling under the weight of Tesla's price cuts, the reality is quite different. BYD has recently achieved record sales and profits, selling more cars and earning higher profits per vehicle than Tesla. Similarly, Hyundai's EV sales surged by 42% in 2023, with these vehicles proving more profitable than some of Tesla's offerings.
How are these companies managing to thrive despite Tesla's aggressive pricing strategies? The answer lies in their approach: they are not attempting to reinvent the wheel.
Tesla's 4680 battery employs innovative designs and manufacturing techniques, such as tabless construction and dry coating, to achieve a competitive price without sacrificing range or charging speed. Meanwhile, BYD and Hyundai have opted for established methods, including 800V architecture, prismatic cells, and more cost-effective battery chemistries, resulting in significant savings in research and development compared to Tesla. This allows them to implement improvements quickly and reliably. Consequently, Tesla finds itself perpetually chasing competitors while BYD and Hyundai's battery solutions render Tesla's offerings appear costly and subpar.
The same narrative applies to Tesla's Cybertruck and FSD projects. No other manufacturer is investing billions into these so-called "revolutionary" products. Instead, they are prioritizing steady, thoughtful incremental enhancements. This strategy has allowed them to catch up and even surpass Tesla, as it is far less expensive and yields results more consistently.
You may believe that this situation could lead to Tesla outpacing its rivals in the future as these ambitious projects come to fruition. Unfortunately, that is unlikely.
As Musk transitioned Tesla's self-driving program to rely solely on camera feeds for environmental awareness, serious doubts arise about whether this lack of redundancy will ever make the system reliable enough for full automation. Moreover, the data and energy demands for training Tesla's self-driving AI may escalate costs to a level that renders it unfeasible without a significant breakthrough in computing or energy efficiency. This further undermines Tesla's plans for robotaxis. Even the Model 2, which Musk claimed would sell millions annually, was destined for failure. EVs with similar price points and specifications already exist. The Model 2 would not have provided anything groundbreaking and would have entered an already saturated market, lacking a unique selling proposition, thus falling short of Musk's lofty sales expectations. It's no surprise he is pivoting away from the Model 2 project.
So, is this the end of Tesla? The answer is both yes and no.
The decline in sales, the drop in stock value, and the unfulfilled product promises serve as a wake-up call for Tesla. For years, the company has been overvalued as investors bought into Musk's exaggerated claims about Tesla's potential and capabilities. This may signal the end of the era of blind faith in Musk's vision for Tesla, especially as serious competition now highlights these glaring issues. However, Tesla is not doomed; their vehicles are still well-regarded and in demand. This market correction merely reflects Tesla's transition from being the golden child of the industry to a more average player. Musk must shift his management approach from that of a desperate start-up to a mature company focused on solidifying its market position. Nevertheless, I harbor doubts about his ability to make this transition.
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(Originally published on PlanetEarthAndBeyond.co)
Sources: BBC, The Register, Yahoo, BBC, The Guardian, Electrek, Hyundai, The Verge, Electrek, Will Lockett, Will Lockett, Will Lockett
Chapter 2: The Potential Decline of Tesla's Supercharger Network
As Tesla navigates its challenges, questions arise about the future of its Supercharger network. With the growing competition and the evolving landscape of EV infrastructure, will Tesla's charging network remain the benchmark in the industry, or is it facing an uncertain future?
Chapter 3: The Rise of Competitors
Tesla's competitors are not just surviving; they are thriving. As other manufacturers ramp up their capabilities and expand their market presence, it raises the question: has Tesla already lost its edge in the EV market?