Electric Car Sales Are Way Up, So Why Does Elon Musk Seem Worried?

Electric car sales accounted for about 7.9% of the market in the third quarter of 2023, which is an all-time record and an improvement over the 6.1% it represented a year prior. Sales of electric cars, in fact, have increased for 13 consecutive quarters. So why did Tesla CEO Elon Musk signal caution and concern in his call with investors yesterday?

As James Carville once famously said: “It’s the Economy, stupid.” More specifically, Musk thinks higher interest rates could potentially soften the market for electric cars.

Do you like talking about Tesla? Journalists sure do and, while I usually try to ignore this tendency, Musk was unusually candid about his company and the future yesterday and there’s a lot there to mine for discussion. Plus, there are some interesting updates about the Cybertruck.

Let’s Musk it up!

The Reality Of Electric Car Sales

Will there come a point where electric car sales plateau or will government requirements mean that they’ll keep growing until they reach 100%? This is the question that keeps product planners up at night.  The good news, for now, is that there’s still room for growth in the market.

Here’s an update from Cox Automotive on what we’ve learned so far in the first three quarters of the year:

Total EV sales in Q3, according to an estimate from Kelley Blue Book, hit 313,086, a 49.8% increase from the same period one year ago and an increase from the 298,039 sold in Q2. Most automakers posted sizeable gains over 2022, with Volvo, Nissan, Mercedes and Hyundai delivering increases above 200%, thanks mostly to new products entering the market. In Q3, 14 new EV models that did not exist one year ago were in the mix, including Chevrolet Blazer and Silverado EVs. (The new Chevy EVs had very low sales – just an initial few to mark a Q3 launch). The EV market is transforming, to be sure.

This seems like good news, right? Well…

EV transaction prices in Q3 were down significantly from 2022. In an attempt to increase sales volume, Tesla slashed prices, which are now down roughly 25% year over year. The price cuts have helped, as Tesla’s Q3 sales grew by 19.5% year over year, surpassing the industry’s overall growth rate of 16.3%. However, Tesla’s share of the EV segment continues to plunge, hitting 50% in Q3, the lowest level on record and down from 62% in Q1.

This is good news if you’re a consumer. Just last night my buddy was so pumped to show off his Model Y, which he got for an extremely fair price, that he half-seriously offered to sell his old gas-powered car at a huge discount (when I offered to buy his car at this price this morning he admitted to talking out of his ass).

Whether this is good news for automakers is a much bigger question. Many of these cars are subsidized by government rebates and are still not profitable, which means the discounting is not necessarily a reflection of the decrease in what it costs automakers to actually make these cars (to some degree it is for Tesla).

Still, the graph above from KBB shows that more and more automakers are seeing EVs grow as a part of their portfolios.

Tesla Predictably Stumbles In Q3

Margins are a measure of profitability, and pretty much everyone knew that Tesla was going to report lower margins this quarter. This is not a shock. No car company, not even Tesla, can cut prices to maintain market share and stay extremely profitable forever. Additionally, investments in products like the Cybertruck start adding up quickly.

So how bad was it? The company’s full investor deck is here, but the highlights are a gross margin of 17.9%, down from 25.1% in Q3 of 2022, but close enough to the 18.0% analysts were estimating ahead of the call. Revenue was about $24 billion, which is also within spitting distance of expectations.

Still, investors didn’t like what they saw according to Reuters:

“Tesla’s auto business is a legacy business now,” Chaim Siegel of Elazar Advisors said.

[…]

Overall, 10 analysts cut their price targets on the stock, pushing the median view to $260, according to LSEG data.

Tesla shares were at $224.89 in premarket trading. The stock has nearly doubled in 2023 on investor optimism that the company will fare better than rivals in an uncertain economy and see a long-term boost from its self-driving efforts.

I do agree that Tesla’s auto business is a legacy business, but it’s still the best legacy car business that currently exists and has profits and revenue everyone who isn’t Ferrari (an apparel company that also makes cars and prints money) would kill for.

Elon Musk Is “Worried” About Interest Rates

Above is the full livestream of the roughly hour-long financial results webcast which, you know, feel free to listen to it if you want.

Here’s what stuck out to me in response to a question about the impending Gigafactory in Mexico:

[I]n Mexico, we’re laying the groundwork to begin construction and doing all the long lead items, but I think we want to just get a sense for the global economy is like before we go full tilt on the Mexico factory. I am worried about the high-interest rate environment that we’re in. I just can’t emphasize this enough, that the vast majority of people buying a car is about the monthly payment. And as interest rates rise, the proportion of that monthly payment that is interest increases naturally.

This is absolutely correct. In some ways, lowering the price of the Model Y has mostly kept its price in line with its original price relative to inflation and financing. Musk goes on:

We are advertising. I think there is something to be gained on the advertising front. I don’t think it’s nothing, but informing people of a car that is great but they cannot afford doesn’t really help. So, that is really the thing that must be sold, is to make the car affordable…

I agree with Elon Musk.

Elon Musk Is Suddenly Very Candid About The Cybertruck

Let’s check in on the “Era of the Cybertruck” why don’t we? The sense that most people I trust seem to have about the Cybertruck is that it’s going to be extremely hard to make and, because of that, extremely hard to make profitable. It’s just slightly too much like a concept vehicle and too far away from something that’s practical to use.

Here’s what Musk had to say about it in that same investor call:

I’ve driven the car. It’s an amazing product. I do want to emphasize that there will be enormous challenges in reaching volume production with the Cybertruck and then in making a Cybertruck cash flow positive. This is simply normal for –when you’ve got a product with a lot of new technology or any new–brand-new vehicle program, but especially one that is as different and advanced as the Cybertruck. You will have problems proportionate to how many new things you’re trying to solve at scale.

Musk is trying to do many, many new things with the Cybertruck. He goes on:

[T]his difficulty going from a prototype to volume production is like 10,000% harder to get to volume production than to make the prototype in the first place. And then it is even harder than that to reach positive cash flow. That is why there have not been new car start-ups that have been successful for 100 years apart from Tesla. So, I just want to temper expectations for Cybertruck.

It’s a great product, but financially, it will take, I don’t know, a year to 18 months before it is a significant positive cash flow contributor. I wish there was some way for that to be different, but that’s my best guess.

Musk cited demand for the Cybertruck, which has more than one million reservations, as proof that they’ll eventually get there.

The Big Question

One of my favorite visualizations is when Wile E. Coyote runs off the cliff but doesn’t fall until he looks down. Is this the moment that carmakers are looking down when it comes to electric vehicles? Is this the inevitable moment in time when we find out that demand is actually only 10% of the market? Or are we just waiting for more affordable options to help bring reluctant buyers in to the EV fold?