On Monday, Tesla (NASDAQ:TSLA) encountered a dip in its stock value as it once more decided to decrease prices in China, indicating a decline in demand for its Electric Vehicles (EVs) within the country.
As reported by Reuters, Tesla declared a reduction in the cost of its Model Y Long Range SUV and Performance variant by 14,000 yuan ($1,934.58). The Long Range version’s price saw a decrease of 4.5%, settling at 299,900 yuan ($41,435), while the Performance model experienced a 3.8% drop, reaching 349,900 yuan ($48,460). The updated pricing details were released by Tesla through its Weibo account.
In addition to the price adjustment, Tesla (NASDAQ:TSLA) unveiled its plan to provide an insurance subsidy of 8,000 yuan ($1,108) for the entry-level Model 3 in China, available from August 14 to September 30.
These recent price reductions by Tesla highlight a waning demand trend in China, which stands as the world’s largest EV market. These actions also seem to breach an agreement that Tesla had entered with other automakers to maintain fair competition on the mainland by not indulging in aggressive price competition.
This agreement was established following Tesla’s initiation of an EV price war in China towards the end of the previous year and into the beginning of this year. The profound price cuts for its Model Y SUV and Model 3 sedan had compelled competitors like BYD and Xpeng to respond in kind. However, the severity and abruptness of these reductions led to protests by numerous Chinese Tesla buyers outside Tesla showrooms and delivery centers, demanding refunds.
Despite the agreement, Tesla’s (NASDAQ:TSLA) recent decision to slash prices indicates a necessity to bolster sales. This urgency arises from a significant drop in deliveries by 31.4% to 64,285 units in July, as reported by China’s Passenger Car Association (CPCA). July witnessed the lowest delivery figures for Tesla this year in China.
Investor concerns are amplified by the anticipated impact on Tesla’s margins due to these price cuts. The company’s stock experienced a setback after the release of second-quarter results in late July. While Tesla outperformed earnings and revenue projections for the quarter, its gross margins fell short at 18.2%, failing to meet the analysts’ expectation of 18.8%. Furthermore, Tesla’s operating margin declined to 9.6%, a nearly 5% decrease from the previous year.
Market experts anticipate that Tesla’s (NASDAQ:TSLA) continuous price reductions, both in China and elsewhere, will persist, leading to further margin pressures. Bernstein analyst Toni Sacconaghi noted in a recent client communication that they believe Tesla might need to undertake additional price reductions or increase promotional efforts in the upcoming year, thereby placing additional strain on its margins.
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