BURBANK, CA – SEPTEMBER 04: A Tesla supercharger station at Burbank Town Center, in Burbank on … [+]
A company’s success depends on creating a competitive advantage — which is hard to sustain in the face of upstart competitors, changing customer needs, and disruptive technologies.
Harvard Business School professor, Michael Porter — at whose consulting firm I worked — wrote about two sources of competitive advantage:
A company that offers the coolest product in a new product category can be a differentiator. However, when rivals rush into that new product category, customers may no longer be eager to pay a premium for the cool pioneer’s product.
This comes to mind in considering Tesla — its stock is up some 20% from its recent low of $102 — which is slashing prices as consumers increasingly view its brand with disdain. How so? The taint from Elon Musk’s Twitter is repelling his Tesla customers.
Moreover, Tesla is neither refreshing its product line nor adapting to evolving customer needs — costing it market share and margins in the U.S. and China.
Simply put, Tesla lacks a sustainable competitive advantage. Without one, there is little reason to invest in its stock.
Tesla’s vehicles are not selling as well as they used to — resulting in 2022 shipment growth that fell short of its 50% target. To spur demand, Tesla is resorting to 20% price cuts for most of its vehicles in the U.S. and Europe, according to the New York Times.
These price cuts are not available to all Tesla customers. They apply to its lower-priced models, depending on optional features. For consumers who qualify, in 2023 the Inflation Reduction Act will provide federal tax credits for EVs priced below $55,000.
One analyst views the price cuts favorably. Wedbush’s Dan Ives told the Times, “I think Tesla recognizes they are not the only game in town and the Detroit companies are jumping into the deep end with E.V.s. I think the price cuts mean Tesla is going to rip the Band-Aid off and try to go on the offensive.”
Lowering prices will certainly erode its high profit margins but will they help Tesla regain market share lost to rivals? I doubt it. That’s because customers perceive that competing EVs offer more benefits for the money than do the discounted Teslas.
Tesla is growing more slowly than the industry. In the U.S., auto sales fell about 8% to “fewer than 14 million cars and trucks, the lowest level since 2011,” noted the Times. However, EV sales rose 66% to over 808,619, according to Kelley Blue Book.
Kia seems to have gained some market share. Last year, it sold 43,000 EVs in the U.S. — way up from “a few hundred in 2021.” Other rivals — such as Ford, Volkswagen and others “posted sizable increases in E.V. sales last year and offer many models that were significantly more affordable than Tesla’s,” noted the Times.
Tesla grew 40% in 2022 — selling 1.3 million cars — falling short of the EV industry growth and below its 50% growth target. It seems to me that Tesla — which previously pursued a differentiation strategy — must change that strategy if it wants to win over mass market consumers who cannot afford to pay over $100,000 for a vehicle.
Specifically, it must become a cost leader — meaning it manufactures EVs that are priced below its rivals. Toni Sacconaghi, a Bernstein analyst, wrote in a research report, “We see demand problems remaining until Tesla is able to introduce a lower-priced offering in volume, which may only be in 2025.”
Tesla’s strategic problem seems to be that its price cuts may leave it stuck in the middle —between its former differentiation strategy and a potential cost leadership strategy in which Tesla would make a good quality vehicle at a price below that offered by rivals such as Kia, Hyundai, and others.
Tesla’s eroding competitive advantage could help explain why it produced 34,000 more vehicles than the 406,000 that it shipped in the fourth quarter.
As I suggested above, Tesla’s ability to grow faster than its rivals depends on a superior customer perception of its value proposition — the ratio of benefits to price compared to that of rivals.
Simply put, customers will buy from the EV maker that offers the most bang for the buck. Sadly for investors, Tesla’s brand — a component of that bang — is weakening. How so? According to Forbes, a Morning Consult survey published on January 12 found that Tesla’s brand favorability is “declining in the wake of CEO Elon Musk’s chaotic takeover of Twitter.”
Specifically, Musk’s decision to allow hate speech onto Twitter — about which I wrote on January 1 — is cutting into Tesla’s brand favorability. Morning Consult found that U.S. adults with favorable views of Tesla fell from 28.4% in January 2022 to 13.4% this month.
The survey revealed that Tesla’s popularity is dropping among Democrats. Specifically, the number of Democrats who view Tesla favorably fell from 10.3% last month to just 3% in January. Meanwhile, Musk’s net favorability rating dropped from 22 points in February 2021 to nine points in November 2022, according to Morning Consult.
Musk’s decision to welcome back to Twitter such figures as Donald Trump and Michael Flynn, a former national security advisor linked to the January 6 assault on the U.S. Capitol, has prompted “some Tesla owners to announce on Twitter that they were getting rid of their vehicles and would-be customers to cancel planned purchases,” reported Forbes.
Even as Musk is weakening Tesla’s brand, he seems to be ceding ground to rivals due to Tesla’s failure to introduce new products to compete with Chinese and U.S. rivals.
Tesla has not launched a new passenger vehicle in nearly three years. As the Wall Street Journal reported, that is ”a long gap by Detroit standards” which gives other EV options to customers who have soured on Musk.
Meanwhile, Tesla has lost ground in China — the world’s largest auto market. Due to Tesla’s failure to offer Chinese consumers the best value proposition, demand for its vehicles there is falling.
How so? As the Journal reported, late in 2022, Tesla reduced the size of certain battery purchases, and cut prices by about 13% for its two most popular models ”after reporting a December slump in sales of its Shanghai-made vehicles.”
Why is Tesla’s share of the Chinese market falling? For one thing, it does not have sufficient insight into the needs of local EV consumers. Andy An, CEO of Zhejiang Geely Holding Group Co.’s Zeekr electric-car brand, told the Journal that Tesla has an “inaccurate understanding” of the needs of Chinese buyers — offering them an interior design that “lacks the premium feel that Chinese consumers are looking for.”
Another problem for Tesla is that rivals have a much better feel for the Chinese buyer. BYD has gained market share by offering “a wider range of models at various price points,” reported the Journal. What’s more, Zeekr’s 001 model — which competes with Tesla’s Model Y crossover — has enjoyed 12-fold growth in demand from 6,000 vehicles delivered in 2021 to 72,000 in 2022.
Tesla is also losing ground in the U.S. Motor Intelligence reported that Tesla’s share of the U.S. market dropped from 72% to 65% between 2021 and 2022. Ford — which launched the F-150 Lightning and an electric version of its Transit van — is in second place with 7.6% market share.
Ford CEO, Jim Farley, sounds like he has a better grasp of how to create a competitive advantage than does Musk. As he told the Journal, “I’m very convinced that the way to do this is not to go after Tesla directly. It is to go into segments that we’re really good at, like F-150, or maybe authentic offroaders, or vans.”
Meanwhile, Ford has been raising prices while Tesla has been cutting them. “In December, as Tesla was discounting its vehicles, Ford raised the price of the F-150 Lightning electric pickup for the third time in 2022…40% more than the Lightning’s original price,” according to the Journal.
To its credit, Tesla was much more profitable than rivals were in the third quarter of 2022. The company’s operating margin exceeded 17% — way more than GM’s 8.1% and Ford’s 1.5%, according to FactSet.
With Tesla cutting prices and Ford raising what it charges for its Lightning, perhaps Ford’s operating margin and market share will improve as Tesla’s both decline.
In the short term, all this negative news could lower expectations — making it easier for Tesla to exceed them — which would boost its stock.
However, if Tesla’s continues to let its competitive advantages erode, investors could profit from buying stock in Tesla rivals that are growing much faster.