Photo: Tesla
The price cuts that Tesla announced in January upended the automotive industry and rattled Tesla investors. Nevertheless, it is now clear that Tesla is looking to outsource the lost margins upstream, to its suppliers, with reports indicating that Tesla is seeking a 10% reduction in part prices.
Market disruptions are never a good thing, and these include the recent price cuts Tesla operated across its entire lineup. The lower prices might appeal to prospective customers and are good at gaining market share. Nevertheless, all other businesses on the supply and production chain are likely to be affected. Ultimately, it’s a big-fish-eat-small-fish thing, and whoever has better leverage imposes its strategy onto the others. In the case of Tesla price cuts, we say the EV maker is the big fish, and all others are now feeling the heat of its decisions.
It’s not only the competition that is in a tight corner right now. Surprisingly, suppliers found themselves in an even more dire situation. Tesla enjoys healthy margins on its vehicle production business, but that doesn’t mean it is willing to absorb all the losses from its price cuts. Tesla suppliers knew decreasing margins would eventually be passed along the supply chain. Tesla’s Q4 earnings call only made it clearer.
During the conference call, Tesla CFO Zachary Kirkhorn sent a chilling message through the Tesla supplier base, even as he thanked them heartily for their support during a difficult 2022. Zach promised Tesla would “attack” every area of cost increase, including logistics, expedites, accumulation of material buffers, part premiums, productivity, and overheads.
“As the world transitions from an inflationary to deflationary environment, we expect a strong partnership with our suppliers on this journey as well,” warned Kirkhorn.
The passive-aggressive message to the supplier industry means they are expected to take one for the team in Tesla’s new price-cut strategy. Despite the good results reported in Q4 2022, Tesla entered a full recession mood. Elon Musk said during the same conference that a recession could lead to “meaningful decreases” in almost all its input costs. In other words, Musk expects suppliers to be hit by slowing activity across the auto industry and would accept whatever pressure Tesla might put on them to cut prices.
A Reuters report shows that Tesla is already pressuring its suppliers to accept a 10% price reduction. This comes after Tesla was willing to pay a premium during the pandemic to secure an uninterrupted part supply. This trend will stop now, which is one reason why Tesla supplier Panasonic was rather pessimistic about its 2023 prospects.
The supplier industry representatives are trying to push in the opposite direction, indicating that its margins are already razor-thin. More cuts would be painful in a sector that is already struggling. Reuters gives the example of Gissing North America, which counted Tesla as its biggest customer. The supplier filed for bankruptcy last year, citing high labor costs and commodity pricing. This shows Musk’s idea that suppliers could make up the potential losses thanks to higher volumes instead of higher prices that might not yield the expected results.
It’s not only the competition that is in a tight corner right now. Surprisingly, suppliers found themselves in an even more dire situation. Tesla enjoys healthy margins on its vehicle production business, but that doesn’t mean it is willing to absorb all the losses from its price cuts. Tesla suppliers knew decreasing margins would eventually be passed along the supply chain. Tesla’s Q4 earnings call only made it clearer.
During the conference call, Tesla CFO Zachary Kirkhorn sent a chilling message through the Tesla supplier base, even as he thanked them heartily for their support during a difficult 2022. Zach promised Tesla would “attack” every area of cost increase, including logistics, expedites, accumulation of material buffers, part premiums, productivity, and overheads.
“As the world transitions from an inflationary to deflationary environment, we expect a strong partnership with our suppliers on this journey as well,” warned Kirkhorn.
The passive-aggressive message to the supplier industry means they are expected to take one for the team in Tesla’s new price-cut strategy. Despite the good results reported in Q4 2022, Tesla entered a full recession mood. Elon Musk said during the same conference that a recession could lead to “meaningful decreases” in almost all its input costs. In other words, Musk expects suppliers to be hit by slowing activity across the auto industry and would accept whatever pressure Tesla might put on them to cut prices.
A Reuters report shows that Tesla is already pressuring its suppliers to accept a 10% price reduction. This comes after Tesla was willing to pay a premium during the pandemic to secure an uninterrupted part supply. This trend will stop now, which is one reason why Tesla supplier Panasonic was rather pessimistic about its 2023 prospects.
The supplier industry representatives are trying to push in the opposite direction, indicating that its margins are already razor-thin. More cuts would be painful in a sector that is already struggling. Reuters gives the example of Gissing North America, which counted Tesla as its biggest customer. The supplier filed for bankruptcy last year, citing high labor costs and commodity pricing. This shows Musk’s idea that suppliers could make up the potential losses thanks to higher volumes instead of higher prices that might not yield the expected results.
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