Tesla is not having the epic end of the year that Elon Musk predicted

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Elon Musk’s prediction that Tesla would have an “epic” year-end seems more unjustified by the day.

The exuberant outlook offered by the CEO on the automaker’s latest earnings call has given way to price and production cuts in China. In the US, Tesla is offering consumers something previously unthinkable: a $3,750 incentive to take delivery of certain vehicles now instead of waiting for the new year.

“Tesla seems increasingly to have a demand problem,” Toni Sacconaghi, a Bernstein analyst with the equivalent of a sell rating on the stock, wrote in a report last week. He believes Tesla will need to lower prices further to boost demand in China, plus permanent cuts in the cost of models in the US to qualify for benefits tucked into the Inflation Reduction Act.

Musk may have lost his top spot on the Bloomberg Billionaires Index on Tuesday, but Tesla remains in an enviable spot. It is still the dominant seller of electric cars worldwide and had only eight days worth of vehicles in stock at the end of September. No other automaker is so well positioned to take advantage of the IRA’s tax credits for battery cell and locally assembled electric car production.

But to meet its goal of growing shipments at a 50% annual rate over several years — a target that Tesla has already said it will just miss by 2022 — it seems increasingly likely that Musk will have to make some compromises. Lowering the sticker prices of models in the lineup, even as battery costs creep up, can shrink profit margins.

Musk also continues to refer to headwinds that Tesla has no control over. Speaking to the company’s third-quarter earnings call, he admitted that demand was “slightly harder than it otherwise would be” due to China’s slumping real estate market, Europe’s energy crisis and Federal Reserve rate hikes. He offered an almost identical assessment in a tweet last week.

The first sign of trouble for Tesla this quarter came when the company reported that production exceeded shipments by more than 22,000 vehicles in the previous three months. CFO Zachary Kirkhorn warned on the Oct. 19 earnings call that investors should expect another “gap” at the end of the year, with more produced cars still on the way as the quarter closes.

Soon after, Tesla slashed prices in China, with discounts ranging from about 5% to over 9%. In November, it offered insurance subsidies, reinstated a referral program and even advertised on a local TV shopping channel, a departure from Musk’s old strategy of avoiding traditional marketing.

Then Bloomberg reported last week that Tesla planned to cut production at its Shanghai plant by about 20% from last month. The company began offering further incentives, with sales in China falling across the industry, in part due to sporadic lockdowns keeping consumers at home. The company has scheduled downtime at its factory for the end of the month and early January and is reducing the amount of time employees spend on production per shift, according to people familiar with the matter.

In the US, customers who take delivery of a new Model 3 or Y this month will get what Tesla calls a $3,750 “price adjustment” to make up for the new EV tax credit that goes into effect next year. The company is struggling to make larger battery cells at its newest facility in Austin, Texas, and has enlisted the help of Tom Zhu, the head of its Asia-Pacific operations.

In April, Musk said Tesla would produce more than 1.5 million vehicles this year. The company made 929,910 cars in the first three quarters, so it needs to produce more than 570,000 vehicles to reach that goal.

“It’s going to be tough to get to 1.5 million for this year,” said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions. “We’re looking at fears of a recession, rising interest payments, buyers who aren’t afraid to spend a lot of money.”

In other words, the kind of circumstances Musk hasn’t had to deal with since Tesla just started making Roadsters in 2008.

–With help from Chunying Zhang.

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