A company’s success depends on creating a competitive advantage–hard to maintain in the face of upstart competitors, changing customer needs, and disruptive technologies.
Harvard Business School professor Michael Porter – whose consulting firm I worked for – wrote about two sources of competitive advantage:
- differentiation Offering a better product for which customers pay a premium, and
- Cost leadership Selling a decent product at a lower price than competitors.
The company that offers the coolest product in a new product category can be a differentiator. However, when competitors rush into this new product category, customers may no longer be eager to pay a premium for a great flagship product.
Cutting prices comes to mind when thinking of Tesla — its stock is up about 20% from a recent low of $102 — as consumers increasingly view its brand with disdain. How is that? Pollution from Elon Musk’s Twitter repels Tesla customers.
What’s more, Tesla doesn’t update its product line or adapt to evolving customer needs — costing it market share and margins in the US and China.
Simply put, Tesla lacks a sustainable competitive advantage. Without one, there is little reason to invest in its stock.
Tesla price cuts
Tesla cars aren’t selling as well as they used to — which has led to shipment growth in 2022 that hasn’t met its 50% target. To stimulate demand, Tesla is resorting to 20% price cuts for most of its cars in the US and Europe, according to The New York Times.
These price reductions are not available to all Tesla customers. Applies to its lower-priced models, depending on optional features. For eligible consumers, the Inflation Reduction Act of 2023 will provide federal tax credits for electric vehicles priced less than $55,000.
One analyst sees the price cuts as positive. Dan Ives of Widbush told The Times, “I think Tesla realizes it’s not the only game in town and that Detroit companies are jumping into the deep end with EVs and I think the price cuts mean Tesla is going to rip off the Band-Aid and try it out to go on the offensive.”
Cutting prices will certainly erode its high profit margins, but will it help Tesla regain the market share it has lost to its competitors? I doubt it. That’s because customers understand that competing electric vehicles offer more value for money than discount Teslas.
Tesla is growing slower than the industry. In the US, auto sales fell about 8% to “just under 14 million cars and trucks, the lowest level since 2011,” the Times noted. However, electric vehicle sales rose 66% to more than 808,619, according to Kelley Blue Book.
It seems that Kia has gained some market share. Last year, it sold 43,000 electric vehicles in the US — up significantly from “a few hundred in 2021.” Other competitors — Ford, Volkswagen and others “recorded significant increases in electric vehicle sales last year and offer several models that were much more affordable than Tesla’s,” the Times noted.
Tesla grew 40% in 2022 – it sold 1.3 million vehicles – below the growth of the electric car industry 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 can’t afford to pay more than $100,000 for a car.
Specifically, it must become a cost leader — meaning it makes electric cars at lower prices than its competitors. Bernstein analyst Tony Sacconaghi wrote in a research report, “We see demand problems lingering until Tesla can make a lower-priced volume offering, which may only be in 2025.”
Tesla’s strategic problem appears to be that its price cuts could leave it caught in the middle — between a previous differentiation strategy and a potential cost leadership strategy in which Tesla builds a quality vehicle at a price lower than that offered by competitors such as Kia, Hyundai and others.
Tesla’s eroding competitive edge could help explain why it produced 34,000 more vehicles than the 406,000 it shipped in the fourth quarter.
Tesla’s weak brand among Democrats
As I suggested above, Tesla’s ability to grow faster than its competitors depends on customers’ superior perception of its value proposition — the benefits-to-price ratio compared to competitors.
Simply put, customers will buy from the EV manufacturer that offers the most bang for the buck. Unfortunately for investors, the Tesla brand — one component of this explosion — is weakening. How is that? to me ForbesA Morning Consult poll published Jan. 12 found that brand preference for Tesla “is slipping in the wake of CEO Elon Musk’s chaotic takeover of Twitter.”
Specifically, Musk’s decision to allow hate speech to be posted on Twitter — which I wrote about January 1st – Decreased preference for the Tesla brand. Morning Consult found that American adults who hold positive views of Tesla fell from 28.4% in January 2022 to 13.4% this month.
The poll revealed that Tesla’s popularity is declining among Democrats. Specifically, the number of Democrats who view Tesla favorably dropped from 10.3% last month to just 3% in January. Meanwhile, Musk’s net preference rating fell from 22 points in February 2021 to nine points in November 2022, according to Morning Consult.
Musk’s decision to welcome back Twitter prompted figures such as Donald Trump and Michael Flynn, the former national security adviser linked to the January 6 attack on the US Capitol, “some Tesla owners to announce on Twitter that they are getting rid of their cars. And potential customers to cancel planned purchases,” the magazine reported. Forbes.
Tesla’s market share declined
Even as Musk weakens the Tesla brand, he appears to be giving way to his competitors due to Tesla’s failure to introduce new products to compete with Chinese and American competitors.
Tesla hasn’t launched a new passenger car in nearly three years. like Wall Street Journal It stated, that this is a “long gap by Detroit standards” that provides other EV options for customers who have soured on Musk.
Meanwhile, Tesla is losing ground in China – the world’s largest car market. As Tesla fails to provide a better value proposition for Chinese consumers, demand for its cars there is plummeting.
How is that? As the magazine reported, in late 2022 Tesla reduced the volume of certain battery purchases, and cut prices by about 13% for two of its two most popular models “after reporting slumping sales of its Shanghai-built cars in December.”
Why is Tesla’s share in the Chinese market declining? For one thing, it doesn’t have enough insight into the needs of domestic electric vehicle consumers. Andy Ann, CEO of Zhejiang Geely Holding Group’s Zeekr electric car brand, told the newspaper that Tesla has an “inaccurate understanding” of the needs of Chinese buyers – offering them an interior that “lacks the premium feel that Chinese consumers are looking for”.
Another problem for Tesla is that competitors have a better feel for the Chinese buyer. BYD gained market share by offering a “wide range of models at different price points,” the magazine reported. What’s more, the Zeekr 001 — which rivals Tesla’s Model Y crossover — delivered 12-fold growth in demand from 6,000 delivered in 2021 to 72,000 in 2022.
Tesla is also losing ground as US Motor Intelligence reports that Tesla’s US market share fell from 72% to 65% between 2021 and 2022. It ranks second with a market share of 7.6%.
Ford CEO Jim Farley seems to have a better understanding of how to create a competitive advantage than Musk. As he told the paper, “I’m very convinced the way to do it isn’t to go after Tesla head-on. It’s to get into segments that we’re really good at, like the F-150, or maybe the original off-roaders or pickups.”
Meanwhile, Ford has been raising prices while Tesla is lowering them. According to the magazine, “In December, while Tesla was cutting the price of its cars, Ford raised the price of the F-150 Lightning electric truck for the third time in 2022… 40% more than the original Lightning price.”
And according to FactSet, Tesla was more profitable than its competitors in the third quarter of 2022. The company’s operating margin exceeded 17% — much more than GM’s 8.1% and Ford’s 1.5%.
With Tesla lowering prices and Ford raising what it charges for Lightning, Ford’s operating margin and market share may improve as Tesla both decline.
In the short term, all of this negative news may lower expectations – making it easier for Tesla to override it – which will boost its stock.
However, if Tesla continues to let its competitive advantages erode, investors could benefit from buying stock in its faster-growing Tesla competitors.