Tesla CEO Elon Musk is considering another round of price cuts for electric vehicles in response to economic uncertainty. He believes it is reasonable to prioritize higher vehicle production over profit margins during turbulent times. Such a move could further impact Tesla’s margins, which have been declining over the past year and have caused concern among investors.
However, Tesla’s advantage lies in the Biden administration’s tax credits for battery manufacturing. This gives the company a competitive edge over rivals who produce fewer batteries, as analyzed in its second-quarter results. Tesla has already reduced prices in several markets, resulting in a 35% increase in U.S. sales during the second quarter, aided by the dynamic discounting strategy and government subsidies.
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The Inflation Reduction Act provided battery tax credits that translated to approximately $900 to $1,400 subsidy on each Tesla sold in the U.S. during the second quarter. When combined with $600 per vehicle obtained from selling regulatory offsets for meeting emissions standards, the subsidies offset a significant portion of the $2,500 price cut for the long-range Model Y.
Tesla benefits the most from battery production credits under the IRA, with estimates suggesting it could collect around $1.8 billion in production credits this year, surpassing General Motors and its battery supplier by a substantial margin.
Despite benefiting from these tax credits, Musk has been critical of President Biden and his policies and has even called for the elimination of subsidies. Nevertheless, Tesla is projected to book considerable battery credits throughout the year, with potential significant increases as it ramps up battery production.
While some analysts exclude regulatory credits and focus on underlying profit margins, Tesla’s quarterly automotive gross margin, excluding regulatory credits, declined to 18.1% in the second quarter from 26% the previous year.
Source: Reuters
