Tesla used its early advantage in the electric vehicle market to drive down costs and raise profits. That strategy is likely to continue paying dividends for it when prices fall, as the market becomes inundated with new competitors.
In the third quarter of 2022, Tesla made $15,653 in gross profit per vehicle, according to recent analysis by Reuters. That’s more than twice as much as was made by competitors like Volkswagen, four times as much as Toyota, and five times as much as Ford.
That cost advantage is the result of big investments by the brand in controlling production costs. New assembly line technology, bringing battery manufacturing in-house, and standardizing design have all helped the automaker keep costs low.
Read: Tesla Cuts Vehicle Prices In China Prompting Shares To Slide By As Much As 7%
Despite that, it raised prices several times in 2022, focusing on maximizing profits through the pandemic. In that, though, it was following the industry trend, while supply chains were snarled and volume was difficult to maximize.
As supply routes untangle and prices begin to fall again, Tesla will have another ace up its sleeve. Thanks to its higher profits, it has more leeway to cut prices, something it has already started doing.
That will be an important tool for the brand to leverage in the coming years, as EV production capacity is expected to outpace demand. By 2026, North Americans are expected to buy 2.8 million EV per year, according to auto industry forecasters. At that same time, though, there will be enough EV factories up and running to assemble more than 4.5 million of the vehicles per year.
In lowering prices, it may attempt to bully other players that can’t afford to cut costs off the pot. It’s a strategy that the brand has already started implementing in China, where government subsidies are ending and production capacity is high.
Local competitors like Xpeng have had to join Tesla in cutting prices. With higher production costs, though, the automaker reported a gross profit of just $4,565, and a net loss of $11,735 per vehicle in the third quarter of 2023.
While big automakers like VW, Ford, and GM have combustion vehicles and a bigger pot to play with, they have had less time to streamline their EV production processes, which may make keeping up with a pricing war difficult. With more margin to play with, Tesla seems to have a powerful weapon in its arsenal.