Tesla wanted a price war — Ford showed up

Elon Musk got what he asked for: Ford has officially joined the electric vehicle (EV) price war. The collateral damage to Tesla could be brutal.

Ford reported results late on Tuesday. The short story is it blew past earnings estimates, mostly because of good margins in the North American business. But it only reiterated guidance for the full-year, meaning Ford’s faith in those drivers’ fortitude is slipping. Moreover, now that Ford reports its electric business separately, everyone can see it made a less than princely operating margin of negative 102% on EVs in the quarter.

There are two intertwining subplots here. The first is the paradoxically bullish effects of the Covid-19 pandemic on the legacy US cars business are waning (or “normalising,” to use analysts’ euphemism). Disruptions to supply chains combined with a relatively swift economic rebound made for a situation unfamiliar to Detroit: booming demand and sparse dealer lots. Ford and General Motors earned more in the past two years than the previous four.

Whereas dealers had free rein to gauge buyers last year with price-adders, discounting has returned to some degree. Clearly, we are not back to pre-pandemic practises, as evidenced by Ford’s and GM’s first-quarter results. But macroeconomic uncertainty, rising monthly loan payments and sheer gravity after the run-up explain why Ford’s earnings are being treated with caution.

Complicating things is the second subplot: electrification. Ford temporarily suspended production of its Mustang Mach-E EV during the quarter to retool; EV unit sales fell 60% compared with the previous quarter. The company said on Tuesday had Ford maintained volume, its margin would have been only a negative 40% rather than about 100%. Never mind that this implies losing roughly the same absolute amount of dollars. The bigger point, for Ford but also Tesla, is what this portends for the rest of the year.

The underlying message of Ford’s comment on volume is it intends to grow its way out of losses on EVs. This makes sense. Car manufacturing has always been a scale business and Tesla didn’t turn a full-year profit until it got to 500,000 annual vehicle sales (Ford sold 91,000 over the past four quarters). Moreover, Ford previously set a target run rate for annual EV production of 600,000 units to be achieved by the end of this year.

While pricing on the F-150 Lightning electric pickup has increased by $11,000 (R200,851) since its launch, according to Ford, prices on the Mach-E were cut again just before the earnings report. It’s easy to see why: That vehicle competes directly with Tesla’s two biggest models, the 3 and the Y, which have had their prices slashed this year. Nevertheless, scale economies and the tyranny of public financial targets mean Ford must boost EV production substantially this year — despite gathering clouds — which is one more reason not to extrapolate its earnings beat.

But it’s also a reason to expect a repeat of Tesla’s weak first-quarter performance. As I wrote here, Tesla’s price cuts in the first quarter cut deep into its gross margin — a calling card on Wall Street — without actually helping to clear its growing inventory of unsold vehicles. As my Bloomberg News colleague Dana Hull reported on Wednesday, online aggregators suggest stockpile has kept rising through the current quarter. Ford’s renewed push on EV volume, however much it may hurt its own bottom line, will keep the pressure on Tesla. And there are other competitive forces entering the fray. For example, Hyundai's Ioniq 6 electric sedan is squarely aimed at the Model 3-curious and has garnered enthusiastic reviews.

Tesla’s margins start from a higher level, of course; which has given bulls something to cling to amid this gathering price war. But they have dropped a lot already.Down at the operating-profit line, Mercedes-Benz passed Tesla in the first quarter and the gap vis-à-vis others has narrowed considerably. 

To be clear, no-one will emerge unscathed as the post-pandemic boom eases and price competition returns. Then again, the traditional carmakers have at least two things to fall back on. First, they still derive the bulk of their income from profitable vehicles using internal combustion engines, helping to offset losses as they build EV capacity at their own pace. Tesla must grow its EV business, come what may. Second, and most importantly, traditional carmakers are defending stock prices trading at 5-8 times earnings. Tesla’s multiple is closer to 50, providing far less tolerance for the pressures now building across the industry.

More stories like this are available on bloomberg.com/opinion