Tesla boss Elon Musk drives sales with strong discounts – but the aggressive pricing policy eats into profits. In the first quarter, the US electric car maker’s net profit collapsed, although sales increased sharply. Musk has cut prices several times this year. Investors are reacting nervously, because Tesla’s previously relatively high profit margins are coming under increasing pressure. But Musk does not want to give up in the price war: “We believe that it is the right decision to focus on higher volumes and a large number of cars,” said the tech billionaire after the presentation of the quarterly figures.

The prospect of falling profits did not go down well in the financial markets. Tesla’s shares fell more than 7 percent in premarket trading on Thursday. But they were also up almost 50 percent year-to-date, so the opportunity for profit-taking is good. Overall, Tesla earned $2.5 billion in the first quarter, down 24 percent from a year ago. The company announced on Wednesday after the US stock market closed. Revenue grew 24 percent to $23.3 billion. Analysts had expected a little more.

Boosted sales with high discounts

Tesla delivered 422,875 electric cars in the first quarter. The company thus equaled its previous record, but fell short of expectations. Musk boosted sales with heavy discounts, and there have already been several rounds of price cuts this year. Profitability is suffering as a result – Tesla’s operating profit margin fell from 16.0 to 11.4 percent quarter-on-quarter. A year ago it was still 19.2 percent. Tesla is still way ahead in the industry. For comparison: The margins of Ford and General Motors were recently five and seven percent.

Musk justifies the lower prices by wanting to make e-cars affordable for the masses. There is no lack of demand. However, Tesla made about 18,000 more vehicles last quarter than the company shipped. “Tesla is going through a difficult period. Inventories are rising,” commented auto expert Gene Munster of investment firm Deepwater Asset Management. Analysts see Musk’s aggressive pricing policy as a reaction to the increasing competition in the electric car business, which is developing from a niche to a mass market.

In the meantime – not least due to regulatory pressure – almost all established car manufacturers have entered the competition with high investments. In order to stay on course for growth and defend its market leadership, Tesla has little choice but to help out with purchase incentives. However, according to its own statements, the company assumes that it will retain one of the highest profit margins in the automotive industry in the future, despite the price cuts. Tesla is also sticking to the ambitious goal of expanding production with annual growth rates of 50 percent and believes it is still on course to deliver around 1.8 million cars this year.