Tesla price cuts and EV adoption

In the beginning of the year aggressive price cuts were driving Tesla shares higher as it was seen coming from a position of strength. There were likely two main drivers behind the price cuts, 1) lithium carbonate prices in China were falling rapidly reducing the cost of lithium-ion batteries, and 2) higher interest rates on new car loans (around 7.5%-8% compared to long-term average of 5%) were reducing demand causing inventory to rise at Tesla. As the AI hype took hold, earnings results were good against estimates, and deals with other carmakers to adopt its charging technology as the industry standard the stock price continue.

The recent weakness in Tesla is due to the outlook that interest rates will stay higher for longer reducing demand for cars and potentially the global economy is entering a stagflation environment which will be bad for cyclical sectors such as the car industry. Finally, the troubles in the Chinese economy is bad news for Tesla as the Chinese market is an important EV market. Today Tesla has announced its second price cut in China in just three days. While it can signal confidence that lithium carbonate prices are to fall again it can also be a sign that the Chinese market is weaker than estimated or competition has simply increased. In any case, it points to lower margins which has already been the case since Q1 2022 when the gross margin and EBITDA margin were 29.1% and 23.9% respectively compared to 18.2% and 14.3% in Q2 2023.

EV adoption is getting closer to an inflection point for crude oil

We have updated the figures for EV deliveries in Q2 2023 and expanded our tracking to 15 car companies. Last quarter saw 1.54mn deliveries a new record for battery electric vehicles (BEV) crossing the cumulative 10mn mark since Q1 2020. Tesla’s market share has fallen from estimated 67% in Q1 2020 to around 30% in Q2 2023 which is more or less unchanged from a year ago. The 30% stable market share is an interesting figure as it is roughly three times Toyota’s current global market share. If Tesla is able to keep its market share as the global car converts to selling only BEVs then one could make the argument that Tesla should be valued at three times the value of Toyota. Interestingly enough, this is also the current yardstick applied by the market. Toyota’s market value is currently $265bn compared to Tesla’s market value of $739bn. This is of course a simplistic and not realistic approach.

What is still striking about the global car industry is that the combined value of the 22 largest carmakers (pure EV makers and the ICE makers) has risen to $1.9trn from $0.7trn in December 2015 outpacing growth in global car production over the same period suggesting that investors are still discounting that the value of BEVs in the future are higher per car than the current ICEs. This assumption is still one of the biggest key risks to investors in Tesla and other EV makers. Will BEVs really have higher operating margins in the future than ICEs?

These 10.3mn BEVs have reduced oil demand by 0.28 Mb/d (million barrels per day) compared to what it would have been if these 10.3mn BEVs were not on the roads. The key inflection point for the crude oil market is when the annual reduction in oil demand from new additional BEVs equal 1 Mb/d which is roughly the estimate demand increase in oil per year. The current 12-month rolling oil demand reduction from BEVs is around -0.14 Mb/d, so peak oil demand, at the current BEV adoption, lies roughly 3-4 years into the future. For each quarter that passes the oil price dynamic will increasingly discount the BEV adoption rate.