Tesla CEO Elon Musk Expresses Concern about Interest Rates and Hesitates on Mexico Factory
Musk Worries about Impact of High Interest Rates
Tesla CEO Elon Musk has voiced his apprehension about the influence of high interest rates on potential car buyers. He revealed that this concern has led the electric vehicle manufacturer to hesitate regarding its plans for a factory in Mexico as it assesses the economic landscape. Musk’s caution comes after Tesla fell short of Wall Street expectations for third-quarter gross margin, profit, and revenue.
Macro Conditions and Tesla’s Factory Plans
Musk stated that if macroeconomic conditions continue to be turbulent, even a well-established company like Tesla will face challenges. This marks a shift in tone from a year ago when Musk described Tesla as “recession resilient.” The company’s stock fell over 4% in after-hours trading following this announcement.
Concerns about Rising Interest Rates
During the call, Musk expressed worries about further expansion due to rising interest rates making cars unaffordable. Despite Tesla’s efforts to maintain demand through price cuts, Musk highlighted concerns about financing costs impacting affordability for consumers. He specifically mentioned that the price of the popular Model Y SUV remained almost unchanged for buyers, even after the price reductions.
Mexico Factory Plans and Past Experiences
In March, Tesla announced plans for a new factory in Mexico’s state of Nuevo Leon. However, Musk admitted to being cautious due to the economic uncertainties. He mentioned being scarred by the bankruptcy of General Motors and Chrysler during the 2009 financial crisis. Furthermore, Musk acknowledged the significant challenges involved in achieving volume production for Tesla’s long-delayed Cybertruck pickup and ensuring positive cash flow.
Tesla’s Aggressive Price Cuts and Gross Margin
Tesla’s aggressive price cuts have affected its gross margin, especially in China where it faces tough competition from local automakers. The company aims to navigate the price war it initiated, capturing global demand for electric cars. However, high interest rates and lower prices at rival companies have dampened electric vehicle sales. Some analysts suggest that Tesla may need to further reduce prices to meet its annual production target.
Margin Decline and Growth Challenges
In the third quarter, Tesla’s gross margin dropped to its lowest level in over four years. Despite this decline, the company remains committed to its target of producing 1.8 million cars annually. Analysts question whether this is merely a temporary setback or indicative of a larger shift in consumer behavior due to rising interest rates and an uncertain economic backdrop. Tesla’s stock has experienced significant growth this year but remains below its record high.
Factors Affecting Tesla’s Margin
Tesla attributes its margin decline to underutilization of new factories, increased operating expenses driven by the upcoming Cybertruck model, and investments in artificial intelligence and other projects. Additionally, the company faced a decrease in average revenue per unit compared to the previous year. Despite these challenges, Tesla’s energy and services businesses have contributed significantly to its profit.
Overall, Elon Musk’s concerns about high interest rates and economic uncertainties have prompted Tesla to reassess its plans for a factory in Mexico. The company’s aggressive price cuts have impacted its gross margin, while analysts question the long-term implications of these strategies. Despite these challenges, Tesla remains focused on achieving its production targets and continuing its growth in the electric vehicle market.
