Why Elon Musk has been forced to shift gears at Tesla

The multi-billionaire is attempting to respond to higher rates and cooling demand with the one thing he knows. Disruption.

If there’s such a thing, it was a slightly more restrained Elon Musk taking stock after a year when Tesla found the limits of its growth. And this has forced his electric vehicle maker to shift gears.

The multi-billionaire has retained his trademark swagger, labelling proxy advisory firm ISS as “ISIS” on an investor call, given its governance battles with Tesla. And in any spare time he is willing to take on anything – including the problematic social media platform renamed “X”, while rolling out rockets at SpaceX and satellites at Starlink.

Musk’s day job as Tesla CEO remains the source of his estimated $US223bn ($339bn) wealth, and the carmaker’s latest update shows he may have met his match in the form of the US Federal Reserve.

Demand for EV’s have been cooling on higher interest rates and saturation among early adopters. Picture: AFP

From the rear-vision mirror, the maker of Model 3 and Model Y cars had a stellar year. It achieved record production and deliveries of 1.8 million cars, increasing 38 per cent on the year. And in the December quarter it upped that again, producing cars at an annualised run rate of almost 2 million cars a year. This by far makes Tesla the biggest EV carmaker in the US.

However, momentum is slowing, and quarterly earnings were down 47 per cent, hurt by discounting to spur on sales with higher interest rates in the US crimping consumer spending.

Tesla’s bottom line was also hit by big expenses on the new brutish Cybertruck and artificial intelligence spending. The numbers come with a backdrop of fast-cooling global demand for EVs as car manufacturers face resistance to the technology from the bigger cohort of consumers that follow the early adopters. High pricing of the cars remains an issue.

This change is mood is having big knock on effect in Australia, which remains one of the biggest lithium suppliers for EV batteries. It has spurred on a collapse in prices, forcing some mines to curb expansion plans.

Tesla warned of “notably” lower growth in the coming year, partly as it focused on building its next generation vehicle platform. This means the company is “currently between two major growth waves”. Tesla, valued at more than $US651bn, saw its shares down 6 per cent in after hours trade on Nasdaq. The car markers stock is widely held by Australian growth fund managers.

Tesla is planning to release a new model in late 2025 pitched at a lower price point. Picture: AFP

On an investor call on Thursday, Musk didn’t provide guidance or broader comments about the health of the EV market. Although he acknowledged high interest rates were taking their toll. Discounting was biting into profit margins.

“If interest rates come down quickly. I think margins will be good and if they don’t come down quickly, they won’t be that good”.

“We have lots of people who want to buy a car but simply cannot afford it. And as interest rates drop, and that monthly payment drops, then they’re able to afford to buy the car. It’s pretty straightforward”.

“There are no tricks to get around this”.

He also pointed out the average price of traditional top-selling combustion engine cars from the likes of Toyota to Honda were a much lower entry point than Tesla. Something needs to change in the equation.

“People are really stretching their wallets to be able to afford a Tesla. It’s quite a difficult thing for them to do”.

Musk is trying to respond to this in the only way he knows how. Disruption. And that involves an plan to up-end Tesla’s manufacturing system along with its next generation car pitched at a lower pricing point. The ambitious project will see the a new fully new model coming to market later in 2025 to take on the big volume manufacturers. Musk said his engineers were working around the clock – including sleeping at the giant plant in Austin.

The new car is not just the design of the vehicle itself, but in the design of the manufacturing system, Musk said. The process of reinventing manufacturing, including rolling out smarter robotics and speeding up production will bring about lower unit costs. He has previously hinted at a single assembly process in the works.

The Tesla Model 3 underpinned the manufacturers sales last year.

“This is a revolutionary manufacturing system significantly. Far more advanced than any other automotive manufacturing system in the world,” the billionaire said. In many ways, he reinvented auto manufacturing during Tesla’s early days as the carmaker was trying to get off the ground.

This involved increased insourcing of parts, heavy use of lean manufacturing and using tech and design in the concept stage to speed up production processes.

The sky might be the limit for now, however Musk hasn’t lost any of the ambition, saying there is a path for Tesla to becoming bigger than Apple or Microsoft as the most valuable company in the world. This is through pushing the boundaries of robotics and AI, dominating energy technology, as well as finding new ways of bringing cars to market.

“I want to emphasise it is not an easy path … but is now in the set of possible outcomes. Previously I would not have thought that a possible outcome,” he said.

Originally published as Why Elon Musk has been forced to shift gears at Tesla