Tesla’s ‘gravity-defying’ powers at risk as electric vehicle market slows

Two years ago, car leasing group Octopus EV could barely keep up with the red-hot demand for Teslas that accounted for half its sales.

“Tesla had the market to themselves,” said Fiona Howarth, chief executive of Octopus EV, which has operations in the UK and US. Now the carmaker has “lost some of its competitive advantage”.

The scale of Tesla’s challenge was laid bare this week when its first-quarter sales fell short of the gloomiest Wall Street forecast. Threats are coming from multiple angles: cheaper Chinese brands such as BYD and MG, faltering demand in China and the US, its two key markets, and even the polarising personality of Elon Musk.

Austin-based Tesla is not alone in confronting a tougher market as higher interest rates and concern in some countries over charging infrastructure curb demand for electric vehicles. Most major carmakers have reported either a drop in EV sales or slowing growth.

But its status as the electric car champion — and one with a stock market valuation still dwarfing that of rivals — leaves Tesla particularly exposed. Unlike legacy manufacturers, it does not have petrol models to fall back on, and nor does it make hybrids, whose sales have picked up over the past year as buyers opt for something less than fully electric.

Cooling demand “poses a unique challenge for Tesla as it is seeing the greater slowdown is in its home (and largest) market, the US,” said Mike Tyndall, an analyst at HSBC.

The slowdown has sent Tesla’s shares down 31 per cent this year, making it the second-worst performer on the S&P 500. The group’s market capitalisation has almost halved from its late-2021 peak of $1.2tn, when investors’ faith in the messianic powers of Musk went unquestioned.

While the company pointed to several issues that blighted the first quarter, including disruption in the Red Sea supply route that forced its Berlin plant to halt production, former executives and analysts say that Musk is now having to steer Tesla through its trickiest period since the “production hell” of 2018, when the company struggled to make cars at scale.

“In the end he’s not a magician, even though he has seemed like that for the last 15 years,” said one former Tesla executive who reported directly to Musk. “I honestly don’t know what levers he pulls. There is no new product, and he won’t take further price action.”

As rivals begin to roll out much cheaper EVs, Tesla’s own plans for a low-cost vehicle, dubbed “Model 2” and not due out until 2026, has assumed ever more importance.

Just over two years ago, Musk said the business was not working on such a car because it had “too much on our plate, frankly”. In January, the billionaire insisted that Tesla was “very far along” with the vehicle.

However, Reuters reported on Friday that Tesla had decided to scrap the project, opting instead to focus on developing a self-driving “robotaxi”.

More than 90 per cent of Tesla’s sales are the Model 3 and Model Y, vehicles with prices starting above $35,000.

Riding high on seemingly insatiable demand in recent years, Tesla had instead poured funds into developing its class-8 Semi haulage truck but has only delivered about 100 of them so far, while it continues to work on the Roadster, an ultrafast sports car.

Last year it launched the Cybertruck, a bold off-roader that Musk has admitted will be a “nightmare” to manufacture and will start retailing for $60,990. 

“They put the money in the wrong place, they should have put it into the Model 2 rather than Cybertruck,” according to the former executive.

Faced with more hesitant consumers, Tesla has cut prices over the past year — often without warning — before sometimes raising them again. Prices are down by around a fifth over the past 12 months, according to HSBC.

The pricing strategy has hit Tesla’s residual values, the projected value of a vehicle at the end of a lease and a key input into the cost of leasing. A lower residual value translates into higher monthly payments for motorists.

Overall US used-car prices have fallen by 14 per cent since July 2022, but those for Teslas have halved, according to data from HSBC. 

“If you’re a private owner of a Tesla, you’re $20,000, $30,000 or even $40,000 worse off,” said the former Tesla executive. “They feel they got blindsided by the price war, and they absolutely will look at other brands” when choosing their next EV. 

Tesla’s predicament has prompted some to step up their criticism of Musk, who since late 2022 has also been overseeing Twitter, which he renamed X after buying it for $44bn. He has used the platform to voice his sometimes divisive opinions on social and political issues, which critics say is damaging the brand.

“His behaviour is affecting the perception of Tesla in the marketplace, and he has been selling his own stock like crazy” to fund other ventures like X, said Ross Gerber, a long-standing Tesla shareholder at Gerber Kawasaki, a wealth management group based in Santa Monica, which has been cutting its stake.

“I still love the company. Tesla has innovation and tech that is incredible, makes the best vehicles on the road, but they can’t sell as many of them because the CEO has become so toxic to so many groups of people,” Gerber said.

Musk has dismissed Gerber’s criticisms, writing on X that he is “such an idiot that he can’t even tell he’s an idiot”.

And Tesla has plenty to help it navigate the downturn. By the end of last year, the carmaker had amassed $29bn in cash and cash equivalents, up from $4bn in 2018. It owns significant infrastructure, such as the major EV charging grid in the US, handing it a big advantage over rivals. Its Model Y was the world’s top selling car of any kind in 2023.

One top 20 investor is untroubled by this year’s decline in the shares, which are still up over 800 per cent in the past five years.

The share price “has come down to a more reasonable level, [the company is] unique among peers, [and the price is a] fair reflection of business today”, said the shareholder.

It is a view echoed by the former Tesla executive. “It’s always defied gravity, it has never behaved like a car company,” he said, but then added: “Suddenly it starts to look like it’s not immune from the same demand cycles and dynamics that affect the rest of the car industry.”

This story was updated after Reuters reported that Tesla had abandoned its Model 2 plans.