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regular-article-logo Tuesday, 27 February 2024

Tesla joins GM, Ford in slowing EV factory ramp as demand fears spread

Elon Musk said he was worried that higher borrowing costs would prevent potential customers from affording its vehicles despite substantial price cuts, and that he would wait for clarity on the economy before ramping up its planned factory in Mexico

Reuters Published 19.10.23, 04:14 PM
Representational picture.

Representational picture. File picture

Tesla on Wednesday joined General Motors and Ford in being cautious about expanding electric vehicle production capacity, citing economic uncertainties and underscoring fears of a slowdown in demand.

Tesla CEO Elon Musk said he was worried that higher borrowing costs would prevent potential customers from affording its vehicles despite substantial price cuts, and that he would wait for clarity on the economy before ramping up its planned factory in Mexico.

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"People hesitate to buy a new car if there's uncertainty in the economy," Musk said on a post-earnings call where he also talked about "paycheck-to-paycheck" pressures on American workers. "I don't want to be going into top speed into uncertainty."

Musk's comments, which sent Tesla shares down more than 4% in after-market trading, come after warning bells from other automakers and EV startups.

GM said on Tuesday it would delay production by a year of Chevrolet Silverado and GMC Sierra electric pickup trucks at a plant in Michigan, citing flattening demand for EVs.

Detroit peer Ford said last week it would temporarily cut one of three shifts at the plant that builds its electric F-150 Lightning pickup truck. The automaker in July slowed its EV ramp-up, shifting investment to commercial vehicles and hybrids.

EV startup Lucid on Tuesday reported a near 30% plunge in third-quarter production and only a marginal increase in deliveries despite big discounts, raising worries about demand for its Air luxury sedan.

Amazon-backed Rivian, which makes electric pickup trucks and sport utility vehicles, also disappointed investors this month when it shied away from raising its full-year production forecast despite stronger-than-expected third-quarter numbers.

"It does highlight that there could be a slowdown in EV (demand) in the near term," said Tom Narayan, global autos analyst at RBC Capital Markets. "But it has more to do with pricing and affordability than a rejection of EVs."

Narayan said he expected this to be a "dip" that improves as prices of EVs fall and lower-priced variants are available.

Automakers have billions of dollars in EV-related investments riding on how the next several quarters play out. Worries about slowing demand have been rising just as companies come to grips with supply chain constraints that wrecked production plans.

Reuters reported in July that the U.S. market was not growing fast enough to prevent unsold EVs from stacking up at some auto dealerships.

To prevent demand from waning, market leader Tesla, with industry-leading profit margins, has been the first and most aggressive in slashing prices, forcing others to follow suit and squeezing margins.

But Musk said higher financing costs due to rising interest rates meant to fight stubbornly high inflation in some cases almost entirely offset the price reductions, making consumers looking to shift away from gas-guzzling vehicles wary.

"If interest rates remain high ... it's that much harder for people to buy the car. They simply can't afford it," Musk said, adding he would "accelerate" expansion of the Mexico factory if interest rates come down.

That is not expected in the United States until June 2024, based on current market estimates, with recent robust economic data suggesting the central bank might leave interest rates higher for longer.

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