Saving Tesla, is FSD the life-saving straw? | Jianzhi Research

On the morning of April 24th, Tesla released its first-quarter performance for 2024.

In the first quarter of this year, Tesla not only experienced a sharp drop in sales volume, but also saw a triple decline in revenue, net profit, and gross profit margin compared to the previous quarter, all falling below expectations. Despite the positive outlook and potential of FSD and Robotaxi as potential lifesavers, boosting sales and profitability in the short term remains challenging.

The only good news is that the highly anticipated budget model, Model 2, does not require new factories or large-scale new production lines, and is expected to start production in the second half of 2025.

In Q1 2024, Tesla achieved operating revenue of $21.3 billion, a 9% year-on-year decrease and a 15% quarter-on-quarter decrease, lower than the market's expected $22.1 billion, marking the first revenue decline compared to the previous quarter since 2020; net profit was only $1.129 billion, a 55% year-on-year decrease and an 86% quarter-on-quarter decrease, below the market's expected $1.81 billion; the gross profit margin decreased by 2 percentage points year-on-year and by 0.3 percentage points quarter-on-quarter to 17.35%.

1. Price cuts no longer effective, Q1 deliveries collapse across the board

Tesla's strategy of lowering prices to maintain sales volume failed in the first quarter of this year, with sales falling well below market expectations. Tesla attributed this to production disruptions caused by line upgrades at the Fremont factory in California and the arson at the Berlin Gigafactory, as well as transportation issues due to the Red Sea conflict, leading to a decline in production and sales.

Huawei's Wall Street Research believes that the reasons behind the sales collapse may be more than what Tesla has stated. The decline in sales is not only affecting the US and European markets as Tesla claims, but also the Chinese market. Under the backdrop of a price war in the domestic electric vehicle market this year, Tesla's continuous price cuts and frequency are not outstanding, and its older models are finding it difficult to continue to excite consumers.

In the first quarter of this year, Tesla's global delivery volume was 387,000 vehicles, an 8.5% year-on-year decrease and a 20.2% quarter-on-quarter decrease; production was 433,000 vehicles, a 1.7% year-on-year decrease and a 12.4% quarter-on-quarter decrease, marking the first time in Tesla's history that both production and delivery volumes have declined compared to the previous quarter.

Furthermore, it is worth noting that while the overall sales of new energy vehicles in China, the US, and Europe continue to grow positively, Tesla is facing setbacks simultaneously in these three major new energy vehicle markets This has also led to Tesla's production-sales gap reaching a historic high in the first quarter of this year. Tesla's production exceeded sales by as much as 47,000 vehicles, not only pushing the inventory for the quarter to a historical high, but also completely breaking the previous trend where Tesla's deliveries were constrained by production capacity rather than demand.

If there are no new strategic changes in the future, Tesla may face weak sales growth or even negative growth this year. As Tesla stated, "The increase in new vehicle deliveries in 2024 may be significantly lower than the growth rate achieved in 2023."

Because even with a flat sales target of 1.8 million vehicles, Tesla will need to achieve an average sales volume of 471,000 vehicles in the next three quarters, a 22% increase compared to the previous quarter. This is not an easy task for Tesla, which has been experiencing continuous declines in sales volume.

2. Profitability has not reversed its trend

Earlier this year, Tesla implemented a price reduction of 29,000 to 36,000 yuan for the Model Y and Model 3, bringing the prices of the refreshed versions of Model Y and Model 3 to a historic low. However, this price reduction strategy did not perform well, failing to boost sales and dragging revenue, profit, and gross margin levels into a declining trajectory.

Fortunately, benefiting from the decline in raw material prices such as lithium carbonate and power batteries, Tesla's operating costs decreased by 1.21 billion yuan year-on-year, along with the increase in FSD (Full Self-Driving) revenue in the automotive business (Tesla stated that due to the release of FSD V12 Beta, first-quarter revenue related to FSD increased significantly), allowing Tesla's first-quarter per vehicle revenue and automotive gross margin to reach 44,900 yuan and 15.6%, only a slight decrease of 2,300 yuan and 1 percentage point year-on-year, slightly exceeding expectations.

Therefore, until the release of the affordable new Model 2 by Tesla, price reduction remains one of the few effective strategies for Tesla. As long as overall production capacity and output continue to exceed order and sales levels, Tesla will continue to maintain price reductions.

In the early second quarter of this year, Tesla introduced a "0 interest" installment purchase policy for the first time for the Model 3 and Model Y, with a down payment of only 79,900 yuan, while continuing to offer a 14,000 yuan discount on all models.

3. Is FSD the lifesaver?

As Tesla's old products gradually reach the end of their life cycle and new products are not expected to be produced until the second half of 2025, Tesla is currently in a vacuum period where there is a gap between old and new models. FSD (Full Self-Driving) and Robotaxi may become Tesla's lifesaver.

With the increasing penetration rate of FSD in the future, Tesla is expected to generate revenue and profit by offering FSD for a one-time purchase price or subscription fee, while also increasing revenue and profit levels through the business commission from the Robotaxi launched in August. However, Tesla also faces many difficulties and challenges （1）FSD Struggles to Enter the Chinese Market

While Tesla's FSD promotion in the European and American markets has indeed attracted more customers and boosted sales to a certain extent, this is reflected in the sharp increase in mileage after Tesla announced a free one-month trial of FSD at the end of March.

As of early April this year, Tesla's FSD mileage has exceeded 1 billion miles and has been updated from a testing version to a supervised version.

To retain customers after the free FSD trial period ends, Tesla has also started lowering prices. The price of the FSD package has been reduced from $12,000 to $8,000, and the subscription price has been lowered from $199 per month to $99. While the price of FSD is decreasing, the technology is still being updated, greatly increasing the product's appeal.

However, Tesla's FSD has not yet been officially introduced in China. Therefore, Chinese consumers find it difficult to fully experience the benefits of Tesla's FSD price reduction and technological improvements. This also means that Tesla in the Chinese market still relies on price reductions for old models and brand influence to attract customers.

Tesla's sales in the European and American markets account for less than 50% of global sales, and the support for new energy vehicles in Europe and the United States is gradually decreasing. Local car manufacturers are no longer focusing on mass production of pure electric vehicles, slowing down the pace of vehicle electrification.

This has kept the penetration rate of new energy vehicles in Europe and America at around 20% and 10%, with no trend of further increase. Therefore, FSD can only boost Tesla's overall sales by up to half.

However, during Tesla's first-quarter earnings call, Musk stated that negotiations are underway with a major automaker for authorization on fully autonomous driving (FSD), which is expected to further enhance FSD's penetration in the autonomous driving market.

（2）Robotaxi Faces Many Restrictions and Lacks First-Mover Advantage

The first Cruise to operate autonomous taxi services in the United States has been forced to suspend operations due to frequent safety incidents. While Waymo has made progress in safety, its usage frequency is not high (only 0.01% of Uber's total business).

The launch of Tesla's Robotaxi project can indeed increase the usage of FSD and drive FSD mileage, but establishing economies of scale quickly and gaining significant profits is still quite challenging. Tesla needs to fundamentally dispel consumer safety concerns, change their travel habits, and obtain approval from regulatory agencies in various states in the United States As for the Chinese market, Tesla has no first-mover advantage in promoting its autonomous taxi business in China, making it difficult to capture a large market share. Currently, Baidu's Apollo, as well as the joint venture between Didi and GAC called Aidi Technologies, have already started their layout. Among them, Apollo has completed business operations in multiple cities such as Beijing, Shanghai, Wuhan, Shenzhen, and Chongqing, with a total order volume of up to 4 million.

Tesla's ineffective price reduction strategy, declining profitability, and decreasing sales volume have cast a shadow over its prospects. Hoping that Tesla, which has crowned itself as an "autonomous driving company," can truly turn the tide with FSD