Tesla's Demand Problems Aren't Going Away

The market says Tesla's 20-30% price cuts will reverse stalling demand, even though several rounds of expensive cuts & incentives in Q4 didn't. I'm not convinced, as shown in my 2023 model & forecast.

After twenty years, the Tesla TSLA 0.00%↑ story still is fueled by the persistently large gap between ambitious market expectations versus its actual execution.

That changed abruptly in 2022, when Tesla stock dropped 65% for the year and wiped out $700 billion in market cap.

Since its stock is valued exorbitantly high versus its largest competitors, even as its global market share is shrinking, Tesla has much further to fall when it fails to hit even its own targets. And Tesla trailed even falling market estimates for deliveries, revenue, and profits in each of the last three quarters of last year (see my reports Tesla Q4: Stalling Growth, Shrinking Margins, Weaker Guidance, Mystery "Investment" on 1/29/23, Tesla Q4: Elon's Burning It All Down on 12/30/22, and Tesla Q3 Missed Drastically Reduced Mkt Ests; And Somehow the Market is Surprised on 10/20/22.

And right on time, as I projected at the end of 2021. I have tracked for years how Tesla was able to revive several rounds of stalling growth by expanding into new markets and/or introducing new models. The year just closed marked the first time they all lapped with nothing new to carry the baton with expansions of all four models now fully scaled into China and Europe. It’s last “new” offering is the nearly 3-year-old Model Y, the only model still growing. Model Y quickly eclipsed Model 3 sales—just as Model 3 quickly cannibalized sales of Models S & X in only the second quarter after its full-scale launch back in 2018.

As I have been tracking since 2018, Tesla model leaders are displaced quickly by newcomers and never reclaim their former market strength. Let’s review.

Models S & X: After being soundly overtaken by Model S in Q3 2018, Models S&X sales steadily declined the next two years. Late in 2021, Tesla revived Model S sales with a mildly successful “Plaid” refurbishment. The lift lasted for only three quarters before sales again slumped in Q422.

Model 3: After trouncing its only real serious competition, Models S&X, plus the still nascent state of the EV industry, Model 3 continued to benefit from the limited crop of rivals by expanding into China and Europe. The launch of Model Y stopped Model 3s advance almost immediately in every market, first in the US, then China, then Europe. By the second quarter of 2022, Model 3 sales went negative overall.

Model Y: Tesla’s latest model was launched in Q1 2020, though Model Y is mostly a slightly larger Model 3 (which is a smaller, poorly made Model S) with a hatchback—retaining most of Model 3s inherent flaws plus new ones of its own. As I expected, it quickly overtook Model 3 in every market and is currently Tesla’s only thriving offering.

That said, a focused look below at Tesla demand by key markets reveals how fast it can lose ground to its own models, even before robust global rivals started taking share.

Model 3 sales in the US went negative in less than a year after launch and would not see a rebound until 2021 versus weak 2020 trends as the world was hit with Covid-19. Model Y overtook Model 3 decisively in just two quarters. Growth in all models stalled in Q422 despite price cuts and incentives.

Model 3 has mostly struggled to gain traction in Europe, the second largest EV market in the world after China. It helped when Tesla started exporting cheaper Made-In-China versions from Shanghai in 2021, but the lift was short-lived as sales stalled again in 2022 despite price cuts and incentives amid the Model Y launch. Neither model have managed to hold off much stronger local rivals like Volkswagen.

As in Europe, Model 3 struggled in China, the world’s largest EV market, until Tesla’s Shanghai factory came online. Again, that brief period of growing sales momentum was halted with the launch of Model Y. After just two quarters, Model Y was outselling Model 3 in China and Tesla was exporting more Model 3s (mostly to inventory lots in Europe) than it could sell locally.

However, as I projected, Model Y is indicating its peak level of sales is approaching. Sales growth slowed markedly every quarter in 2022 in China, from up 355% y/y in Q1 versus its launch in 2021 to increasing by just 25% y/y in Q4. If Tesla’s historic trends hold, Model Y sales growth may begin to stall or even decline y/y in the next quarter or two.

So much for Elon Musk’s boast that Tesla would need several factories in China just to meet local demand.

Regardless of the market, the continuing theme is that Tesla persistently struggled to sustain same-store sales even before the market grew to scores of newer models. Now all of Tesla’s important challengers are recently launched models in every key market.

China-based BYD Co, for example, now leads the world in EV sales less than a year after it started selling only NEVs in March 2022.

Tesla’s all too predictable playbook is limited

Given now perilous competitive pressure, and its own self-inflicted failings, there’s a good chance even drastically reduced prices plus expensive incentives like insurance discounts and supercharger credits will not be enough to permanently revive stalling same store sales for Tesla.

Indeed, competitors in all its markets have already begun to respond with their own similar deals. Moreover, Tesla is pushing its most important models into more heavily populated ranges where it may be increasingly less competitive.

As I long have warned, Tesla’s fleet is old and sparse, with just four models which really are just derivations of the original 2012 Model S. And, despite making