As Tesla price cuts concede billions, Musk is pushed to spend on ads

By most standards, Gary Black is a big supporter of electric vehicle giant Tesla.Chicago fund manager Tesla The fund has been his first or second holding since opening it in 2021, and he’s been frequently seen on social media (and sometimes CNBC) talking about it, usually in a supportive way. But one thing Black has been thinking about lately: Tesla is wasting money on cutting prices to maintain high growth rates.

With growth in Tesla’s car and SUV sales lagging and the launch of its Cybertruck pickup truck only a distant prospect, Black insists that Tesla, true to Elon Musk, should abandon its longstanding opposition to investing in large-scale The practice of spending money on media campaigns. .

His once-lonely campaign has recently found allies in the social media space that Musk keeps a close eye on. An online poll conducted by @TroyTeslike, another active Tesla social media fan, found that half of the more than 8,000 respondents thought Tesla should start advertising to beat more price cuts and premium models for the high-end Model S and Model X adds technology and other growth strategies. .

Investor pressure, or at least push, doesn’t come out of nowhere.Last May, at Tesla’s annual shareholder meeting, when shareholders Challenge him on this issue About 70 minutes later, Tesla fans erupted in cheers.

“The $525 per car break this year is half of Netflix’s advertising budget, and the $1,000 is Netflix’s entire advertising budget, and I see their ads everywhere. Why not promote these things you’re telling us about here?” Southern California Said Kevin Paffrath, operator of The Meet Kevin Pricing Power ETF.he Safety features, including airbag deployment technology, are specifically mentioned as strengths of Tesla that may attract consumers through advertising.

Musk is open to the idea.

“Tesla has some amazing features and capabilities that people just don’t know about, and while obviously a lot of people follow the Tesla account and my account to some extent, it’s preaching to the choir, and the choir is Already convinced,” Musk said.

Then Musk made the promise. “I think there’s some truth to what you’re saying, and I believe that taking the advice, we’re going to try to do some advertising and see how it goes,” he said.

Shareholders erupted in cheers, and Musk responded: “I didn’t expect such enthusiasm.”

If shareholders were expecting a major advertising campaign, they will be disappointed today. Wedbush analyst Dan Ives said Tesla has spent very little on online and social advertising in the months since. Meanwhile, steep price cuts continue, Musk’s main strategy to boost interest in Tesla.

Musk has been a staunch supporter of cutting costs first. As he said at this year’s annual meeting, Tesla’s goals include bringing electric transportation to mass-market consumers, and as he said many Model 3s sell for less than the average price of a new passenger car in the U.S. cost.

Indeed, on average Most Tesla prices dropped by about 20% From August 2022, according to Cox Automotive. These figures do not include the $7,500 federal tax credit restored to Tesla under the Inflation Reduction Act of 2022.

But the latest round of price cuts announced last month cost Tesla $2 billion a year, Black said. Overall, price cuts over the past year have decimated revenue, Ives estimated.

In fact, Black’s premise is that Musk should reconsider the extent to which Tesla relies on price cuts rather than spending money on advertising to promote features like falling electric vehicle costs and safety features like over-the-air software updates. This becomes especially pressing given that Tesla shares, while up about 140% this year, are still a third below their 2021 peak and lagged the S&P 500 last year.

“I don’t think you’re going to get that much elasticity of demand by lowering the price of Model Y from $55,000 to $48,000,” Black said. “Instead of lowering the price by $2,000, you could lower the price by $1,800 and try to advertise more.”

CNBC reached out to Tesla multiple times. The company did not respond.

In fact, Black believes that Tesla’s price cuts are actually a marketing expense, saying that Tesla’s declining share of electric vehicles this year shows that price cuts alone will not work.

In fact, Tesla’s share of the U.S. electric car market Prices are falling despite price cuts. Delivery volume in the third quarter was 435,059 vehicles, a significant increase from 343,830 vehicles in the same period last year, but lower than the sales volume of 466,140 vehicles in the second quarter and the approximately 423,000 vehicles sold in the first quarter. In a press release, Tesla attributed the reason why third-quarter data fell short of analysts’ forecasts to “the shutdown of the factory upgrade plan.”

Ives said the price decline was also reflected in Tesla’s gross margin, which fell to 18% of second-quarter sales from 25% in the second quarter of 2022. That would mean a $1.5 billion drop in underlying gross profit, unless some of that can be recouped through higher sales, he said.

What a Tesla ad campaign might look like

Allen Weiss, CEO of marketing research and training firm MarketingProfs, said we can guess what an effective Tesla ad campaign would do, noting that consumers do care about safety beyond safety. of many features.

“I start by identifying the benefits that the client is looking for,” he said. “Some of them might be (about performance), but others are (about) luxury, and even some are symbolic, (to be) help save the planet.” “I would find out what those benefits are, target a segment of those buyers, and come up with a great theme around those benefits. That way, you can have interesting ideas but connect with the buyer about something they really care about. “

The challenge for Tesla, Weiss said, is that as it grows, it is competing more directly with companies with experienced marketers. Ford has invested heavily in promoting its F-150 Lightning pickup truck, and General Motors Super Bowl ads have been running for the past three years. Swedish electric car maker Polestar has also launched an advertising campaign, spending an estimated $20 million this year, Weiss said. Polestar and BMW are both promoting electric vehicles during the Super Bowl telecast, the most expensive television show in the U.S., industry data firm iSpot estimates About a quarter of automotive ad spending in 2022 will be on electric vehiclesIves calls the move a “wave,” and he expects it to grow.

“Other automakers are used to focusing more on customer interests, but Tesla is not,” Weiss said. “Go to Ford’s website, click on ‘electric’ and you’ll immediately see words like head-turning design, impressive performance and thrills. Go to BMW’s electric vehicle page and you’ll see ‘cutting-edge performance and Luxury’.” Visit Tesla’s website and you’ll see the prices. “

Musk himself admitted at the annual meeting that he often encounters people telling him that electric cars are too expensive.

“I’ve talked to a lot of people who still think Tesla is super expensive,” Musk said. “I think, no, Tesla’s (average selling price) is lower than the average selling price in the U.S.”

Ives said Tesla doesn’t need to spend as much on advertising as Ford or General Motors, arguing that targeted ad campaigns could zero in on the specific advantages of Tesla or electric vehicles.

“Tesla has some differentiation that people don’t know about,” he said. Tesla’s luxury brand image can be maintained through advertising even as the average cost of a car drops, he said. “You start to change your mind.” “

Ives said that when Tesla reaches full scale, “the name of the game” will be sales volume and operating margin. Black believes it’s worth finding out soon whether more advertising will help. Even Musk could be convincing, and the irony of his longstanding reluctance to advertise wasn’t lost on him at the annual meeting:

“I think it’s ironic that Twitter (X) is heavily reliant on ads and I’ve ‘never used ads’ here and now have a company that is highly reliant on ads. I guess I should say ads are great and everyone should be this way.”