Leasing company Hertz learned the hard way that Tesla cars didn’t become the appreciating assets Elon Musk famously predicted.
This can be attributed to his strategy of cutting prices to boost sales – as he did on Thursday.
Hertz Chief Executive Stephen Scherr said its third-quarter underlying profit margin almost halved to 13%, in large part due to issues specific to its electric vehicle fleet, of which five Four out of four cars come with Tesla badges.
“Had we had a similar fleet size in the third quarter but consisting solely of internal combustion engine vehicles, our EBITDA margin would have been a few percentage points higher,” he told us. investor Thursday.
In short, the decline in the value of the Tesla cars in Hertz’s fleet—a decline that is a direct result of Musk’s price cuts—has a direct impact on Hertz’s bottom line.
Ironically, this is happening to Hertz of all companies because the leasing company isn’t just any customer of Musk’s.
When Hertz first emerged from bankruptcy, announcement Scheer’s predecessor, Mark Fields, purchased 100,000 Model 3 sedans in October 2021, with estimated revenue of $4.5 billion, adding $100 billion to Tesla’s value overnight. Thanks to this order, Tesla has been able to maintain the rare height of a market capitalization of more than $1 trillion in nearly half a year.
Even Musk thinks investors have Act irrationally By increasing the stock price because the company is then supply constrained rather than demand constrained. If Hertz hadn’t shown up, he would have sold them to someone else.
A casualty of Musk’s sales growth over profit strategy
The tycoon famously advised car buyers, “financially crazy“Buy anything other than a Tesla because his car will actually appreciate in value.
For a while he was right.Prices rise steadily, allowing owners to make profits even last year flip their tesla.
But Musk acknowledged last week that the automaker has grown so big that he has exhausted the supply of higher-income consumers who want a Tesla Model 3 or Model Y. Now, he needs to move further down the market to capture new business.
That’s why Musk is on a mission this year to slash sticker prices to hit a sales target of 1.8 million vehicles — even if it means sacrificing profits. One theory behind Tesla’s well-respected financial chief Zach Kirkhorn’s abrupt departure from the company in August may have been a disagreement over prioritizing sales growth over profit margins.
Hertz now finds itself a victim of this strategy.
Maintenance costs twice as much as gasoline-powered cars
Schell did not explain why, but said damage occurs more frequently at Hertz, particularly in its electric fleet, which costs about twice as much to repair as comparable gasoline vehicles.
“Studies of current electric car ownership show that the incidence of damage and crashes is lower than with internal combustion engine cars, not as high as we have experienced,” he revealed.
Musk’s price cuts became a serious problem when one of Hertz’s electric vehicles suffered so much damage that the cost of repair exceeded the asset itself.
“When a car is totaled, we have to immediately identify the difference between our book value and the market value of the car,” Schell explains. “The decline in electric vehicle (prices) in 2023, driven primarily by Tesla, has resulted in the fair market value of our electric vehicles falling compared to last year, so scrapping will cause a greater loss and therefore a greater burden.”
In short, Hertz needs to record non-cash accounting charges. Combined with higher maintenance costs, this resulted in a significant reduction in profit margins.
Fortunately for Tesla, the rental company remains committed to its milestone goal of eventually expanding its electric fleet from 10% to 25%, even if it is no longer committed to achieving that goal by the end of next year.
That’s because Schell wants to further diversify its business into ride-sharing, with many cities struggling to get license plates without switching to zero-emission vehicles.
“Electric vehicles open the door to our continued growth in ride-sharing, where electrification is a fast-moving requirement, not just an option,” the Hertz CEO said.
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