Tesla’s quagmire: hardware price cuts and software price hikes, what does it mean?

 As soon as the price of the front Model 3 was reduced, Musk announced that the price of Tesla's FSD (Full Autonomous Driving Capability) software would rise by US$2,000 from this week, from US$8,000 to US$10,000. The price of the whole vehicle has been reduced all the way, and the price of software equipment has soared. What is Tesla's calculation?

The average selling price of complete vehicles continues to fall, and demand exceeds supply.

During the National Day this year, Tesla announced that the updated Model 3 standard battery life upgraded version will be subsidized and the price will be lowered to 249,900 yuan, while the comprehensive cruising range has increased to 468km.

In fact, Tesla’s price has been continuously adjusted since its entry into China. With the completion of Tesla’s Shanghai super factory, the substantial increase in production capacity, the localization of Model 3 accessories, and the advancement of software technology and efficiency optimization, the price of Model 3 has increased. In the second reduction, the sales of Tesla's affordable models have also risen sharply. Of the 139,300 new vehicles delivered by Tesla in the third quarter, Model 3 and Model Y delivered a total of 124,000 new vehicles worldwide, and the growth rate is amazing, an increase of 55% from the previous quarter , An increase of 56% year-on-year.

On October 22, Tesla announced its third quarter 2020 financial report. While achieving profit for five consecutive quarters, it also showed a strong growth momentum: In the third quarter, Tesla achieved total revenue of 8.771 billion US dollars. ; Net profit was US$331 million, a year-on-year increase of 131%, and a month-on-month increase of 218%; free cash flow reached US$1.4 billion, which made many industry competitors suck.

In fact, as Tesla's sales product structure continues to shift from ModelS and ModelX to more affordable Model3 and ModelY, and the average price of bicycles may be lowered; in addition, Tesla also paid $290 million in stocks in the third quarter. Incentives, many factors overlap and the growth rate of profits still far exceeds revenue. Tesla achieved an operating profit margin of 9.2% in the quarter.

Tesla said that with the expansion of production capacity and the continuous localization process, the operating profit margin continues to grow and will eventually reach the leading level in the industry. It is reported that Tesla has recently further increased the production capacity of Model 3 and Model Y at the Fremont plant to 500,000 vehicles per year, and the construction of three new plants on three continents has continued as planned. At the same time, the Shanghai Super Factory has added a third production shift, and has reached an annual production capacity of 250,000 vehicles. In addition, while meeting the needs of the Chinese market, the Shanghai Super Factory will also provide products to European consumers. In October, the Shanghai Super Factory officially launched its vehicle export business to the European market.

"In the special period affected by the epidemic this year, Tesla's production capacity in the United States and Europe has been affected to varying degrees. The epidemic in China is well controlled. Tesla is rapidly advancing the construction progress of the Chinese factory and replacing the products produced in China. Export to Europe to adjust the problem that orders cannot be completed in overseas markets." Zhang Xiang, a new energy and intelligent networked automobile industry expert in the "Changfeng Plan" of the Ministry of Industry and Information Technology, told a reporter from the Securities Daily, "Tesla products are currently on the market. Supply is in short supply, and production needs to be increased sharply. Rapidly increasing production capacity will help Tesla seize the market faster. With price cuts, it will squeeze the growth space of industry competitors. Tesla will maintain a dominant position."

At the same time, on this year's Battery Day, Tesla concentrated on displaying a number of innovative technologies such as cell design, cell factory, anode materials, cathode materials, and vehicle manufacturing. A Tesla related person told a reporter from the Securities Daily: “Through systematic portfolio innovation, Tesla can reduce battery costs per kilowatt hour by 56%, increase its cruising range by 54%, and reduce investment and production costs by 69%. Based on significant With reduced production costs, Tesla is confident that it will develop an electric car with a price of about $25,000 within three years."

FSD's overseas price increase is 2,000 US dollars, and the software business targets core business sectors

The competitive price has allowed Tesla to expand its market share, and this is the basis for Tesla to obtain higher revenue through the software business.

According to Tesla, the company's Autopilot autonomous driving team has been focusing on rewriting the infrastructure of neural networks and control algorithms. This rewrite can release the remaining driving characteristics. Just in October of this year, Tesla has already rewritten the first FSD (Full Autonomous Driving Capability) software update-urban roads, to a handful of early experience program users in the United States.

A Tesla related person told reporters that the rewritten FSD has the ability to perceive depth and complex intersections, which greatly enhances the performance of FSD on urban roads. Its rewrite also means that Tesla is about to enter a high-end Fully automatic driving. As data continues to be collected, the system is expected to become more powerful.

Just recently, Musk posted on the social platform that the price of Tesla's FSD will rise by $2,000, from $8,000 to $10,000. However, the Chinese market has not announced a price increase, and the unupdated FSD price is still 64,000 yuan. At the same time, Musk also said that as the function of the software gets closer and closer to fully autonomous driving, the price of the software will increase if the regulatory approval is obtained, and the software may rise to more than $100,000.

Although Tesla currently does not separately disclose the revenue composition of the software business in its financial report, the gross profit margin of the software business is undoubtedly much higher than that of vehicle sales. In the future, with the introduction and gradual popularization of FSD and more software products, software The business is expected to develop into a core component of Tesla's business model.

In addition, in addition to FSD, from the perspective of Tesla's current product layout, other software businesses are constantly refreshing their "sense of existence." Tesla’s new vehicle software features have been launched since the third quarter. In order to make products more secure to avoid unauthorized access, Tesla introduced the feature of two-step verification through smartphones. In addition, there are many other updates: such as updating the Powerwall's charging coordination for vehicles, and adding automatic window closing functions and glove box password access. Customers of the ModelY all-wheel drive version can upgrade the 0-60 mph acceleration performance to 4.3 seconds through software upgrades.

A Tesla related person told a reporter from the Securities Daily that technological attributes are one aspect of Tesla that is different from traditional car companies. FSD will affect Tesla's development in the next few decades, and its value is far higher. With the current net profit and delivery volume, its goal is to rewrite the entire transportation industry.

Since the beginning of 2020, Tesla's (TSLA) share price has risen by more than 400%, with a market value of nearly US$400 billion. It firmly occupies the top spot in the market value of global auto companies. What is Tesla's software technology? Perhaps it will be the best touchstone for its valuation.


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