Tesla reported a sharp fall in quarterly profit despite delivering a record number of vehicles, underscoring the mounting cost of maintaining its electric-vehicle dominance in an increasingly competitive market.
The world’s most valuable carmaker said its net income fell more than a quarter year-on-year, even as total deliveries climbed to new highs. The results highlight a growing dilemma for chief executive Elon Musk: whether to prioritise volume and market share or profitability as rivals flood the EV sector with cheaper alternatives.
The company’s revenue rose modestly, lifted by strong global demand and the ramp-up of its Model Y and Model 3 production lines. Yet the boost in sales volumes was outweighed by price cuts, higher logistics costs, and slowing demand growth in China — a combination that squeezed Tesla’s once-exceptional operating margins to their lowest level in four years.
Investors reacted cautiously, with Tesla’s shares slipping in after-hours trading as markets digested the company’s guidance for slower profit growth through 2025. Musk reiterated his commitment to expanding production capacity but offered a notably restrained outlook on near-term earnings, warning that the company was in a “transition year” as it prepared for next-generation vehicles.
Price War Erodes Margins
Tesla’s aggressive price-cutting strategy, launched in early 2023 to fend off competition from BYD, Hyundai, and legacy automakers, has reshaped the EV market but come at a heavy cost. The average selling price of its vehicles has dropped by nearly 20 per cent since last year, analysts estimate, even as battery costs have stabilised.
While the cuts helped Tesla achieve record quarterly deliveries, they eroded its industry-leading gross margins — once above 30 per cent — to around 17 per cent. That puts the company closer to the levels of traditional automakers, erasing much of its profitability advantage.
Tesla said the decision was deliberate, describing it as a “strategic investment in growth.” Musk argued that expanding the fleet of Teslas on the road would strengthen the company’s ecosystem of software, charging, and autonomous-driving services — areas he believes will deliver higher-margin revenue in the long term.
But investors remain wary. “The market is no longer rewarding growth at any cost,” said one portfolio manager at a major European asset manager. “Tesla’s valuation depends on high margins and future software monetisation. If those fade, the story changes.”
Mixed Regional Picture
In North America, Tesla’s sales continued to rise, helped by tax incentives under the U.S. Inflation Reduction Act and strong uptake of the Model Y crossover. In Europe, deliveries were steady but profit contribution was lower as logistics expenses climbed and energy costs remained elevated.
China, Tesla’s largest overseas market, remains both a source of strength and vulnerability. Local competitors such as BYD, NIO, and Xiaomi are ramping up output and undercutting Tesla on price and technology. The company has responded by localising more of its supply chain and pushing software-based differentiation, such as the latest Full Self-Driving (FSD) beta roll-out.
Still, even Musk acknowledged that Chinese manufacturers represent Tesla’s “toughest competition by far.” Analysts warn that as Chinese brands expand aggressively into Europe and Southeast Asia, Tesla’s share could erode further unless it introduces a lower-cost model.
Focus on the Next Generation
Tesla said development of its long-anticipated next-generation vehicle platform remains on track for production at its Texas Gigafactory, but gave few details about timing. The new platform, expected to underpin a smaller, cheaper EV priced around $25,000, is central to the company’s plan to double global sales volumes over the next few years.
Until that model arrives, Tesla is leaning on software revenue, energy storage, and grid-scale battery projects to offset automotive margin pressure. Its energy division posted record installations, but the profits remain modest compared with vehicle sales.
Musk hinted that Tesla’s artificial intelligence and robotics divisions would become increasingly important sources of value. He said the company was “closer than ever” to scaling its Optimus humanoid robot and to commercialising its Dojo supercomputer, which trains self-driving algorithms. However, investors continue to view these initiatives as long-term bets rather than immediate profit drivers.
Market Reassessment
The broader market context has also turned less favourable. High interest rates, slowing consumer confidence, and tighter credit conditions have cooled global demand for big-ticket items. Even loyal Tesla customers are delaying upgrades as financing costs rise.
Analysts expect the global EV market to continue expanding, but at a slower pace than in the post-pandemic boom years. Europe’s subsidy roll-backs and China’s price battles are accelerating consolidation, while U.S. buyers are showing signs of “EV fatigue.”
Tesla’s challenge now is to prove it can sustain growth without sacrificing profitability. Its latest results show the trade-off between scale and margin has become stark: record sales achieved at the expense of investor confidence.
For Musk, whose company once symbolised unbounded technological optimism, the task is to convince markets that Tesla can thrive in a more pragmatic, competitive era — one where profits matter as much as progress.
