My findings from researching the auto industry’s vehicle retail price trends and the profit margins and expense ratios for Tesla, General Motors and Ford were very disturbing. The odds are high that the three vehicle manufacturers and the entire U.S. Auto Industry will become extinct. Since the auto industry employs 9.6 million or about 5 percent of the private sector in the U.S. its extinction would be a catalyst for causing or extending the 3rd U.S. Great Depression. For a video covering the content in this article go to bottom of page.
My breakthrough was from calculating the aggregate of the direct and indirect per vehicle production costs for Tesla, General Motors and Ford. According to my math, the per vehicle production costs for all three were above the prices that are required for their vehicles to be able to compete. Additionally, from the research, my conclusion was that the retail prices for all new vehicles will steadily decline for the foreseeable future.
The future is very bleak for the U.S. auto industry. The costs to produce a vehicle are above the price a vehicle can be sold for. My recommendation is that the shares of Tesla, General Motors and Ford be sold.
The findings further support my June 2022 prediction for the S&P 500 to experience its most significant peak to trough decline since the -85% decline from 1929-1932. The findings also support my second June 2022 prediction for the U.S. to enter into its 3rd Great Depression by late 2023 or early 2024. For articles and videos that provide the rationale for my June 2022 predictions see “Videos & Articles Supporting Markowski’s S&P to Crash & to Cause next Great Depression Predictions”.
On April 20, 2023, Tesla’s share price declined by as much as 11% when compared to the prior day’s close. The decline was caused by the company’s announced earnings missing their estimate. The culprit for the miss was Tesla’s lowered profit margins due to its steady reductions for the price that it has been selling its vehicles at since late 2022. See “Tesla Stock Has Second Worst Day In 2023 After Earnings As ‘This Keeps Investors Up At Night”, Investors.com, April 20, 2023. See also “Tesla cuts US prices for fifth time since January”, Reuters, April 7, 2023. The retail prices for Tesla’s models at April 19, 2023:
- Model S Plaid: $104,990
- Model X Plaid: $104,990
- Model X: $94,990
- Model S: $84,990
- Model Y Performance: $53,990
- Model 3 Performance: $52,990
- Model Y Long Range: $49,990
- Model Y All-Wheel Drive: $46,990
- Model 3: $39,990
Due to the sharp decline of Tesla shares, the company increased the prices for its vehicles. See “Tesla increases price of Model S, X in U.S. After Shares Slump”, Bloomberg, April 21, 2023.
Tesla founder Elon Musk has defended the price reductions strategy by stating that “he’ll sacrifice profit margins for growth”. See tweet below between Musk and one of his followers.
The reality is that Tesla has been steadily reducing its prices because, if it doesn’t, the world’s best known electric vehicle manufacturer will not survive. Even with Tesla slashing its prices the probability is high that it will not survive. Tesla is under attack by two very formidable Chinese Competitors:
- BYD, China’s largest electric vehicle manufacturer
- The electric vehicle subsidiary of Geely Group, China’s second largest automobile manufacturer
BYD unveiled a sleek hatchback at a retail price of $10,600 at the April 2023 Shanghai auto show. It’s the lowest priced electric vehicle in the world. Tesla’s lowest price model which competes in China retails for $33,000. See “Tesla’s biggest Chinese rival unveiled a ridiculously cheap electric car — see $11,000 BYD Seagull”, Businessinsider.com, April 28, 2023
BYD $11,450 EV Hatchback Set to Reshape China’s First-Car Market, Bloomberg
Also in April 2023, Geely Group’s subsidiary launched its first electric SUV, the Zeekr X. The SUV retails for $27,600 and resulted from the company’s efforts to create a premium electric vehicle brand. The SUV had been under development for over two years. See “Zeekr X Takes On Tesla Model 3 With Incredible Performance and 348 Miles of Range at Just $27,600”, Vehicles Suggest, April 17, 2023
As depicted in the table below BYD and Geely Group are well positioned to be formidable competitors of the three largest U.S. automakers. BYD has the distinction for being the largest manufacturer of electric vehicles in the world.
BYD has the vehicles and the financial resources to manufacture and sell them at prices which are significantly lower than the break-even prices of Tesla, Ford and General Motors. Geely Group sells vehicles for below the break-even prices of Tesla and Ford.
BYD is positioning to become the largest manufacturer of automobiles in the world. See the following:
- ”China’s BYD plans to beat Nissan and Tesla on EV price in Japan”, Nikkei Asia, December 5, 2022
- “BYD Will Make Electric Cars in Brazil Using a Factory That Was Once Owned by Ford”, Autoevolution, November 2, 2022
- ”The US Hasn’t Noticed That China-Made Cars Are Taking Over the World”, Bloomberg BusinessWeek, January 25, 2023
Please note. The manufacturing of vehicles outside of China is a brilliant strategy for BYD. By doing so, it will be more difficult for the U.S., Canada and Europe to invoke tariffs. It will also reduce the cost for shipping a vehicle manufactured in China.
The table below depicts the average vehicle sales prices and the break-even prices for Tesla, General Motors and Ford. The average cost was computed by adding the cost of goods and operating expenses per vehicle. Break-even was computed by subtracting the allocation of operating income per vehicle from the average cost per vehicle. The average cost per vehicle was computed by adding per vehicle cost of goods sold and operating expenses allocations.
Based on the average break-even prices in the above table Tesla and Ford are not in the position to compete against BYD (Seagull @ $11,000) or Geely Group (Zeekr X @ $27,600). General Motors is not in the position to compete with BYD. The two large Chinese automobile manufacturers are the least of the problem for the three U.S. passenger vehicle manufacturers.
The U.S. and the rest of the world’s automobile manufacturers are facing fierce competition from China’s automobile manufacturing industry. China has 450 registered electric vehicle manufacturers. The New York Times in its April 17, 2023, “Buy Now and Save! Price War Over Electric Cars Erupts in China” article said:
“The intense competition among the country’s huge number of start-up carmakers has unsettled what had been a pillar of the economy in the last few years.”
The chart below depicts that only three of the 10 best-selling electric vehicle models in mainland China for 2022 were Tesla models. Tesla accounted for 439,000 of the 2,574,000 vehicles sold via the top 10 models. BYD, accounted for 1,609,000 of the top 10 models’ vehicles sold in 2022.
The formation of China’s electric vehicle industry is analogous to the early days of the U.S. automobile industry. There were 253 active automobile manufacturers is the U.S. in 1908. Due to price wars, etc., the number declined to 44 in 1929. The paragraph below which covers the history of the U.S. automotive industry is an excerpt from a Dell Technologies article:
“The history of the automotive industry is paved in taking luxury technologies and democratizing them to empower the masses to move faster, safer and more efficiently. Henry Ford’s Model T, assembly line and modern factory wage plan essentially created the 20th Century American city, the middle class, and a car culture that’s transformed and traversed the globe. For approximately a century – although cars have gotten safer, faster and more fuel-efficient – the guts of the industry and that culture hasn’t changed much. There hasn’t been a truly successful American auto startup since Chrysler in 1925.” Dell Technologies 8/30/2017.
Even though Tesla created the first luxury electric vehicle, it is not immune from its industry which has constantly evolved. The industry has a history of constantly creating new technology and features for its luxury vehicles. The improvements eventually become available for the lower priced vehicles.
Tesla which has the leading electric vehicles market share has an unavoidable problem. Its cost to produce a vehicle is higher than all other manufacturers in the world. Price cutting to retain market share can’t help Tesla. The company has a $40,955, break-even price or cost per vehicle which is substantially above the prices of the BYD and Geely Group vehicles.
Tesla can do nothing about the 450 Chinese electric vehicle manufacturers, most of which have much lower production costs, who will reduce its market share. Tesla has the highest per vehicle cost of the three U.S. automakers ($51,485). Therefore, it can-not leverage the lowest-cost-to-manufacture-model that Henry Ford developed. Ford Motor utilized its lowest cost per vehicle advantage to dominate the world’s automobile industry in the early 20th century.
Presently, Tesla is where Studebaker was after Ford introduced the Model T. Back in the horse and buggy days, Studebaker was the largest manufacturer of vehicles in the world. Abraham Lincoln’s funeral carriage bore the Studebaker brand. The company entered the automobile industry with an electric vehicle in 1902 which was followed by a combustion engine model in 1904. The company underwent a refinancing in 1911 that was led by Lehman Brothers and Goldman Sachs. Goldman’s highly esteemed founder Henry Goldman became a member of its Board of Directors. The paragraph and photo below are excerpts from Hemmings.com.
“Studebakers made their owners look smart. But from 1928 through 1933, Studebaker produced the President, a powerful, long-wheelbase luxury model that today deserves to be uttered in the same breath as the finest cars of the era from Chrysler, Buick, Cadillac, Lincoln, and even Packard.”
On March 18, 1933, Studebaker, then heavily in debt, went bankrupt. The company’s president, Albert Erskine, resigned and later that year died by suicide.
Tesla is facing the same fate as Studebaker. It’s because Tesla’s cost per vehicle of $51,485 is higher than the prices that BYD and Geely Group are selling vehicles for. Tesla’s cost is also higher than Ford and General Motors average vehicle retail prices of $44,992 and $51,000 respectively. My recommendation is for Tesla shares to be sold.
Even though it will be difficult for Tesla to survive as a manufacturer of self driven vehicles, Elon Musk will go down in history as the Andrew Carnegie of the 21st century. Mr. Carnegie, after immigrating to the U.S. parlayed the profits he made from railroad stocks in the 19th century to build U.S. Steel, the company enabled the steel industry in the U.S. to become the worlds most formidable in the early 20th century. He became the richest man in the world.
After becoming a U.S. citizen in 2002, Mr. Musk founded a company that, after combining with another company, became PayPal which was then acquired by Ebay for $1.5 billion. The cash enabled Elon Musk to purchase a significant stake in Tesla in 2003 and to become its Chairman in 2004. With Tesla, Musk created the electric vehicle industry and became the world’s richest man. Tesla was founded in 2003, more than 100 years after the world’s auto industry was founded. That Tesla became the world’s most valuable ever automobile company a century later is perhaps the most remarkable business achievement of all-time.
What will enable Musk to surpass Carnegie as the world’s most successful businessman, industrialist or “digitalist” is his selling $35 billion of his Tesla shares to acquire Twitter. The move enabled Musk to transform his fortune from industrial to digital. With Twitter Mr. Musk is now well positioned to become the world’s first “Trillionaire”.
General Motors and Ford also face a similar eventual fate even though their per vehicle costs are below Tesla’s. Ford can-not compete with BYD or Geely Group. General Motors also can-not compete with BYD. General Motor’s per vehicle cost is below the Geely Group’s retail price for Zeekr X. However, it has no intention of lowering its price to compete since General Motors’ profits would be anemic. See “GM Says Its EVs Are Priced Right, Won’t Chase Tesla, Ford MSRP Cuts” Autoweek, 1/31/23.
Tariffs are not the answer to the U.S. auto industry’s significant problem. Its because the inability of the automakers to compete is not because their labor costs are higher. Tesla is a good example. For 2022, Tesla manufactured 710,000 vehicles in China which accounted for 52% of their total vehicles manufactured worldwide. Yet, Tesla’s cost to manufacture a vehicle was significantly higher than it’s two other U.S. rivals. The much lower labor cost in China should have enabled Tesla to be the lowest cost U.S. automobile manufacturer. See “Tesla China plant expansion in doubt”, Automotive News Europe, January 12, 2023.
My recommendation is for shares of General Motors and Ford to also be sold. Finally, since I am predicting a significant decline for the S&P 500, my recommendation is for all equities in a portfolio to be sold. The only exceptions are the shares of micro-cap companies that have good prospects. The proceeds from the sale of equities can be utilized to deploy the defensive Return OF Capital strategy that is highly recommended. The strategy includes an allocation to micro-cap companies. For more on the Return Of Capital strategy view video below.
Michael Markowski, a 46-year financial markets veteran, is the Director of Strategies for AlphaTack, whose slogan is “growing assets against the wind”. He conducts empirical research of the past, which he then utilizes to develop algorithms to predict the future. His research of Enron’s Financial Statements after its infamous bankruptcy led to the development of a Cash Flow Statement algorithm. The algorithm was utilized to predict a “day of reckoning” for Lehman, Bear Stearns, Merrill Lynch, Morgan Stanley and Goldman Sachs in a September 2007, Equities Magazine article. Michael’s research of prior market crashes led to the development of the Bull & Bear Tracker (BBT) algorithm. From 2018 to 2022, the BBT gained 177% vs. the S&P 500’s 50%. His predictions of all periods of heightened market volatility from 2008 to 2022 and that S&P 500 at March 23, 2020 had reached its bottom which was exact are media verifiable.
"Is Michael Markowski the 21st century's reincarnation of Benjamin Graham?"
("Best Stock Picker on Wall Street)
“Have Wall Street’s Brokers been Pigging Out?”
(predicted demise of Lehman in 2007 and before its 2008 bankruptcy)