A recent update on the third-quarter data from Tesla and Toyota Motor reveals a potential flaw in Elon Musk’s battery-electric-vehicle pricing strategy. The latest statistics show a significant change in rankings, putting Toyota Motor (ticker: TM) ahead of its global peers. Previously, it was Tesla (TSLA) that held the top position in a crucial ranking, while Toyota was trailing behind.

Toyota’s third-quarter operating profit came as a surprise to analysts, surpassing expectations by approximately 25%. According to FactSet, the company reported a profit of about $9.5 billion, a substantial increase from $3.8 billion in the same period last year. As a result, Toyota stock experienced a gain of 4.7% during overseas trading, and American depositary receipts were up 5.7% in early trading on Wednesday.

In terms of operating profit margin, Toyota excelled this quarter by achieving approximately 12.6%, up from 6.1% in the previous year. This places Toyota among the top-performing global auto makers who have released their third-quarter numbers. With $9.5 billion in operating profit, Toyota leads the pack.

Contrastingly, Tesla held the title for the best operating profit margin in the third quarter of the previous year—approximately 17.2%. Unfortunately, significant price reductions have impacted profitability, resulting in Tesla’s third-quarter 2023 operating profit margin dropping to about 7.6%, less than half of what it was in the year-ago period.

Despite the drop in operating profit margin, Tesla still managed to generate $3.7 billion in operating profit during the third quarter of 2022. This accounts for roughly 13% of the total operating profit for several global auto makers and around 7% of total sales.

However, in this year’s third quarter, Tesla’s share of the group’s operating profit decreased to around 5%, even though it accounted for about 6% of total sales. On the other hand, Toyota’s performance stood out, contributing to 27% of the group’s operating profit while generating 21% of the sales.

This shift in data highlights a need for Tesla to reassess its battery-electric-vehicle pricing strategy and regain its competitive edge. Meanwhile, Toyota’s success signifies its strong position in the global market, showcasing consistent profitability and steady sales growth.

Auto Production: A Tale of Two Companies

The recent developments in the auto industry have shed light on some important realities. First and foremost, it is clear that auto production is a business that operates on a massive scale. Toyota, for instance, managed to increase its volumes by about 13% compared to the previous year. This means that despite having the same number of plants and employees, they were able to produce more units. And this, in turn, has a positive impact on their profit margin.

On the other hand, Tesla also experienced an increase in sales, but the prices of their key models dropped by up to 25% year over year. This decline is not easy to overcome simply by selling more vehicles. Additionally, Tesla is in the process of ramping up production at new facilities that are not yet operating at full capacity. As a result, they are not able to fully capitalize on their increased manufacturing capability.

Interestingly enough, despite Toyota’s sales growth, they did not resort to significant price cuts. This suggests that perhaps Tesla did not need to lower their prices as drastically as they did in order to achieve their production and sales goals.

Despite these differences, it is worth noting that Tesla has experienced much faster growth than Toyota in recent quarters. In fact, their unit shipments have increased by over 50% year over year, amounting to approximately 900,000 units in the past six months alone. In comparison, Toyota’s volume growth during the same period was 14%.

Part of the reason behind Tesla’s aggressive price cuts may be attributed to the fact that they had a larger volume of vehicles to sell. It is also worth noting that, on average, Tesla vehicles tend to be more expensive than those produced by Toyota. In the third quarter, the average price per unit sold by Tesla was around $54,000, whereas for Toyota it was approximately $31,000.

The ongoing debate about whether Tesla’s price reductions were necessary will certainly continue. However, it is likely that investors would prefer to see an end to these price cuts.

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