Tesla Margin Contraction and Other ESG News This Week

FactSet StreetAccount publishes regular company-level and summary-style ESG news. Below is our recap of key ESG developments and insights over the past week.

Tesla reported diminished profitability, albeit from relatively high levels, in yesterday’s Q1 earnings report. In fact, margins have trended lower over the past year. In October, Tesla announced price cuts in China which became the first of many such announcements for the auto maker globally, including reductions in the US beginning in mid-January. For example, the Model Y sticker price has declined by some 20% in the US this year.

Elon Musk said yesterday that Tesla will continue pursuing higher volumes in a move that will have impacts across EV makers. Figure 1 shows gross margins for select auto makers. While the numbers are not directly comparable across companies (due to differences in earnings streams), the trend has been stable on average across Tesla’s competitors. It remains to be seen if these car makers can maintain margins amidst Tesla’s competitive price cuts. Falling lithium prices, as noted in last week’s blog, may help provide a cushion.

Share prices for OEMs such as GM and Volkswagen have outperformed those for Tesla since the price cuts began (Figure 2). The story has been similar for large China EV makers like BYD. There has been quite a bit of pain, however, for smaller EV makers which are also dealing with rising cost of capital as they try to make the leap to mass production of their vehicles. While most EV shares initially fell sharply in October, Tesla shares rebounded strongly based on its low cost of production. Smaller producers like Rivian and Lucid have not seen such a recovery.

Figure 1: Gross margins for select auto makers, before Tesla price cuts in 4Q22

Source: FactSet

Figure 2: Indexed share prices for select auto makers since Tesla announced first price cuts

Source: FactSet

Thematic Performance

Thematic sectors mostly lower on the week with EVs and battery makers leading losses; Tesla posted its lowest quarterly gross margin in two years after a further bout of price cuts across regions, sparking fears of a price war in the sector and hitting auto stocks. Smaller US EV makers leading losses including Ree Automotive, Ideanomics, Arrival, and Arcimoto. Earlier this week the US Treasury Department released a new, shorter list of vehicles qualifying for IRA tax credits; US OEMs are set to benefit most. At the recent Auto Shanghai, EVs were in the spotlight where auto makers announced a host of electrification plans.

Diversified renewables lower along with the broader utilities space as market dials back hopes of a central bank pivot on rates. European wind developers underperforming sector with Eolus and Nordex leading losses. Analyst-preferred Vestas and Orsted faring better. US solar names outperforming on the week with several resi solar names (SunRun, Enphase, Sunpower) receiving analyst upgrades and positive commentary, noting the segment as well positioned to capture demand upside from Biden's IRA. Street more negative on Sunnova and First Solar, though former received a $3B loan guarantee from the DOE. Transition materials leading gains this week on APAC lithium miners as some analysts point to thin stockpiles and improved demand for battery storage and EVs as signs lithium prices could soon bottom out in China.

Environment

G7 environment and energy ministers reached an agreement over the weekend setting ambitious new targets for solar and wind generated power, as well as pledging to accelerate the phase-out of unabated fossil fuels and advanced a target for reducing additional plastic pollution to zero to 2040. Ministers challenged host nation Japan’s energy strategy, with a focus on ammonia and carbon capture over renewables; however, ultimately its focus on “clean coal”, nuclear, and hydrogen power was endorsed by the group. While some observers welcomed the advancement of renewables targets, critics consider the communique a missed opportunity for failure to eliminate funding for fossil fuels and provide a timeline for phasing out coal.

The EU Parliament adopted legislation banning import of products linked to deforestation. Products including cocoa, coffee, palm oil, and cattle must establish they do not come from deforested land or lead to forest degradation. The European Commission faces legal challenges to its inclusion of gas and nuclear within its green taxonomy; environmental groups contend the decision was unlawful. The EU’s proposal to ban PFAS (“forever chemicals”) faces industry criticism; Chemours chief warned the ban will threaten the green transition, as EVs, semiconductors, and green hydrogen require use of fluoropolymers.

Social and Governance

Investors and shareholders continue to press corporates on climate. Glencore faces pressure to detail how it will achieve its climate change commitments after investors holding over $500B in assets backed a shareholder resolution ahead of its meeting next month. BP chair Helge Lund faces opposition as five of UK’s largest pension funds will vote against his reappointment over the company’s backtracking on climate pledges. Investors are putting pressure on Nestlé to become less reliant on products high in sugar and saturated fats, warning that products of limited nutritional value pose “systemic risks” to financial returns. And Exxon investors LGIM and Christian Brothers filed a resolution at the oil giant requiring the disclosure of the cost liabilities associated climate change risks.

Corporate litigation in the headlines this week: Nine states joined a federal antitrust lawsuit against Google related to the tech company’s digital ad business. Google must also face trial in a patent infringement lawsuit from smart speaker maker Sonos after a federal judge in California failed to invalidate Sonos’s patents at issue. On the eve of trial, Fox settled its defamation case with Dominion related to the media conglomerate’s reporting of alleged election fraud. On the regulatory side, the EU proposed the Cyber Solidarity Act to strengthen cross-border cybersecurity capacity. The bloc is also scrutinizing the EV charging industry for potential competition concerns.

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