article

Starting from the middle of 2022, Tesla, which has been highly praised by many car owners as the "top stream of new energy," has finally lowered its stance and joined the price reduction trend initiated by Toyota. However, it is surprising that as the product prices have fallen, Tesla's profit margin has actually increased against the trend.

Referring to Tesla's Q3 financial report, from July to September 2022, Tesla sold a total of 344,000 new energy vehicles, achieving a revenue of $21.45 billion, of which the net profit amounted to $3.29 billion, with the profit margin soaring by 36% compared to the same period last year.

Considering that Toyota, with a total car sales volume of 2.62 million, only achieved a net profit of $3.15 billion, Tesla's net profit per car even reached more than 8 times that of Toyota. Tesla is indeed worthy of being called "the most profitable car company!"

Why can Musk "not lose money" and also increase sales volume?

First, a costly "arrogance"

Musk's price reduction strategy starts with the selection of component suppliers.

For example, in the choice of automotive glass for domestic Tesla vehicles, Musk played a clever trick, deliberately bypassing the long-standing partner Saint-Gobain and choosing Cao Dewang's Fuyao Group. Musk's "business acumen" is hidden in the grudges between the two glass giants.

Advertisement

In 1996, when Fuyao first entered the automotive glass industry to solve technical research and development issues, it transferred 42% of its shares to Saint-Gobain in the form of equity transfer, making the latter the major shareholder of Fuyao, and then the two parties cooperated to operate the subsidiary Wanda Automotive Glass under Fuyao.

According to Cao Dewang's description in "If the Heart is a Bodhi," the cooperation between the two parties was very pleasant at the beginning. As a European company with a history of more than 300 years, Saint-Gobain took good care of Fuyao, which was only 10 years old at the time. It not only gave up the position of Fuyao's chairman but also let Fuyao independently control the decision-making power of the jointly invested Wanda factory, with Saint-Gobain only being responsible for technology and financial audit-related business.

It should be known that in the early days of Sino-foreign joint ventures, it was not uncommon for foreign enterprises to seize high-level positions or even hold the reins of power. Even as an investor shareholder, Masayoshi Son has repeatedly demanded decision-making power from Jack Ma for Alibaba. A company like Saint-Gobain, which "knows when to advance and retreat," once moved Cao Dewang very much. But soon, Cao Dewang saw the unique arrogance of Western enterprises.The representative of Saint-Gobain, responsible for technical cooperation, treated Fuyao with as much caution as one would a thief. Every time they negotiated cooperation, the representative would make a special trip to the factory to count the equipment, as Cao Dewang put it, "for fear that a single piece of equipment might be missing."

In the following three years, Saint-Gobain did not approve any documents from Cao Dewang, and the two parties were unable to resolve a single dispute. Eventually, Cao Dewang had no choice but to terminate the cooperative relationship through a share buyback. At the moment of "breaking up," Saint-Gobain did not forget to be arrogant one more time, promising Fuyao in the buyback agreement: not to enter the Chinese market for five years.

II. After the Grievances, Part Ways

The five-year period spanned from 1999 to 2004.

During this time, China's annual automobile production leaped from 2.33 million vehicles to 5.7 million. By 2005, with a total automobile sales volume of 5.92 million, China surpassed Japan to become the world's second-largest automobile market. However, the prosperity of China's automobile industry had nothing to do with Saint-Gobain.

When Saint-Gobain rushed back to the Chinese market in 2004, it was already dominated by Japanese companies Asahi Glass, Nippon Sheet Glass, and Fuyao. In particular, Cao Dewang's Fuyao, which started with two joint ventures five years prior, had grown into a global glass giant with more than ten factories and fixed assets of 5 billion, finding its own market position amidst the entanglements.

1. Saint-Gobain: Focusing on High-End, Diversified Layout

After missing out on the Chinese automobile market, Saint-Gobain had to take a high-end route in the automotive glass sector. However, just like many luxury sports car groups on the brink of collapse, relying solely on "high-end" was far from enough to support Saint-Gobain's massive structure.

Data shows that by 2021, Saint-Gobain's global market share in automotive glass had slipped to 14%, exactly half of Fuyao's market share. It is becoming increasingly difficult for Saint-Gobain to make a comeback in the automotive glass sector.

Fortunately, Saint-Gobain's other glass businesses remain strong. Relying on technological advantages in the fields of architectural glass and special coatings, Saint-Gobain has successfully maintained a total revenue of 310 billion yuan, demonstrating the strong stability of a diversified layout.2. Fuyao: Concentrated Business, Full-Spectrum Dominance

Compared to Saint-Gobain, Fuyao's glass business is significantly more focused. Financial data indicates that Fuyao's automotive glass revenue consistently accounts for about 90% of its total revenue, benefiting from a gross margin of over 35%, Fuyao's automotive glass business is robust and promising.

In terms of market positioning, like most domestic companies, Fuyao distinctly emphasizes the "value for money" approach. It strives to solidify its hold on the mid-to-low-end market while continuously advancing into the high-end market. Regarding market prices, Fuyao's front windshields of the same size and specifications typically sell for around 800 yuan, whereas Saint-Gobain's prices generally exceed one thousand yuan, with the highest reaching over 2000 yuan.

III. Conclusion

Switching from Saint-Gobain to Fuyao, Tesla's domestic production not only instantly saves a substantial amount on procurement costs but also eliminates the long-distance transportation expenses of automotive glass from France to China. It is this significant price flexibility that has given Musk the confidence to make bold price reductions, and it also forms the direct reason why Tesla can make more profits even as it lowers prices.

Of course, what deserves more attention is Musk's logic behind the price cuts. Although it is unclear whether Musk has studied the history of the two glass giants' rivalry, the lessons from Saint-Gobain and the rise of Fuyao are indeed reflected in these price reduction measures:

Rather than focusing solely on a high-end positioning, it is better to extend the business to a broader market through limited price reductions. Before having an absolute technological advantage, there is no harm in expanding the path!