There are two intertwining subplots going on here. The first is that the paradoxically bullish effects of the pandemic on the legacy US autos business are waning (or “normalizing,” to use analysts’ euphemism). Disruptions to supply chains combined with a relatively swift economic rebound made for a situation very unfamiliar to Detroit: booming demand and sparse dealer lots. Ford and General Motors Co. earned more in the past two years than the prior four.

Whereas dealers had free rein to gouge buyers last year with price-adders, discounting has returned to some degree. Clearly, we are not back to pre-pandemic practices, as evidenced by Ford’s and GM’s first-quarter results. But macroeconomic uncertainty, rising monthly loan payments and sheer gravity after the run-up explain why Ford’s earnings are being treated with caution.

Complicating things is the second subplot: electrification. Ford temporarily suspended production of its Mustang Mach-E EV during the quarter to retool; EV unit sales fell 60% compared with the prior quarter. The company said on Tuesday evening’s call that had Ford maintained volume, its margin would have been only a negative 40% rather than about 100%. Never mind that this implies losing roughly the same absolute amount of dollars. The bigger point, for Ford but also Tesla, is what this portends for the rest of the year.

The underlying message of Ford’s comment on volume is that it intends to grow its way out of losses on EVs. This makes sense. Auto manufacturing has always been a scale business and Tesla didn’t turn a full-year profit until it got to 500,000 of annual vehicle sales (Ford sold 91,000 over the past four quarters). Moreover, Ford previously set a target run rate for annual EV production of 600,000 units to be achieved by the end of this year.

While pricing on the F-150 Lightning electric truck has increased by $11,000 since its launch, according to Ford, prices on the Mach-E were cut again just prior to the earnings report. It’s easy to see why: That vehicle competes directly with Tesla’s two biggest models, the 3 and the Y, which have had their prices slashed this year. Nevertheless, scale economies and the tyranny of public financial targets mean Ford must boost EV production substantially this year — despite gathering clouds — which is one more reason not to extrapolate its earnings beat.

But it’s also a reason to expect a repeat of Tesla’s weak first-quarter performance. As I wrote here, Tesla’s price cuts in the first quarter cut deep into its gross margin — a calling card on Wall Street — without actually helping to clear its growing inventory of unsold vehicles. As my Bloomberg News colleague Dana Hull reported Wednesday, online aggregators suggest that stockpile has kept rising through the current quarter. Ford’s renewed push on EV volume, however much it may hurt its own bottom line, will keep the pressure on Tesla. And there are other competitive forces entering the fray. For example, Hyundai Motor Co.’s Ioniq 6 electric sedan is squarely aimed at the Model 3-curious and has garnered enthusiastic reviews.

Tesla’s margins start from a higher level, of course; which has given bulls something to cling to amid this gathering price war. But they have dropped a lot already. Indeed, down at the operating-profit line, Mercedes-Benz Group AG passed Tesla in the first quarter and the gap vis-à-vis others has narrowed considerably. 

To be clear, no one will emerge unscathed as the post-pandemic boom eases and price competition returns. Then again, the traditional automakers have at least two things to fall back on. First, they still derive the bulk of their income from profitable vehicles using internal combustion engines, helping to offset losses as they build EV capacity at their own pace. Tesla must grow its EV business, come what may. Second, and most importantly, traditional automakers are defending stock prices trading at 5-8 times earnings. Tesla’s multiple is closer to 50,  providing far less tolerance for the pressures now building across the industry.

More From Bloomberg Opinion:

• Tesla’s Price War Leaves Self-Inflicted Wounds: Liam Denning

• The Global EV Transition Hinges on One Company: Anjani Trivedi

• New Tailpipe Rules Will Choke Big Auto’s Profits: Liam Denning

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’s Lex column.

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