Tesla’s price cuts could spur an EV pricing war

A Tesla showroom is seen at the City Center Shopping Center on January 17, 2023 in Washington, DC.

Anna Moneymaker | Getty Images

detroit – Tesla Vehicle prices in the US are falling significantly, and that’s proving to be a double-edged sword for electric car makers and the larger automotive industry.

Tesla earlier this month cut the price of its new cars by 20%, making the vehicles more affordable and eligible for federal tax credits. But it also dents cars’ resale values ​​for current owners and is sending ripple effects through the auto industry.

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CEO Elon Musk did not directly address the price cut, which contradicts his claim that the company’s cars will appreciate in assets — a rarity for the market outside of classic and collectible vehicles.

Analysts say the price cut suggests Tesla is prioritizing sales over profits, potentially signaling a demand problem.

“Demand is weakening, and they want to improve their sales — or that’s market share,” said Michelle Krebs, executive analyst at Cox Automotive.

For the industry at large, Tesla’s price cuts pressure other automakers to offer more affordable EVs despite rising commodity costs, wreak havoc on used-vehicle retailers that will need to write off vehicles and worry Wall Street amid the first EV pricing war. Fear of recession.

“Tesla’s price drop is driving all other EV makers and [internal combustion engine vehicles] It looks increasingly expensive, squeezing margins and cooling the used-car market, Morgan Stanley analyst Adam Jonas wrote in an investor note Friday.

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Automakers regularly change prices with new models. It is usually done through incentives or when a new model year comes out. But to avoid disrupting the automotive ecosystem for both consumers and car dealers, upward or downward adjustments have historically been small.

Musk foreshadowed such a move last month in predicting a recession later this year.

“Do you want to increase unit volume, in which case you have to adjust prices downward? Or do you want to grow at a lower rate, or remain stable?” Musk said on December 22 during a Twitter Space conversation. “My bias is to grow as fast as we can without putting the company at risk.”

Tesla will report fourth-quarter earnings on Wednesday after the market closes.

used price

When the price of a new vehicle drops, the price of a used model also takes a hit. In Tesla’s case, some new models were going for about the same price — just thousands of dollars off — as their used counterparts. That’s problematic for current owners as well as used vehicle retailers and Tesla, which sells used models directly to consumers.

In the first 17 days of January, Edmunds reports, prices for 2020 model year or new Teslas fell to an average price of $58,657 — down 24.5% from their June peak of $76,626.

Tesla’s stock performance over the past year.

Cars.com reports that used-vehicle list prices on the consumer-shopping website fell 3.3% for the Model Y and Model 3 as owners try to hold the line on resale pricing despite new-vehicle cuts.

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“Tesla’s price cut will affect consumers very differently depending on which side of the news they sit on,” said Evan Drury, director of insight at Edmonds.

On the one hand, Tesla owners have taken to the social media platform to complain to billionaire CEO and Twitter owner Musk that the price cut devalues ​​their vehicles. In China, where the price cuts took effect earlier than in the US, protesters reportedly gathered at the automaker’s showrooms and distribution centers demanding rebates and credits.

Recent Tesla buyers who missed out on the new price cuts are petitioning Musk and company to make them whole. They offer free, premium driver-assistance upgrades, free supercharging and other pluses to offset their high price tags.

At the same time, both Cars.com and Edmunds report interest in Tesla vehicles and searches for Tesla vehicles have increased since the decline.

Carmax, the nation’s largest seller of used vehicles, quickly sold hundreds of Teslas after the price change. It had about 150 Tesla cars for sale as of Tuesday, down from hundreds before the company cut prices.

“We adjust retail vehicle prices in real time to match market conditions and offer competitive pricing,” CarMax Chief Operating Officer Joe Wilson said in an emailed statement. “As such, we have adjusted pricing to respond to market conditions related to the decline in new car prices and this has been positively received by customers looking to purchase a used Tesla.”

Peer pressure

Wall Street analysts were mostly positive on the cuts for Tesla as a boon for sales.

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Tesla has enjoyed significantly higher profit margins on its EVs than traditional automakers. Its software and subscription offerings, including its advanced-driver assistance systems and in-vehicle Wi-Fi, could help offset expected profit losses due to recent price cuts, such as EV tax credits.

Also, the price drop forces other automakers or OEMS to lower prices on their own EVs.

“Most OEMs are currently losing money on EVs, and these price cuts are likely to make business more difficult as they try to ramp up production of EV offerings,” BofA Securities analyst John Murphy wrote to investors earlier this month.

Gerald Johnson, General Motors The head of global manufacturing said Tesla’s cuts do not change the company’s production plans for electric vehicles. The automaker currently sells its sub-$30,000 Chevy Bolt EV models — the most affordable in the industry — as well as higher-priced models on the new battery system.

“We believe we have an EV for every price bracket and every market segment that we’re introducing here,” Johnson said Friday during an event in Flint, Michigan. He said Tesla’s price cuts signaled that “the vehicles were overpriced to begin with.”

GM cut the price of its Bolt model by thousands of dollars last year, only to raise it by hundreds of dollars more recently, citing industry price pressures.

– CNBC of Laura Kolodny And Michael Bloom contributed to this report.

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