How Tesla’s price cuts could spark an electric vehicle price war

How Tesla’s price cuts could spark an electric vehicle price war

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

Anna Moneymaker | Getty Images

DETROIT – Tesla vehicles in the U.S. are seeing significant price drops, and that’s proving to be a double-edged sword for the electric car maker and the entire auto industry.

Tesla earlier this month slashed the prices of its new vehicles by as much as 20%, making the vehicles more affordable and likely eligible for federal tax credits. But it also fuels the resale value of cars for current owners, sending ripples through the auto industry.

CEO Elon Musk hasn’t directly addressed the price cuts, contradicting his claims that the company’s cars will appreciate assets — a rarity on the market outside of classic and collectible vehicles.

Analysts say the price cuts suggest Tesla is prioritizing sales over profits, potentially pointing to a demand problem.

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

For the industry at large, Tesla’s price cuts are putting pressure on other automakers to offer more affordable EVs despite rising raw material costs, creating havoc at used-car dealers who are having to write off vehicles, and worrying Wall Street about the first EV price war on recession fears.

“Tesla’s price cuts are making all other electric vehicles and [internal combustion engine vehicles] are looking increasingly expensive, depressing margins and making the used car market shiver,” Morgan Stanley analyst Adam Jonas wrote in a Friday investor note.

Car manufacturers regularly change the prices for new vehicles. This usually happens through incentives or when a new model year comes out. But the adjustments, whether up or down, are historically small to avoid disrupting the automotive ecosystem for both consumers and auto dealers.

Musk hinted at such a move last month when he predicted a recession later this year.

“Do you want to increase the unit volume and in this case have to adjust the prices downwards? Or do you want to grow at a slower rate or remain constant?” Musk said on Dec. 22 during a Twitter Spaces conversation. “My bias would be to say let’s grow as fast as we can without jeopardizing the business.”

Tesla will report fourth-quarter results after the market close on Wednesday.

used prices

If the price of a new car falls, the value of the used models also suffers. In Tesla’s case, some of the new models were priced at almost the same price — just thousands of dollars less — than their used counterparts. That’s problematic for current owners as well as used car dealers and Tesla, which sells used models directly to consumers.

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

Tesla stock performance over the past year.

Cars.com reports that used vehicle listing prices on the consumer shopping site for the Model Y and Model 3 fell 3.3% as owners try to maintain resale prices despite cuts in new vehicles.

“The Tesla price cuts will affect consumers very differently depending on which side of the news they’re on,” said Ivan Drury, Edmunds director of insights.

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

Recent Tesla buyers who missed renewed price cuts are urging Musk and the company to complete them. They’ve been looking for free premium driver assistance upgrades, free supercharging, and other perks to offset their higher prices.

At the same time, Cars.com and Edmunds report that interest in and searches for Tesla vehicles have skyrocketed since the reductions.

CarMax, the nation’s largest seller of used vehicles, quickly sold hundreds of Teslas after a price adjustment. There were only about 150 Tesla cars for sale on Tuesday, down from hundreds before the company cut prices.

“We continuously adjust retail vehicle prices in real-time to market conditions and offer competitive pricing,” said Joe Wilson, CarMax’s chief operating officer, in an emailed statement. “As such, we have adjusted pricing to respond to market conditions related to new vehicle price reductions, and this has been well received by consumers looking to buy a used Tesla.”

peer pressure

Wall Street analysts were largely positive about the cuts for Tesla as a boon to sales.

Tesla has achieved a significantly higher profit margin on its electric vehicles compared to traditional automakers. Its software and subscription offerings, including its advanced driver-assistance systems and in-vehicle Wi-Fi, could help cushion expected profit losses from recent price cuts, as could its EV tax credits.

Also, the price cuts put pressure on other automakers or OEMs to lower the price of their own EVs.

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

Gerald Johnson, General Motors’ head of global manufacturing, said Tesla’s cuts would not change the company’s electric vehicle manufacturing schedule. The automaker is currently selling its sub-$30,000 Chevy Bolt EV models — which are among the most affordable in the industry — as well as higher-priced models with a new battery system.

“We believe that for every price point and every market segment we have an electric vehicle that we are introducing here,” Johnson said Friday during an event in Flint, Michigan. He said Tesla’s price cuts signal the vehicles “may have been overpriced to begin with.”

GM slashed the prices of its Bolt models by thousands of dollars last year, only to recently raise them by hundreds of dollars, citing industry pricing pressures.

– CNBC’s Lora Kolodny and Michael Bloom contributed to this report.