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

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

Anna Geldmaker | Getty Images

DETROIT — Tesla vehicles in the US are undergoing significant price cuts, proving to be a double-edged sword for the electric car manufacturer and the larger auto industry.

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

CEO Elon Musk has not directly addressed the price cuts, which run counter to his claims that the company’s cars will value assets — a rarity for the market aside from classics and collector’s vehicles.

Analysts say the price cuts suggest Tesla is prioritizing sales over profit, potentially signaling a problem with demand.

“Demand is weakening and they want to improve their sales — or it’s to gain market share,” 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, are wreaking havoc with used-vehicle sellers who will have to write off the vehicles, and are worrying Wall Street about the first EV price war amid recession fears.

“Tesla’s price cuts make all other EVs and [internal combustion engine vehicles] is looking increasingly expensive, depressing margins and sending chills across the used car market, Morgan Stanley analyst Adam Jonas wrote in an investor note Friday.

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Car manufacturers regularly change the prices of new vehicles. It is usually done through incentives or when a new model year comes out. But the adjustments, up or down, have traditionally been small to avoid upsetting the auto ecosystem for consumers and auto dealers alike.

Musk foreshadowed such a move last month when forecasting a recession later this year.

“Do you want to grow volume per piece, in which case you need to adjust prices down? Or do you want to grow at a slower rate or remain stable?” Musk said that on December 22 during a Twitter Spaces conversation. “My bias would be to say let’s grow as quickly as possible without jeopardizing the business.”

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

Prices used

When the price of a new vehicle drops, the value of used models also takes a hit. In Tesla’s case, some of the new models went for nearly the same price — only thousands of dollars off — as their pre-owned counterparts. That’s problematic for current owners, as well as used car retailers and Tesla, which sells used models directly to consumers.

In the first 17 days of January, Edmunds reports, used prices of Model Year 2020 or newer Teslas fell to an average price of $58,657 — 24.5% off their June peak of $76,626.

Tesla’s stock performance over the past year.

Cars.com reports that list prices for used vehicles on its consumer retailer website are down 3.3% for the Model Y and Model 3 as owners try to stick to resale prices despite cutbacks on the new vehicles.

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“Tesla’s 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 came into effect earlier than the US, protesters reportedly gathered in 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 the company to make them whole. They’ve looked for free premium driver assistance upgrades, free Supercharging, and other perks to offset their higher price tags.

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

AutoMax, the nation’s largest used vehicle seller, quickly sold hundreds of Teslas after pricing adjusted. It only had about 150 Tesla cars for sale as of Tuesday, up from hundreds before the company slashed prices.

“We are constantly adjusting car prices in real time to meet market conditions and offer competitive pricing,” CarMax Chief Operating Officer Joe Wilson said in an emailed statement. “As such, we have adjusted prices to respond to market conditions regarding new car price reductions and this has been positively received by consumers looking to purchase a used Tesla.”

peer pressure

Wall Street analysts were largely positive about Tesla’s cuts as a boon to sales.

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

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

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

Gerald Johnson, General engines’ head of global manufacturing, said Tesla’s cuts do not change the company’s electric vehicle production plan. The automaker is currently selling its sub-$30,000 Chevy Bolt EV models — some of the most affordable in the industry — as well as more expensive models on a new battery system.

“We believe we have an EV for every price point and every market segment that we roll out here,” Johnson said Friday at an event in Flint, Michigan. He said Tesla’s price cuts indicate the vehicles “may have been too expensive to begin with”.

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

– CNBCs Lora Kolodny and Michael Bloom contributed to this report.

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