Tesla’s price cuts could fuel an EV price war

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

Anna Moneymaker | Getty Images

DETROIT – Tesla In the US, the vehicles are seeing significant price cuts, proving to be a double-edged sword for the EV maker and the larger auto industry.

Tesla slashed the prices of its new cars by up to 20% earlier this month, making the cars more affordable and eligible for federal tax credits. But it also saves cars’ resale values ​​for current owners and sends ripple effects through the auto industry.

CEO Elon Musk did not directly address the price cuts, contradicting claims that the company’s cars will appreciate in assets — a rarity for the market, except for classics and collectibles.

Analysts say the price cuts show Tesla is prioritizing sales over profits and potentially point to a demand problem.

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

For the industry as a whole, Tesla’s price cuts are putting pressure on other automakers to offer more affordable EVs despite rising commodity prices, creating havoc for used-car retailers that will have to mark down the vehicles and unsettling Wall Street amid the first EV price war . recession fears.

“Tesla’s price cuts are all other EVs and [internal combustion engine vehicles] looks increasingly expensive, squeezing margins and sending a chill through the used car market,” Morgan Stanley analyst Adam Jonas wrote in an investor note on Friday.

Car manufacturers regularly change the prices of new cars. This is usually done through promotions or when a new model year comes out. But upward or downward revisions are historically small enough to avoid disrupting the automotive ecosystem for both consumers and car dealers.

Musk foreshadowed such a move last month to predict 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 slower rate or go steady?” Musk said on Dec. 22 during a Twitter Spaces chat. “My bias would be to say we’ll grow as fast as we can without putting the company at risk.”

Tesla is due to report fourth-quarter earnings on Wednesday after the market closes.

Prices used

When the price of a new car falls, so does the value of used models. In Tesla’s case, some new models were going for nearly the same price as their used counterparts—just thousands of dollars off. This is problematic for both current owners, used car dealers and Tesla, which sells used models directly to consumers.

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

Tesla’s stock performance over the past year.

Consumer shopping site Cars.com reported that used car list prices fell 3.3% for the Model Y and Model 3 as owners tried to hold the line on resale prices despite discounts on new cars.

“Tesla’s price cut will have a completely different impact on consumers depending on which side of the news they sit on,” said Ivan Drury, director of insights at Edmunds.

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

Recent Tesla buyers who missed out on the fresh price cuts are calling on Musk and company to make them whole. They looked for free, premium driver assistance upgrades, free Supercharging and other perks to offset their hefty price tags.

Meanwhile, Cars.com and Edmunds report increased interest and searches for Tesla vehicles after the discounts.

CarMaxThe nation’s largest used car dealer sold hundreds of Teslas quickly after repricing them. There were about 150 Tesla vehicles on sale Tuesday, up from hundreds before the company cut prices.

“We continuously adjust retail vehicle pricing 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 of lower new car prices, which has been well received by consumers looking to buy a used Tesla.”

Peer pressure

Wall Street analysts welcomed the cuts for Tesla as a boon for sales.

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

Moreover, price cuts force other car manufacturers or OEMS to reduce prices on their electric vehicles.

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

Gerald Johnson, General Motors Tesla’s global manufacturing chief said the layoffs do not change the company’s production plan for electric vehicles. The automaker currently sells Chevy Bolt EV models priced under $30,000 — among the most affordable in the industry — with higher-priced models on the new battery system.

“We believe there’s an EV for every price bracket and every market segment we’re serving here,” Johnson said Friday at an event in Flint, Michigan. He said Tesla’s price cuts show the cars “could be prohibitively expensive to begin with.”

GM slashed prices on Bolt models by thousands of dollars last year, only recently raising them by hundreds of dollars, citing industry price pressures.

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

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