Tesla price cuts could spark a price war on electric vehicles

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

Anna Moneymaker | Getty Images

DETROIT – Tesla prices for cars in the U.S. are seeing significant price cuts, and this is proving to be a double-edged sword for the electric vehicle maker and the auto industry as a whole.

Earlier this month, Tesla cut 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 lowers the resale value of cars for current owners and has a ripple effect on the auto industry.

CEO Elon Musk hasn’t spoken directly about the price cuts, which contradicts his claims that the company’s cars will rise in price – a rarity in the market, except for classics and collectible cars.

Analysts say the price cuts indicate Tesla is prioritizing sales over profits, which could signal a demand problem.

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

For the industry as a whole, Tesla’s price cuts are forcing other automakers to offer more affordable electric vehicles despite rising product prices, creating havoc for used car retailers who will have to write off cars, and raising Wall Street concerns about the first electric car price war. crisis fears.

“Tesla price cuts make every other electric car and [internal combustion engine vehicles] looking increasingly expensive, shrinking margins and causing chills in the used car market,” wrote Morgan Stanley analyst Adam Jonas in a Friday note to investors.

Automakers regularly change the prices of new cars. This is usually done through incentives or when a new model year comes out. But adjustments, up or down, are historically small so as not to disrupt the automotive ecosystem for consumers and car dealers alike.

Musk predicted such a move last month, predicting a recession later this year.

“Do you want to increase unit volume, in which case you have to adjust prices downwards? Or do you want to grow at a slower pace or remain stable?” Musk said Dec. 22 during a Twitter Spaces call. “My bias would be to say let’s grow as fast as we can without putting the company at risk.”

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

Used prices

Tesla stock performance over the past year. reports that list prices for used cars on its consumer shopping website are down 3.3% for the Model Y and Model 3 as owners struggle to hold down resale prices despite declining new car sales.

“Tesla price cuts will affect consumers in very different ways depending on which side of the news they sit on,” said Ivan Drury, director of information analytics at Edmunds.

On the one hand, Tesla owners have complained to billionaire CEO and Twitter owner Musk on the social network that price cuts are devaluing their cars. In China, where price cuts came earlier than in the US, protesters reportedly gathered outside the carmaker’s car dealerships and distribution centers. Demand for discounts and credits.

Recent Tesla buyers who missed the new price cut are reaching out to Musk and the company to fix them. They were looking for free premium upgrades for driver assistance, free boost and other perks to make up for their higher price tags.

At the same time, and Edmunds report that interest and searches for Tesla vehicles have skyrocketed since the cuts.

CarMax, the nation’s largest used car dealer, quickly sold hundreds of Teslas after price adjustments. As of Tuesday, there were only about 150 Tesla vehicles on sale, compared to hundreds before the company cut prices.

“We are constantly adjusting retail vehicle prices in real time to meet market conditions and offer competitive pricing,” CarMax COO Joe Wilson said in an emailed statement. “Therefore, we have adjusted prices to respond to market conditions related to lower new car prices, and this has been positively received by consumers looking to purchase a used Tesla.”

peer pressure

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

Tesla has made significantly higher profits from its electric vehicles compared to traditional automakers. Its software and subscription offerings, including advanced driver assistance systems and in-car Wi-Fi, could help mitigate expected profit losses due to recent price cuts, as can electric vehicle tax breaks.

In addition, price cuts are forcing other automakers or OEMs to cut prices on their electric vehicles.

“Most OEMs are currently losing money on EVs and this price cut is likely to further complicate business 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’ the head of global manufacturing, said Tesla’s cuts don’t change the company’s electric vehicle 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 with a new battery system.

“We believe we have EVs for every price point and every market segment that we are bringing here,” Johnson said Friday during an event in Flint, Michigan. He said Tesla’s price cuts signaled that car prices “may have been inflated from the start.”

GM slashed the prices of its Bolt models by thousands of dollars last year, but recently raised them by hundreds of dollars, citing industry price pressures.

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

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