Tesla’s price cut could spur a price war for electric cars

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

Anna Moneymaker | Getty Images

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

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

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Tesla’s price cut could spur a price war for electric cars


CEO Elon Musk has not directly addressed the price cuts, which are counterintuitive to his claims that the company’s cars will appreciate in assets — a rarity for the market aside from classics and collectibles.

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

“It’s demand weakening and they want to improve their sales — or it’s a grab for market share,” said Michelle Krebs, managing analyst at Cox Automotive.

For the industry at large, Tesla’s price cuts put pressure on other automakers to offer cheaper electric cars despite rising raw material costs, wreak havoc on used car dealers who have to write down vehicles and worry Wall Street about the first price war for electric cars. recessionary fears.

“Tesla’s price cut makes all other electric cars and [internal combustion engine vehicles] looks increasingly expensive, compressing margins and sending a chill across the used car market,” Morgan Stanley analyst Adam Jonas wrote in an investor note Friday.

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

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

“Do you want to increase unit volume, in which case do you need to adjust prices down? Or do you want to grow at a slower rate, or go flat?” Musk said on 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 will report results for the fourth quarter on Wednesday after the stock market closes.

Used prices

When the price of a new vehicle falls, the value of the used models also takes a hit. As for Tesla, some of the new models went for nearly the same price — just thousands of dollars off — as 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 or newer Teslas fell to an average price of $58,657 — a 24.5% discount from the June peak of $76,626.

Tesla’s share performance over the past year. reports that used-car list prices on the consumer retail website fell 3.3% for the Model Y and Model 3 as owners try to hold on to resale prices despite cuts in the new vehicles.

“The Tesla price cuts will affect consumers quite differently depending on which side of the news they’re sitting 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 United States, protesters reportedly gathered at the automaker’s showrooms and distribution centers demanding discounts and credits.

Recent Tesla buyers who missed out on the fresh price cuts are asking Musk and company to make them whole. They’ve sought free premium driver assistance upgrades, free supercharging and other perks to offset the higher price tags.

Meanwhile, both and Edmunds report 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 changing their prices. It had only about 150 Tesla cars for sale as of Tuesday, down from hundreds before the company cut prices.

“We continually adjust retail car 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 adjusted prices to respond to market conditions related to new car price reductions, and this has been received positively by consumers looking to purchase a used Tesla.”

Peer pressure

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

Tesla has had a significantly higher profit margin on its electric cars compared to traditional car manufacturers. The software and subscription offerings, including advanced driver assistance systems and in-vehicle Wi-Fi, could help cushion the expected loss of profits from the recent price cuts, as could tax credits for electric cars.

In addition, the price reductions pressure other car manufacturers, or OEMs, to cut the prices of their own electric cars.

“Most OEMs are currently losing money on EVs, and these price cuts are likely to make business even more difficult just 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’ head of global manufacturing, said Tesla’s cuts do not change the company’s production plan for electric vehicles. The automaker currently sells its Chevy Bolt EV models under $30,000 — among the most affordable in the industry — as well as more expensive models on a new battery system.

“We think we have an EV for every price point and every market segment that we’re rolling out here,” Johnson said Friday at an event in Flint, Michigan. He said Tesla’s price cuts signal that the vehicles “may have been overpriced to begin with.”

GM cut prices on Bolt models by thousands of dollars last year, only to recently raise them by hundreds of dollars, citing industry pricing pressure.

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

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