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

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

Anna Moneymaker | Getty Images

DETROIT — Tesla vehicles in the U.S. are seeing significant price cuts, and that’s proving to be a double-edged sword for the EV maker and the larger auto 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 ripple effects through the auto industry.

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

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

“There’s a weakening of demand 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 as a whole, Tesla’s price cuts put pressure on other automakers to offer more affordable electric cars despite rising raw material costs, wreak havoc on used-vehicle dealers who will have to write down the vehicles, and have Wall Street worried about the first price war for electric cars. fear of recession.

“Tesla’s price cuts make all other EVs and (internal combustion engine) vehicles look progressively more expensive, are margin compressive and send a chill across the used car market,” Morgan Stanley analyst Adam Jonas wrote in an investor note on Friday.

Car manufacturers regularly change the prices of new vehicles. This is typically 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, and if so do you have to adjust prices downward? Or do you want to grow at a slower rate or go flat?” Musk said Dec. 22 during a Twitter Spaces conversation. “My bias would be to say let’s grow as fast as possible without putting the company at risk.”

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

Used prices

When the price of a new vehicle falls, the value of the used models also takes a hit. In the case of 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 vehicle 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 their June peak of $76,626.

Tesla’s stock performance over the past year.

Cars.com reports that used-vehicle list prices on the consumer shopping site fell 3.3% for the Model Y and Model 3 as owners try to hold on to resale value despite new-vehicle cutbacks.

“The Tesla price cuts will affect consumers very 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 new price cuts are asking Musk and the company to make them whole. They’ve sought free premium driver assistance upgrades, free Supercharge and other perks to offset their higher price tags.

At the same time, both Cars.com 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 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 associated with new car price reductions, and this has been received positively by consumers looking to purchase a used Tesla.”

Group pressure

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

Tesla has had a significantly higher profit margin on its electric cars compared to traditional car manufacturers. 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 EV tax credits.

Plus, the price reductions are pushing other automakers, or OEMs, to lower 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 as they try to ramp up EV production,” 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 manufacturing 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 believe we have an electric car for every price point and every market segment that we’re rolling out here,” Johnson said Friday during an event in Flint, Michigan. He said Tesla’s price cuts signal that the vehicles “may have been overpriced to begin with.”

GM dropped prices on its Bolt models by thousands of dollars last year, then recently raised them by hundreds of dollars, citing industry pricing pressures.

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

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