Selling Tesla in the US (TSLA-US) cars are slashing prices, which is proving to be a double-edged sword for the electric car maker and the auto industry in general.
Tesla slashed prices on its new vehicles by as much as 20 percent earlier this month, making the vehicles more affordable and potentially eligible for federal tax credits. But it also reduces resale value for existing owners and has knock-on effects across the auto industry.
The price cuts represent Tesla’s prioritization of sales ahead of profits, which could signal demand problems, analysts said.
“With weaker demand, they’re looking to boost sales or grab a slice of the pie,” said Michelle Krebs, executive analyst at Cox Automotive.
For the industry as a whole, Tesla’s price cuts have put pressure on other automakers to offer more affordable electric vehicles despite rising commodity costs, hitting used-car retailers hard. They must write down profits and keep Wall Street worried about the first EV price war amid recession fears.
Morgan Stanley analyst Adam Jonas wrote in his latest investment report: “Tesla’s price cuts make all other electric and gasoline vehicles look more and more expensive, compressing margins and freezing used car market.”
Automakers regularly change the prices of new vehicles, usually for promotional purposes or to coincide with the arrival of new year-style models. But historically, adjustments up or down have been small to avoid disrupting the auto ecosystem for consumers and auto dealers.
When new car prices drop, the value of used models also takes a hit. In the case of Tesla, some new cars cost almost the same as used cars by just a few thousand dollars. That’s a problem for existing car owners, as well as used-car retailers and Tesla, which sells used cars directly to consumers.
The Edmunds report pointed out that in the first 17 days of January, the average price of a used 2020 or newer Tesla electric car fell to $58,657, 24.5% lower than the June peak of $76,626.
Cars.com, a consumer shopping site, reported a 3.3 percent drop in the list prices of used Model Y and Model 3 vehicles on its official website, as car owners try to control resale prices even as new car prices are cut.
“Tesla’s price cut will have a very different impact on consumers depending on how they view the news,” said Ivan Drury, director of insights at Edmunds.
On the one hand, Tesla owners have complained to CEO Musk on social media platforms that the price cuts have devalued their vehicles. In China, where the price cuts took effect earlier than in the U.S., protesters reportedly gathered at Tesla showrooms and distribution centers to demand refunds.
Buyers who missed out on the latest price cuts are demanding handouts from Tesla and Musk. They demand free, premium driver assistance upgrades, free supercharging and other perks to offset their higher price tags.
Meanwhile, both Cars.com and Edmunds noted that interest and searches for Tesla vehicles have skyrocketed since the price cut.
CarMax, the largest used car seller in the United States (KMX-US) quickly sold hundreds of Teslas after readjusting their prices. As of Tuesday (24th), there were only about 150 Tesla vehicles for sale on the official website, down from hundreds before the price cut.
Wall Street analysts took a positive view of Tesla’s price cuts, seeing it as a sales boon.
Compared with traditional automakers, Tesla’s electric vehicle profitability is much higher. Its software and subscription products, including its advanced driver assistance systems and in-vehicle Wi-Fi, could help cushion expected profit losses from recent price cuts, as could electric vehicle tax credits.
In addition, price cuts force other automakers or original equipment manufacturers (OEMs) to lower the prices of their electric vehicles.
“Most OEMs are currently losing money on EVs, and these price cuts could make business more difficult,” Bank of America Securities analyst John Murphy wrote in a letter to investors earlier this month. It’s like they’re trying to ramp up production of electric cars.”
General Motors (GM-US) global manufacturing chief Gerald Johnson said Tesla’s price cuts won’t change the company’s plans to make electric vehicles. GM currently sells a Chevrolet Bolt EV that costs less than $30,000, as well as a higher-priced model with a new battery system.
“We believe there are electric vehicles at every price point and every segment that we launch,” he noted, adding that Tesla’s price cuts meant those vehicles “could have been overpriced to begin with.”
