Elon Musk has finally responded to the growing competition in the electric vehicle industry by announcing a new strategy for Tesla, huge price reductions. The company, known for its innovative products and groundbreaking technology, has revolutionized how people think about transportation with its electric cars. This new plan is a critical turning point for the industry. But how big of a move is it, actually? In recent years, Tesla has made headlines with its moves in the automotive industry and electric cars but this one appears to be something bigger.
Elon Musk’s actions always generate controversy, sometimes overshadowing Tesla’s success story. As the world waits for potential market challenges, Tesla faces decreased demand, sluggish sales, and a declining stock price. To deal with this problem, the company slashed the prices of its most popular models by up to 20 percent in the US and Europe. Anyone in the US interested in buying a Model 3 and Model Y is in for a treat, as these cars are now cheaper. Competitors are also worried about the $7,500 federal tax credit for electric vehicles in the US, which has made Tesla cars 30 percent cheaper than last year. Aside from that, reports have suggested that demand for Tesla vehicles has skyrocketed, which means lesser sales for its rivals. However, Tesla cutting its prices while other automakers are increasing theirs above MSRP shouldn’t surprise anyone. If anyone was unsure about purchasing a Tesla before, they now have a strong reason to do so, as the price reductions come at a time when major automakers are launching more electric vehicles, especially in the lower price range, which challenges Tesla’s dominant influence in the market. This aggressive pricing strategy is partly due to gradually improving supply issues and new government incentives starting to kick in.
Affordable EVs is Key
As the number of vehicles in the market grows and supply chain problems ease, the affordability of cars is becoming a pressing concern in the automotive industry. Despite the benefits manufacturers have received from a shortage of cars that has driven up prices, they are aware that high prices could discourage potential customers who cannot afford a $50,000 car. Edmunds Insights executive director Jessica Caldwell previously told Axios that “Tesla has always been an anomaly in the automotive space,” but its decision to preserve its market share by cutting prices has turned it into just another automaker. The average price of a new electric vehicle by the end of 2022 was around $65,500, exceeding the new high price tags of internal combustion engines. Analysts are closely observing which automakers will lower costs and compete for market share in response. Despite her remarks, Caldwell has pointed out that Tesla was the only electric vehicle manufacturer in the US that provided a superior product with enough range and features to pull people away from gasoline-powered vehicles. While Tesla remains the leader in the EV market, its recent price cuts didn’t make everyone happy.
Tesla’s Increased Competition
The competition in the electric vehicle market is heating up as other automakers are presenting alternatives to Tesla’s offerings with similar ranges, designs, and features. Once considered game-changers, the Model S and Model 3 are starting to show their age. Although the company is already profitable from electric vehicle sales, Tesla doesn’t appear to have many vehicles in development aside from the long-awaited Roadster, so the recent price cut could be a risky move. Also, the price reductions could be part of Tesla’s mission to compete with automakers like BYD in China. The price reduction in the US came amid the changes to the EV tax credit under the Inflation Reduction Act, which provides tax incentives for electric vehicle batteries manufactured in North America. However, investors received these price reductions poorly, resulting in a decline in Tesla’s stock value. Despite the increased competition and market apprehensions, Wedbush Securities analyst Daniel Ives remains confident in Tesla’s power. He’s ready to watch the company compete with other automakers in the ever-growing electric vehicle market. Tesla’s price cuts could also be seen as a clear challenge to established automakers like GM and Ford, signaling Tesla’s unwavering stance in the electric vehicle price war.
“This is a clear shot across the bow at European automakers and US stalwarts that Tesla is not going to play nice in the sandbox with an EV price war now underway,” Ives wrote in a note. “Margins will get hit on this, but we like this strategic poker move by Musk and Tesla,” he added.
The US electric vehicle market saw a 65 percent rise in sales from 2021 to 2022, with only 4 out of the 47 electric models being Teslas. According to S&P Global Mobility, 159 other electric vehicle models will be available by 2025. Although electric vehicle sales are booming, Tesla’s market share in the US is gradually decreasing. From 2018 to 2020, Tesla held around 80 percent of the electric vehicle market, but by 2021, that number had been reduced to 71 percent. However, despite the declining market share, Tesla’s sales in the US rose by 40 percent last year, and S&P predicts this trend will continue as the electric vehicle market continues to progress.
Tesla’s Pricing Strategy
As mentioned earlier, even with the tax incentives, the cost of electric vehicles remains higher than gasoline-powered cars, primarily due to the expensive nature of batteries and the increasing cost of raw materials and loan rates, affecting Tesla and its competitors’ sales. But again, Tesla has recently reduced the prices of its popular models, including the Model Y Performance, which was priced at nearly $70,000 and is now only $57,990. Meanwhile, the Model Y Long Range’s price has gone down to $54,990 after benefiting from a $12,500 reduction. That price could drop to around $45,490 with the tax credit. Previously, only the three-row Model Y was eligible for the credit due to its higher price cap, but other models have also seen a decrease in starting price. Meanwhile, Model 3 rear-wheel-drive vehicles can now be purchased for $43,490 or $36,490 with the tax credit.
Not much optimism was shown by Tesla owners after the company executed the price reductions. They said it would only hurt the company, while others highlighted that it’s one step forward in making electric cars more affordable. One Tesla owner, Marianne Simmons, expressed her frustration after discovering she could have bought the same Model Y she purchased in September for $13,000 less, just a few weeks after the price cut.
“I feel like I got duped. I feel like I got taken advantage of as a consumer,” Simmons said, adding that she believes the “large reduction” is “going to affect a lot of people who just bought a vehicle.”
Edmunds director of insights Ivan Drury shared the same sentiment, saying that secondhand Teslas will lose value since buyers crave that new-car smell.
“For any existing owner it’s a kick to the teeth,” said Drury.
Tesla owners in China are also against the price cuts because their cars now have very little resale value.
The Start of a Price War
In response to Tesla’s controversial move, Ford slashed the prices of four Mustang Mach-E models by as much as $5,900, qualifying them for the $7,500 clean vehicle tax credit offered in the US since they are now priced under $55,000. The Mach-E is the third best-selling electric car in the US, behind the Model 3 and Model Y. Marin Gjaja, chief customer officer for Ford Model e, has made it clear that Ford isn’t backing down from anyone.
“We are not going to cede ground to anyone. We are producing more EVs to reduce customer wait times, offering competitive pricing and working to create an ownership experience that is second to none,” he said.
However, GM won’t be lured into employing the same strategy despite plans to cut costs by $2 billion in 2023. CEO Mary Barra said that GM vehicles are perfectly priced.
“We think we’re pricing where we need to be,” she said at a press conference.
Because of new additions to its EV lineup, GM is confident that it would achieve its goal of selling a million electric cars by 2025. Despite the mass disapproval from Tesla fans, a huge number of people love the company’s decision, most being long-term investors. This scenario is not new in the automobile industry, wherein customers find themselves angry following a car purchase because a rebate comes out shortly after that would’ve saved them a significant amount. However, the situation is different because Tesla’s cuts are more substantial than standard rebates. Tesla is facing massive risks with their recent move, which only helps attract more customers and makes competitors struggle.