Aspiring Tesla owners, rejoice. (And recent Tesla buyers, look away.)
The auto industry’s leading electric vehicle producer has slashed prices across its lineup of vehicles in the U.S. and several major European markets, aiming to boost sales amid an inflation-driven slump in demand.
The price cuts in the U.S. range from 6% on its cheapest sedan (the Model 3, now $43,990) to 20% on its best-selling SUV (the Model Y, now $52,990). The move also gives U.S. buyers the chance to receive up to a $7,500 federal tax credit for purchasing Tesla’s souped-up version of the Model 3 and standard Model Y eligible. Both vehicles previously exceeded a price limit on the tax credit.
The reductions, when coupled with recent price cuts in China and other Eastern Hemisphere markets, mark a substantial concession from Tesla, which failed in 2022 to meet its self-imposed target of raising deliveries by 50% year over year. Slowing demand and rising competition have stunted sales growth and hammered Tesla’s stock, which has fallen 64% in the past 12 months. (CEO Elon Musk’s purchase of Twitter didn’t help, either.)
Tesla shares fell as much as 6% in early-morning trading Friday, though they were only down 2% by the early afternoon.
We’ll see whether these price cuts are a temporary response to an inflationary period or a new chapter in Tesla’s history. In the meantime, the changes raise three big questions that will go a long way toward defining the company’s future.
Is waning demand transitory or a sign of larger issues?
Tesla’s remarkable growth in recent years and the broader auto industry’s rush to invest in EVs, among other signs, suggest that interest in electric cars remains solid. EV sales still jumped 58% in 2022, even as global economic headwinds dented consumer budgets, according to BloombergNEF.
But Tesla, for now, is still targeting a relatively small customer base and faces growing competition in the market. To wit, only one-third of Americans would definitely get or seriously consider getting an electric vehicle right now, according to a Consumer Reports survey of roughly 8,000 U.S. adults conducted in early 2022. Charging logistics is still the biggest hurdle to EV interest, a problem that will likely take multiple years to address.
Meanwhile, global automotive rivals like Ford, General Motors, Volkswagen, and BYD are ramping up their output, investing tens of billions of dollars to scale their EV operations.
Consumer penny-pinching still seems like the most likely culprit for Tesla’s missed delivery targets last year, but the company’s once-enormous EV edge is waning. If Tesla sales rebound well following the price cuts, it’s a sign that the Tesla brand remains strong.
Will other car companies follow suit with price cuts?
Up until a late-2022 price war broke out in China, the cost of EVs across the world was steadily rising. Soaring materials expenses, particularly for battery production, were driving sticker shock throughout the industry.
With its price cuts, Tesla is sending “a clear shot across the bow at European automakers and U.S. stalwarts,” Wedbush Securities analyst Dan Ives wrote in a client note, according to Reuters. While many of its rivals operate on comparatively thin margins, Tesla’s robust profits give it more runway to reduce prices, undercut the competition, and potentially earn some brand loyalty from new buyers.
Investors are already worried about the potential impact of Tesla’s gambit on Ford and General Motors, in particular, which saw their shares fall more than 4% in midday trading Friday.
Can Tesla make up some of the revenue difference with software?
In a Twitter Spaces conversation last month, Musk foretold today’s developments, arguing that the company is better off sacrificing some profit margin for higher unit sales. One main reason: Tesla sells semi-autonomous vehicle upgrades at a premium.
“Even if your margins are extremely low in selling the car, the subsequent upgrade to it being autonomous is a lot,” Musk said. “That’s something no other car company can do.”
Still, in the short term, that strategy requires up-selling customers already fighting inflation. Tesla’s Full-Self Driving capability costs $15,000 upfront or up to $199 per month. Not exactly chump change.
And while Musk remains exceedingly bullish on software as a sales generator for Tesla, the promise of fully autonomous vehicles continues to wane with each passing year.
"We are more skeptical on the company’s full-self driving/autonomous vehicle (AV) approach, which we view as a critical input to the overall risk/reward assessment given our positive stance on the AV opportunity as a whole," Citi analyst Itay Michaeli wrote in a client note this month, according to Yahoo Finance.
Want to send thoughts or suggestions to Data Sheet? Drop me a line here.
Jacob Carpenter
