Tesla’s price cuts could lead to an electric car price war

Detroit – Tesla Cars in the US are seeing significant price cuts, and this is proving to be a double-edged sword for the electric car maker and the major automaker.

Tesla earlier this month lowered the prices of its new cars up to 20%making the vehicles more affordable and more likely to qualify Federal tax credits. But it also lowers the resale values ​​of cars for existing owners and sends ripple effects through the auto industry.

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Executive Director Elon Musk He didn’t directly address price cuts, which contradicted his claims that the company’s cars would value assets—a rarity in the market aside from classic cars and collectible vehicles.

Analysts say the price cuts indicate that Tesla is prioritizing sales over profits, which indicates a demand problem.

“There’s a weakness in demand, and they want to improve their sales — or it’s a market share grab,” said Michelle Krebs, executive analyst at Cox Automotive.

For the industry as a whole, Tesla’s price cuts pressure other automakers to offer more affordable electric cars despite rising commodity costs, create chaos for used-car retailers who will need to write down vehicles and worry Wall Street about the first electric-vehicle pricing war. amid fears of a recession.

Tesla’s price cuts make all other electric vehicles f [internal combustion engine vehicles] “It looks incrementally more expensive, narrowing margins and sending a chill into the used-car market,” Adam Jonas, an analyst at Morgan Stanley, wrote in an investor note on Friday.

Automakers change the prices of new cars regularly. This is usually done through incentives or when a new typical year comes around. But adjustments, up or down, have historically been small to avoid upsetting the automotive ecosystem for both consumers and car dealers.

Musk predicted such a move last month in predicting a recession later this year.

“Do you want to increase unit size, in which case you have to adjust prices downward? Or do you want to grow at a lower rate, or stabilize?” Musk said Dec. 22 during a conversation on Twitter Spaces. “My bias is to say let’s grow as fast as we can without putting the company at risk.”

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

When the price of a new car drops, the value of used models is affected as well. In Tesla’s case, some of the new models were going for nearly the same price—only thousands of dollars—as their used counterparts. This presents a problem for current owners as well as used car retailers and Tesla, that sells used models directly to consumers.

On the first 17 days of January, Edmonds ReportsUsed prices for 2020 or newer Teslas fell to an average price of $58,657 — 24.5% from the June peak of $76,626.

Cars.com reports used car prices on the consumer shopping site are down 3.3% for the Model Y and Model 3 as owners try to maintain resale prices despite discounts on new cars.

“Tesla’s price cuts are going to affect consumers very differently depending on which side of the news they’re sitting on,” said Evan Drury, director of Edmunds Insights.

On the one hand, Tesla owners have complained to billionaire CEO W Twitter owner Musk posted on the social media platform that price cuts reduce the value of their cars. In China, where price cuts took effect earlier than in the United States, protesters reportedly gathered at company showrooms and distribution centers. Claim deductions and credits.

New Tesla buyers who missed out on the new price cuts petitioned Musk and the company to make it complete. They sought free and premium driver-assist upgrades, free supercharging and other positives to offset the higher price tags.

At the same time, Cars.com and Edmunds both reported interest and searches for Tesla vehicles since the cuts.

carmaxInc., the nation’s largest seller of used cars, quickly sold hundreds of Teslas after a price realignment. It had only about 150 Tesla cars for sale as of Tuesday, down from the hundreds before the company slashed prices.

“We continually adjust retail auto pricing in real time to match market conditions and offer competitive pricing,” Joe Wilson, CarMax’s chief operating officer, said in an emailed statement. “As such, we have adjusted prices to respond to market conditions related to new car price reductions and this has been received positively from consumers looking to purchase a used Tesla.”

Wall Street analysts have been largely positive about the Tesla cutbacks as a sales boon.

Tesla has enjoyed a much higher profit margin on its electric vehicles than traditional automakers. Its software offerings and subscriptions, including advanced driver assistance systems and in-car Wi-Fi, can help mitigate expected profit losses due to recent price cuts, as can tax credits for electric vehicles.

In addition, price cuts pressure other automakers, or OEMS, to lower the prices of their electric cars.

“Most original equipment manufacturers are currently losing money on electric vehicles, and these price cuts will likely make business more difficult, just as they are trying to ramp up production of their auto offerings,” John Murphy, a securities analyst at Bank of America, wrote to investors earlier this month. electrical”.

Gerald Johnson, general motors’ The head of global manufacturing, said Tesla’s cuts don’t change the company’s plan to manufacture electric vehicles. The automaker currently sells for under $30,000 Chevy Bolt EV electric models – Among the most affordable models in the industry – as well as the highest-priced models in the new battery system.

“We believe we have an EV for every price segment and every market segment that we’re putting out here,” Johnson said Friday during an event in Flint, Michigan. He said Tesla’s price cuts suggest the cars “may have been overpriced to begin with”.

GM price reduction of its Bolt models sold thousands of dollars last year, only to recently increase it by hundreds of dollars, citing industry pricing pressures.

CNBC channel Laura Kolodny And Michael Blum Contribute to this report.