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What Effect Will Tesla’s Price Cuts Have On US Auto Market? We Answer

An EV writer recently posted the above query. It spurred some thought and this reply.

After years of rapid and significant price increases, Tesla has recently made meaningful cuts to its vehicle prices. The general reasons for this are twofold. First, Tesla wants to leverage some of the free government money presently being created in the form of income tax incentives on EVs under a certain price threshold. Second, without a doubt, Tesla has started to see demand softening for its products in the U.S. and is taking action before cars start to pile up on its “dealership” lots. If you follow Tesla, you understand the quotation marks around “dealership.”

Related Story: Tesla's Plummeting Shopper Consideration In Q3 Signals Weakening Demand

Anyone with a keyboard is now offering up their analysis of why Tesla is making these moves and what they will mean to the "big picture." As a veteran automotive writer, I give great consideration and respect to my colleagues who may have more or better information than do I. In particular, if the staff of a respected publication like Inside EVs makes a claim or poses a question, I like to think about it and form my own opinion based on what I know. Ben O’Hare of Inside EVs and Electric Car News made a post today that grabbed my attention and made me think.

Ben posted, in part, “It will be interesting to see what impact Tesla’s price cuts will have on the wider automotive market. Used EV prices will undoubtedly plummet, but will other manufacturers follow suit with similar price slashes on new models?” There is a lot to unpack in Ben’s query, so let’s break it down. Before we begin, let me say that I am offering my own analysis from my own angle with information I will list. If you have better facts that help inform an opinion, please post them in our comments section.

Will Tesla’s Price Cuts Influence Other Automakers To Follow Suit?
Ben’s question is a smart one because he jumps right to the whole “uncontrollable” aspect of marketing. That being, no action a company takes is in a vacuum. Cut your prices to grab market share, and your competitors may react in kind, or they may take another action to offset yours. In this case, I would point out that GM cut the prices of its only EV that really sells, the Chevy Bolt, and did so before Tesla cut its prices. So the dog in this story may not be Tesla after all. It may be GM, and Tesla may be the tail that got wagged. Make sense?

Price Cuts Not Always What They Seem
Another consideration is that pricing is not always what it seems. Let’s say that Tesla looks over its take rate on the various trims of a model and realizes that its pricey trims sell best. The brand may also know from internal data that many shoppers who start out looking at a low-cost trim often end up buying a higher-cost trim. In this reality, cutting the price of a low-cost trim, or even creating a new lower-cost entry-level trim, may do no harm to the brand if the brand only builds a token handful of the low-cost trims it will broadly advertise (either formally or informally). So, we may have what we used to call in my sales days “a minister’s discount.” One that implies savings but actually provides nothing to the shopper in general. Sure, a few folks will get a smoking deal. But overall, the pricier trims will still remain the bulk of sales.

Every EV Sells Out - For Now
Another aspect of the post made by Ben relates to inventory and capacity. For three years, no automaker except Tesla has produced any BEV with a run rate of over 3,000 units per month (sold in America.) Only one non-Tesla model has ever averaged over 2,000 units per month. Can you name it? That is ridiculously small by any measure. The truth is, battery-electric vehicles barely sell in America, even if you count Tesla. Consider that the Ford F-Series outsells all of Tesla in America, and the F-Series has less than a 3% market share in America.

Do Automakers Really Want to Sell More EVs?
An unspoken assumption is that automakers in America want to sell more EVs. If they do, where are the factories? Factually, every EV for sale in America has had waiting lists for three years. Meaning folks order an EV and then wait a long time (months) for it to be built and delivered. Until EVs start to pile up on dealer lots, no automaker is really worried that they need to “slash” prices. Most of the EV price moves have more to do with advertising and branding than inventory management at this point in time. That may change, but not overnight.

Used BEVs Are Dropping Dramatically In Price
Ben is already correct about one thing; Used battery-electric vehicle prices are dropping. A study released just today found that the used Model 3 dropped in value by double-digit percentages over the past 12 months, and that over the past three months, the value of a used Model 3 has dropped by almost $9K on average. That is a massive shift.

EV Tax Incentive Facts Are Not Pretty
Another angle on this whole price and EV tax incentive situation is that less than half of all Americans old enough to drive are eligible to take advantage of the tax credits. We all pretend like a Model 3 will “have a $7,500 tax break,” but I don't qualify. Neither of my adult sons qualifies. My parents don't qualify, and my wife does not qualify. We own more cars than we have people in our family. We buy a lot of new and used cars, yet the new tax law won't help any of us buy an EV at a discount. And it’s not because we are all stinking rich. Most of my family can’t qualify because we don't earn enough taxable income, and some of us cannot because we earn too much money to qualify. So Tesla moving some trims lower in price to qualify for free government handouts may not have the big impact we all pretend it might.

Anything That Signals Slowing Inflation Is Welcome
As a consumer and as a person who wants to keep what he has already earned, I’m thrilled to see some price softening in cars and in homes. Inflation is the single biggest threat to American prosperity of this decade. Any price cut is a good price cut to my mind. I also respect Tesla as a company, and I think the cars are pretty nifty for those who can afford one. It would be great news to me if Tesla’s price cuts helped to slow the overall march upward of EV prices and the automotive process in general. I’m just cautiously pessimistic that Tesla can influence the automotive industry going forward the way it did in the past.

Feel free to post your thoughts below.

Image of Tesla showroom by John Goreham

John Goreham is a long-time New England Motor Press Association member and recovering engineer. John's interest in EVs goes back to 1990 when he designed the thermal control system for an EV battery as part of an academic team. After earning his mechanical engineering degree, John completed a marketing program at Northeastern University and worked with automotive component manufacturers, in the semiconductor industry, and in biotech. In addition to Torque News, John's work has appeared in print in dozens of American news outlets and he provides reviews to many vehicle shopping sites. You can follow John on TikTok @ToknCars, on Twitter, and view his credentials at Linkedin

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