31 Jan 23

The price cut: What is the message behind the Tesla strategy?

The price cut strategy of Tesla is a risky move flavoured with Elon Musk’s confidence. But will it pay off? 

It all started on the sixth day of the new year when Tesla’s unexpected price cut shook China. The discount on Model 3 went up to 36,000 yuan ($5,300), and 48,000 yuan ($7,000) for Model Y, setting the threshold for both models to $48,200 and $52,600, respectively. The reaction was enormous. 

Having lost as much as $13,000 in savings, Chinese Tesla customers who recently hopped in their dream vehicle stormed Tesla stores with fury. In the city of Chengdu, the Tesla store even got vandalised, and petitions were created to force Tesla to pay their money back (to no avail). 

Tesla didn’t stop there. Only one week later, the price cut hit the US and Europe by up to 20%, creating a shockwave in the auto industry in two new geographies. So much so that in the US, the discount for Model Y Long Range (LR) reached $20,500, added the tax credit under the Inflation Reduction Act. 

The general view of automotive industry experts is that Tesla is triggering a price war by prioritising sales over profits. If we look at the statements of Elon Musk before the price cuts, it wouldn’t be wrong to say that he is highly motivated to keep Tesla number one in the electric vehicle (EV) market. 

Musk joined a Twitter Spaces conversation in late December and signalled the upcoming price cuts: “Do you want to grow unit volume, in which case you have to adjust prices downward? Or do you want to grow at a lower rate or go steady? My bias would be to say let’s grow as fast as we can without putting the company at risk,” Musk said, according to CNBC. Musk said that Tesla would overcome an economic storm better than any other company, Teslarati reports. “Unless the company is making bread.”

What’s in the Tesla strategy? 

Tesla is defying its rivals with price cuts by forcing them to go over all the calculations based on supply chains and production in a market it has long been the leader of. The charts from an independent industry analyst Troy Teslike and Cnevpost clearly show which rival Tesla is targeting: 

By the end of 2022, BYD sold over 911,000 EVs globally, totalling 1.86 million new energy vehicles (including plug-in hybrids). On the other hand, Tesla sold over 1.3 million EVs globally and fell behind BYD in China, the world’s largest EV market. According to Reuters, Tesla Model Y and Model 3 prices went down by 17%, while Troy Teslike says that the price of a new Model 3 shrunk by 14%, while it is 19% for Model Y. 

So, what is the Tesla price cut telling us? 

  • Many Tesla models now qualify for the US tax credit of $7,500.
  • Many EV seekers may choose Tesla Model 3 or Y over BYD’s Atto 3 or Dolphin in Europe.
  • Tesla is likely to open the gap between Volkswagen’s ID.4 and ID.3 in Germany and Europe.
  • Increasing Tesla orders in China, Europe and the US caught many rivals unprepared in major markets.
  • Tesla is primarily targeting customers, not the fleets.

Tesla also appears to be well prepared for the price move, as having assembly plants in all the geographies the price cut impacted: Two in the US (California and Texas -being the newer one), Shanghai, China and Gruenheide, Germany.  

What is the message? 

When the used vehicle market is considered, the Tesla price cut goes beyond the rivalry in the EV market. According to California-based car shopping Edmunds, the price of a used 2020 model Teslas witnessed a price drop of around 24.5%, falling to an average of $58,657, says CNBC. While demand for used Tesla’s increased significantly, how it will impact the used car market in the long term is unclear.  

Considering the rivals, Xpeng dropped prices by 12.5% in China, and Ford announced a discount of up to $5,900 on the Mustang Mach-E. Other than the prices, the investment strategies of global EV makers will probably change in 2023. Nevertheless, the picture is clear: The war between Tesla and BYD is not a myth but a reality now. 

Main image: Tesla. The in-article graphics are courtesy of Troy Teslike and CnEVPost, respectively. 

Authored by: Mufit Yilmaz Gokmen