The EV Price Wars Have Begun. Will Tesla Be The Amazon Of The Automotive Industry?
Source: Fast Company, Gabriel Smith
Photo: FC
Tesla made a calculated move to take advantage of the industry’s highest gross margins as a result of their direct sales model, manufacturing technology and battery investments.
In January of 2023, Tesla implemented a massive price decrease, up to 20% on some models. Less than a month later, when the federal tax credit rules changed to include more Tesla Ys, Tesla increased its prices on Tesla Y and 3 between $500 and $1500 per model. In March, Tesla cut the prices of the Model X and Model S by about $10,000 and $5,000, respectively. Elon Musk indicated his perception of the elasticity of demand for Tesla’s vehicle at an investor meeting, saying, “Even small changes in the price have a big effect on demand.”
The size, bidirectional nature, and frequency of Tesla’s price moves are unprecedented in automotive history and will have interesting ramifications. Let’s take a closer look at what this means to the market, the industry, and customers.
After an extended period of not being able to meet demand, with increased competition from both traditional OEMs and new market entrants, Tesla saw their backlog drop drastically at the end of 2022.
To counter this trend, and to make some of its vehicles qualify for federal tax credits, Tesla made a calculated move to take advantage of the industry’s highest gross margins as a result of their direct sales model, manufacturing technology, and battery investments.
Tesla is well positioned to be able to produce EVs far cheaper than anyone. That, combined with its technology, the distribution advantages of not using dealers, and dynamic pricing, has made it the Amazon of the EV industry. I would argue that Tesla is at a more favorable position in their life cycle than Amazon at this point.
MARKET RESPONSE
Edmunds noted that the search ranking for the Model Y went from seventieth to second in the week following the price cuts. Used car prices for Tesla have dropped by $18,000 since July 2022, or 8% since the price cut, making them more affordable for most consumers that can’t afford to buy a new vehicle. Not only have used EV prices come down, all used car prices have come down 8.7% year-over-year. Tesla’s stock is up significantly since the move, and their competition is generally flat-to-down.
COMPETITIVE LANDSCAPE
The EV price landscape is now too complex and varied to examine as a whole, so let’s just examine the most popular Tesla, the Model Y, versus its closest competitors available in 2023, and limit it to those with over 300 miles of range.
Perhaps the closest to the Y is the Ford Mach E. Ford responded to Tesla’s drop by cutting prices on the Mach E between $900 and $5,900 per vehicle, but it is still more expensive at lower range. So far, they are the only company that has responded with price cuts. Staying firm on price is generally a wise move when you are cost disadvantaged, as the lower cost competitor will always win a price war. If you don’t have a unique and differentiated value proposition versus your competition in this case, you are in trouble.
That said, Tesla Y is competitively priced but not the cheapest 300-mile SUV available. As you can see from the table below, they are in the middle of the pack. However, Tesla has several unique value drivers over its competition, such as the Tesla charging network, leading self-driving AI technology, and differentiating features like pet mode, camp mode, more cargo room, as well as some user experience and entertainment features.
As an owner of the Model Y performance, I feel it’s the most well balanced and best value of a vehicle like it you can buy today when you consider all the factors like performance, UX, and cargo and passenger room. It’s basically a family SUV that is faster than a Ferrari Modena. While it doesn’t corner like a Ferrari, it’s surprisingly good for a mid-size SUV.
IMPACT TO CURRENT TESLA CUSTOMERS
While new customers of Tesla are happy to get a reduced price, recent buyers of Tesla vehicles prior to the price cuts were obviously not pleased when the prices were reduced, and there have been worldwide protests and social media criticism.
So far, Tesla has not offered any concessions to them. I think this is wise, as it would be a slippery slope and is not much different than if any company ran a promotion or discount the week after buying anything, except for the “permanence” of the price cut, which has already been increased since.
I lease a Tesla Y Performance, and the cost to end the lease jumped up by over $10,000 since the move. This also means that Tesla takes a hit on the value of their lease returns because many of these vehicles are not eligible to be purchased at the end of the lease.
Will price cuts and the bumps in the road to full autonomy and Tesla’s Robotaxi vision—originally scheduled to start operating in 2020—mean that they will revisit this policy?
IMPACT ON EMERGING EV COMPANIES
Perhaps the most interesting long term impact of these moves is the viability of emerging companies like Fisker, Rivian, Lucid, Faraday Future, and so on. Their business models are predicated on being able to get certain prices.
Now that the landscape has changed and, combined with the supply chain issues, higher vehicle financing costs for consumers, and continued margin pressure, will they be able to make it?
It’s likely that not all of them will. With low debt and overhead due to a contract manufacturing model, industry expertise, and differentiated products such as Ocean and the upcoming Pear, Fisker looks to be one of the better bets. But Fisker’s stock recently took a hit when Magna, their contract manufacturer for the Ocean, warned of increased cost pressure in 2023.
Shots have been fired, but the war has just begun.
Gabriel Smith is the chief evangelist and VP of Innovation at Pricefx.
https://www.fastcompany.com/90877381/ev-price-wars-tesla-amazon