Tesla Abandons Mercedes Battle to Compete with Ford

The Tesla Inc. new era has started with Elon Musk keeping a different set of car executives up at night, while others are resting a little easier knowing Elon Musk is handling the company.

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As Tesla has picked off customers from luxury brands such as BMW and Mercedes-Benz since the launch of the Model S, it has been taking business away from these companies. The founder of Tesla had ambitious plans to compete with mass manufacturers with a $35,000 Model 3, but he ultimately ended up charging much more — both out of necessity to keep Tesla afloat, and because production constraints limited the Tesla and broader industry in the long run.

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Tesla opened two new plants this year, doubling its car factory footprint and putting wheels in motion to change all that. Musk put the wheels in motion at this time last year to make all that different. The bosses of Ford and Renault are now looking nervously in the rearview mirror as Musk is dead set on expansion and not concerned with earnings.

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In a charity event in Detroit on Thursday, Ford CEO Jim Farley said, "Price wars are raging everywhere," on the heels of Renault's announcement that it was reviewing its product positioning. "Who's going to blink for growth?" he asked.

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In addition to Tesla, Mercedes has already lowered the sticker price on its electric vehicles in China in recent weeks, weeks after the company began to lower the sticker price. While executives in Germany have been adamant that they will not compromise brand value in order to increase volume, they have been adamant about the fact that they will not follow Musk's path.

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The CEO of Mercedes-Benz Group AG, Ola Källenius, seems to increasingly understand that the company should move to a higher price point in order to capitalize on the success of its upmarket strategy. The company announced late Thursday that earnings in the first quarter were stronger than expected, due to resilient pricing for the automobiles.

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It is not just Tesla that sacrifices its margins for its electric vehicles to achieve its volume targets, as a result of its high volume goals. In a report written by Daniel Roeska, Bernstein's European auto analyst, Daniel Roeska, said that the company is placing its goodwill and brand equity on the altar too. It is important in the premium end of the market because brand perception is the main factor in deciding how much product will sell.

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It has been no secret that Musk has been knocking down the price of Tesla's top-selling Model Y sport utility vehicle by 29% over a period of three months, and this has been accomplished using energy-efficient methods.

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The carmaker was recently forced to reduce the price of its Mustang Mach-E SUV to get it close to the competition. Although Ford pulled ahead of General Motors Consolidated last year and overtook General Motors as the US' second best seller of electric vehicles, it still trails far behind Tesla Motors.

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The company has forecast a $3 billion loss in its electric vehicle business in this year, owing to the fact that it lacks the economies of scale Musk has built and has made heavy investments to catch up.

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It appears that Renault plans to go even further than Ford — not only will it separate its electric vehicle and combustion engine operations, but it will also plan to launch an initial public offering for its plug-in car and software businesses. In spite of the French company's strong first-quarter sales, investors sold off its shares on Thursday despite the head of the Renault brand calling Tesla's price cuts a clear challenge early this week.

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It has been noted that Chief Financial Officer Thierry Piéton has admitted that overall pricing will be “a little softer” in the second half of the year as he answers questions regarding the sustainability of the €42,000 ($46,000) sticker on the electric Megane E-Tech hatchback. Despite this, he said Renault does not have any plans to make any drastic changes to the vehicle.

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In his view, Piéton says, there are no major incentives for us to reduce prices or to kill residuals and to follow in the footsteps of some of our competitors, who cut their prices and kill residuals.