Tesla's Price Cuts Are Disrupting the Car Market

Tesla Inc. is an American electric vehicle and clean energy company based in Palo Alto, California. Tesla's mission is to accelerate the world's transition to sustainable energy. Tesla designs, manufactures, and sells electric vehicles, solar panels, and batteries.

Price cuts on popular car models in the United States are having an impact on the entire automotive industry, with rivals feeling the pressure and consumers reconsidering their purchase decisions for both new and used cars.

Elon Musk's car company recently cut prices on some of its top-selling Model Y cars by as much as 20%. This shocked Stanly Tran, a 32-year-old California psychotherapist who had been waiting to buy a Ford F 1.81%.

I was originally going to get the Mustang Mach-E electric SUV, but I quickly changed my mind and got the Model Y instead after a friend told me about the price drop.

"I was really surprised when I saw Tesla's new prices," Mr. Tran recalls. The Model Y offers more battery range than the Mach-E at a competitive price, he said.

Tesla's price cuts have received mixed reactions from investors and Wall Street analysts. Some have suggested that the move was made in response to waning demand, while others have viewed it as Tesla squeezing competitors by sacrificing some of its strong operating-profit margins. However, by lowering prices enough to qualify many models for a $7,500 federal tax credit, Tesla may be able to increase its market share and boost its bottom line.

Analysts say that Tesla's lower prices are undercutting some competitors' EVs just as those auto makers try to convince investors and car buyers that they are a viable Tesla alternative by rolling out new plug-in models. This has also caused problems for used-car dealers, who have seen the value of some Teslas drop by several thousand dollars overnight.

The Model Y starting price is now around $53,000, down from about $66,000. That is still higher than a base-model Mach-E, but below some of Ford’s higher-end versions of the EV. The Model Y base price is roughly $10,000 less than the starting point for General Motors Co.’s GM -1.06%

The Cadillac Lyriq is a similarly sized SUV that the auto maker is now rolling out.

The return of a federal tax credit for some Tesla buyers gives the company additional pricing power. Under the federal climate package passed last year, some buyers of Tesla’s bestsellers—the Model Y and Model 3—are eligible for the $7,500 subsidy if the cars are priced at $55,000 or below. In recent years, Tesla buyers weren’t eligible at all because of a manufacturers’ cap on overall EV sales, but the cap was eliminated as of Jan. 1 under the new law.

Mr. Musk has not discussed Tesla's rationale for cutting prices. However, he has said that rising interest rates can hurt consumer demand by making cars less affordable.

"When the Fed raises interest rates, it makes cars more expensive for consumers, which makes it harder for automotive companies," Mr. Musk tweeted Thursday.

Bank of America analyst John Murphy said that for now, traditional auto makers which don't have the EV scale of Tesla have thin profit margins or lose money on their plug-in models. He said that Tesla's price reductions likely will pressure car companies to further reduce their EV costs and ultimately could lead to a price war.

"These price cuts are likely to make business even more difficult for automakers, just as they are attempting to ramp production of EV offerings," he said.

A GM spokesman said the company is monitoring Tesla's strategy, but it hasn't had an effect on GM. The spokesman said, "It does underscore the value of having a broad EV portfolio at multiple price points, which is exactly what we're developing."

A Ford spokesman said that the company had record sales for its Mach-E EV last year, and that demand for the vehicle remains strong. He added that Ford is continuing to monitor the market to ensure that it remains competitive.

GM and Ford are both aiming to eventually overtake Tesla as the top EV seller in the US, but for now they remain far behind. Tesla sales accounted for around 65% of total US EV sales in 2022, compared to Ford's 7.6% and GM's 3.5%, according to sales data and estimates from research firm Motor Intelligence.

Following Tesla's early January price cut, the number of car shoppers researching the company's vehicles surged, according to research site Edmunds. The Model Y was the second-most-researched vehicle on Edmunds' website for the week ended Jan. 15, up from 70th the week prior. The Model 3 moved up 36 spots.

Tenet, a New York startup firm that provides financing to EV buyers, saw a threefold increase in applications for Tesla vehicle financing soon after the price cut. This influx of customers has remained elevated, according to Tenet Chief Executive Alex Liegl.

Some car dealers say they are worried about losing customers to Tesla. Tesla's recent pricing moves have made it a more competitive option for many car buyers, and some dealers are concerned that they will lose business as a result.

Howard Drake, who owns Cadillac, Buick-GMC and Subaru dealerships in the Los Angeles area, expects Tesla's lower prices to draw customers who were looking for EVs, but also those who would have otherwise bought a traditional gas-powered car. With EV sales expected to grow in the coming years, Tesla's lower prices could help them gain a larger share of the market.

"The electric vehicle market will be most impacted by the new SUV, but all vehicle prices in Los Angeles will be affected," he said.

Meanwhile, dealers who sell Teslas from their used-car inventory say valuations on some models have fallen since the company announced a price cut this month.According to Edmunds, in the first 17 days of January, prices of 2020 model year or newer used Teslas were down about 25% from their peak in June of last year. This is about double the rate of the industrywide drop during that same period.

Shaun Del Grande, chairman of a large dealership group in the Bay Area, said he had dozens of used Teslas in stock. The Bay Area is another hotbed for EVs, and Del Grande said he's seeing more and more interest in used Teslas.

He said that the market is softening and that when new-vehicle prices go down, the price of used cars gets impacted. He added that they are seeing this in a big way.