José Saramago once shared a fantastic lesson on knowledge. He used to go to the opera house in Lisbon and sit in a high part, where he could see a crown that most people thought was magnificent. His perspective gave an utterly opposite impression: the crown was hollow, dusty, and filled with spider webs. The Portuguese Literature Nobel Prize winner concluded that knowing demands you to check all aspects of a given thing. The Tesla discount for new cars shows how true that is.
On the surface, Tesla investors claim this will help the company break sales records and frighten competitors. The company’s detractors say this is a desperate measure to keep production volumes high, with two factories still trying to reach total production capacity. They all may be partially correct, which shows just how complex the entire situation is.
Demand is regulated by price. When Tesla sold only the Model S and Model X, it never reached the production volumes that the Model 3 allowed it to achieve. If the company’s cars get cheaper, more people may indeed be willing to buy them. However, doing so with vehicles that were already for sale makes everybody else who bought them for higher values feel deceived. That’s what we saw in China and now also in the U.S. and Europe regarding the EV maker.
While some Tesla investors tried to present the people visiting Chinese Service Centers as a rush to buy new cars, the truth was that they were protesting the discounts. In Chengdu, customers vandalized the local Tesla Service Center, with some of them claiming the EV maker tricked them into buying their cars in December because prices would get higher in 2023.
Tesla already said it would not compensate these buyers, which is the perfect strategy not ever to sell them anything else. Tesla could have avoided that by presenting cheaper derivatives of its current cars or even more affordable models. When it just dropped the prices of whatever it had for sale, hell broke loose for the company’s faithful customers. That hurt their pockets when they bought their EVs – they could have paid less – and it will do that again when they resell them.
That had an immediate effect on the used car market. Not long ago, people bought a brand-new Tesla and immediately ordered another one because they could sell their vehicles for a premium due to the company's massive backlog. That demand is now gone, and several used Teslas are competing with cheaper new cars in the market. Doug DeMuro talks about that in the video below.
The Cars and Bids owner gave a pretty good example of that effect on used Tesla prices with two Tesla Model 3 Performance cars, one sold last month and the other more recently. He also talked about what he believes are the four main reasons for the prices to drop so steeply: Elon Musk’s behavior, higher interest rates, lower demand, and increased competition.
Tesla came up with the excuse that it lowered prices because of “a partial normalization of cost inflation.” Anyone buying that ignores the things DeMuro stressed or just needs others to believe that his ideas are not valid. They are.
Raw materials – especially for batteries – are increasingly more expensive precisely due to more competition. With more companies willing to buy lithium-ion cells and sell EVs, only a massive improvement in production could keep prices at the same levels or reduce them. That demands new mines, which can take up to 20 years to open. Inflation is a significant concern in most developed countries. Energy and transportation costs are higher.
The only possible explanation for a natural price reduction would be some changes to manufacturing that made production costs much cheaper. Even in that scenario, all carmakers would use that cost reduction to increase profit margins. Check what Kia did: its UK boss told Autocar the South Korean brand would not follow the “blunt” action taken by Tesla. According to Paul Philpott, it could have “dangerous” implications for residual values in the longer term. Isn’t that obvious?
Let’s suppose Tesla attracts new buyers and just does not mind the complaints from its more loyal customers. DeMuro said Tesla vehicles would get so attractive in terms of pricing that even he would consider buying one. After all, it would be a Tesla for Corolla money, right? Now consider all people who are used to buying Corollas or Civics driving a used Tesla: they may have similar price tags, but anyone accustomed to Toyota or Honda levels of reliability will be shocked by Teslas’ EVs.
They will suddenly have cars that may get peeling and fragile paint, suspension components that may break, motors that constantly need to be replaced, windows that break spontaneously, foggy headlights and taillights, uneven panel gaps, water leaks, doors that do not open if the 12V battery fails (they need to know where the manual release is), and a long etcetera. If these guys make Tesla break sales records, they will make the crowded Tesla Service Centers even more challenging to cope with.
On top of all that, none of Tesla’s vehicles has ever seen a new generation. The first one to get one should be the Roadster, but don’t expect to see it anytime soon. All Tesla has ever done are mild refreshes that older vehicles can receive with little effort.
Buyers with an eye on the newest vehicles available will not focus on something that looks exactly like an EV released in 2017 or even earlier. Although that makes perfect sense with electric cars – the newer the battery pack, the better – people may prefer the new kids on the block. If the idea is to impress anyone with a Tesla, used (and cheaper) ones will do the trick. If new ones are cheaper and readily available, used ones will depreciate a lot before finding new customers.
Some of these used and now affordable Teslas may be out of warranty for their battery packs. What if they start failing, and these new customers have to replace them by paying around $20,000? Again, a direct comparison with Toyotas or Hondas from people that used to buy them may be pretty damaging to Tesla’s already battered reputation.
The Wall Street Journal (WSJ) recently wrote an article containing an interesting question: “What if Tesla is… just a car company?” Several people had already come to this conclusion way before its fans realized that was the case. If the EV maker accepted that, it could try to tackle its main failures compared to everybody else in this business. Expanding its lineup and improving service and product quality would probably have prevented it from reducing prices in the first place. If only it checked its situation from all possible perspectives…
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