Tesla's Price Cuts Are a Punch in the Gut to All Other Players in the EV Arena

Stylized pricing graph and Tesla logo 7 photos
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Tesla price cuts are a punch in the gut to all other players in the EV arenaTesla price cuts are a punch in the gut to all other players in the EV arenaTesla price cuts are a punch in the gut to all other players in the EV arenaTesla price cuts are a punch in the gut to all other players in the EV arenaTesla price cuts are a punch in the gut to all other players in the EV arenaTesla price cuts are a punch in the gut to all other players in the EV arena
Although anticipated, Tesla’s move to cut its vehicle prices was more extreme than anybody predicted. The new prices rattled the competition, with EV startups likely hit the hardest, but other players are also in disarray. Here are the winners and losers of the price cuts.
If you haven’t been living under a rock, chances are you’ve heard about Tesla’s price cuts. After all, it’s been all over the news in the past three days, and social media channels are flooded with posts on the subject. The move was anticipated by a hefty discount offered to buyers in China, already devastating the local market. The Chinese flocked to order Teslas following the price cuts, with orders increasing by a whopping 500%. As expected, people canceled reservations for other brands and switched to Tesla, a clear sign that the price cuts have distorted the market.

Although the writing was on the wall, many in the western hemisphere thought it was just a move to boost sales in China, where Tesla struggled to clear inventories. A similar situation was in the U.S., though, where people have delayed purchases to profit from the IRA incentives this year. With the $7,500 tax credit coming into effect, many expected that Tesla would actually raise prices even more, similar to what GM did with the Chevy Bolt. Alas, Tesla thought differently, so we now have some of the biggest price cuts in history.

Few get to benefit from Tesla's massive price cuts

Tesla slashed its EV prices not only in the U.S. but also across Europe, sometimes more than 20% off the sticker price. In absolute value, the Model S and Model X saw the biggest discounts, up to $21,000 in the U.S. The move upended the car market and will likely reverberate in the used-car market as well. We can easily anticipate a blood bath, which goes way beyond Tesla’s immediate business. The paradox is that this move is likely a benefit to mostly no one except Tesla and those preparing to order one of its cars.

We’ll start with those who see the price cuts as a win, and we see no bigger winner than Tesla itself. Obviously, when the competition loses, it’s a huge win. Although this is not 100% positive for Tesla (we’ll explain below why not), the Californian-turned-Texan EV maker is the main beneficiary of the price cuts. Don’t think for a second that Tesla would suffer because its profit margins are shrinking.

As veteran Sandy Munro once said, Tesla could cut its margins in half and still make more money selling EVs than everybody else in the auto industry. That’s because Tesla had insane margins on its vehicles to begin with, close to 30%, while the industry’s average is slightly above 5%. This will only improve over time, thanks to economy of scale, new production techniques (see 4680 battery cells and megacastings), and optimizations. Tesla has shown a willingness to cut costs and will do it even where it shouldn’t.

Besides Tesla, customers who haven’t yet placed an order would benefit the most from the recent price cuts. Add the tax credit to the mix, and you can buy a Tesla Model 3 in the U.S. for a measly $36,490, while the Model Y would set you back $45,490. That’s $10,500 and $16,500 less than last year. Tesla extended this bonus to all customers who placed an order earlier and were still waiting for delivery, so these earlier customers are also happy with the price cuts. But this is pretty much it, and we’ll explain why everybody else will feel the sting of the price-cuts decision.

EV startups are among the biggest losers of Tesla's price cuts

The move will be painful to those who ordered a Tesla and got it just before the price cuts. We know Tesla tempted customers in the U.S. with a $7,500 discount to match the IRA tax credit. This has prompted some folks to place an order instead of waiting for the 2023 incentives. They certainly feel betrayed because they paid more for a car that is valued much less now. And this likely affects the resale value as well, so it’s safe to assume that these customers are among the biggest losers of the new pricing strategy. Nevertheless, it is what it is, and, as Musk once said, customers who bought a car before the prices went up last year did not come to pay a difference to Tesla. Tough luck, that is.

It’s easy to imagine that legacy carmakers are still far from turning a profit on electric vehicles, and the new pricing will hurt them a lot. They will now face a tough choice between prioritizing growth at the expense of profits or having a lot of hard-to-sell electric vehicles in their inventories. The legacy carmakers will likely see all their hard work going down the drain, as they are now back to square one, competing with Tesla. They invested a lot in battery factories and EV production facilities, but they are less likely now to turn a profit. Unless they lower the prices, their EVs will be very hard to sell.

Nevertheless, while legacy carmakers have a strong revenue stream from their ICE business, the same is not true for EV startups. Players like Lucid and Rivian already struggled to make ends meet. Maybe the latter is in a better position, at least until Tesla starts the Cybertruck deliveries. Not having any model in a head-to-head battle for market share with Tesla is a good business today. But we can see Lucid executives already losing sleep after Tesla’s decision. With the Model S at $94,990, it’s hard to argue against the Air being an even less compelling proposition.

Maybe it’s not that obvious, but many legacy dealers bought used Tesla cars to resell at exorbitant prices in 2022. These are now toast, as they will never manage to sell them for a profit. Many dealers throughout the U.S. have millions of dollars stuck in Tesla inventories, and they will have to write them off. Used-car dealers are in hot waters these days, and we’ll likely see some of them biting the dust. CarMax, for instance, sold Teslas with a 30-day money-back guarantee. What do you think will happen with all these cars now that the new ones are cheaper?

Tesla investors look at the price cuts with a raised eyebrow

That’s not all because there’s another category unhappy with Tesla cutting prices. It could even turn against Tesla, hence my prediction that the price cuts are also not 100% positive news for Tesla. I’m talking about Tesla investors. They don’t care much about the future, they want their investment to pay off now. Tesla shares are already at the lowest level in years, and the news of lowering prices will likely tank the stock even more.

If you feel sorry for customers who bought a Tesla before the price cuts, imagine how it is for investors who poured millions of dollars into Tesla stock at its highest. In November 2021, Tesla shares were valued at $1,222, equivalent to $407 after the stock split. Now, Tesla trades at $122, which is 70% lower. With the recent price cuts come shrinking margins, which only means lower share prices and more losses for investors. This is even though Tesla is now in a better position long term.

With Tesla’s latest price cuts, we’re likely seeing history unfolding before our eyes. Electric vehicles are poised to become truly affordable, and they will probably achieve price parity with ICE vehicles sooner than expected. Tesla hasn’t even spoken its last word, considering that Giga Texas and Giga Berlin are far from their planned capacity. With the EV maker still enjoying hefty profit margins, it’s not unlikely that we’d see more price cuts in the future. After all, Elon Musk promised that his mission is to save the Earth, not make a profit. So long as Tesla vehicles keep a positive cash flow, there’s a lot more where this came from.
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About the author: Cristian Agatie
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After his childhood dream of becoming a "tractor operator" didn't pan out, Cristian turned to journalism, first in print and later moving to online media. His top interests are electric vehicles and new energy solutions.
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