Photo: Tesla via Weibo
Everybody has been talking about the Tesla price cuts lately, but people tend to forget that this started in China weeks before Tesla slashed the prices elsewhere. Tesla’s move was promptly followed by XPeng, while other carmakers considered whether to engage in the price war.
Tesla claims its recent price cuts were done because production improved while inflation eased. True as it might be, Tesla can’t deny trying to prop up disappointing sales with discounts, incentives, free Supercharger sessions, and other perks. China is a tough market, and the competition, mostly from local companies, was eating into its market share. BYD, especially, was topping the charts more often, albeit for its hybrid models, which China still counts in the “new-energy vehicles” (NEV) category.
With its biggest production hub filling parking lots with thousands of cars, Tesla had no choice but to give up a sizeable part of its burgeoning margins. The latest price cuts operated in the first days of January were so significant that they startled everyone in the Chinese automotive market. It’s easy to underestimate the effect of this move, but early reports showed that people started canceling orders for other car brands and switched to Tesla in droves. Car companies set up late-night meetings to plan countermeasures.
Of course, not everyone was happy, and we’ve seen Tesla showrooms taken by storm by angry customers who paid for a Tesla the full price just before the new cuts were introduced. The jury is still out on whether anybody, including Tesla, would benefit from this aggressive price adjustment. Many argued that Tesla sacrificed its reputation as a luxury car maker, being degraded to a mass-market brand.
But the price cuts worked, there’s no denial about that, and Tesla quickly cleared cars in its inventories. Reports from China showed that orders increased a whopping 500% in the week of 9-15 January compared to the week before. It was the success in China that prompted Tesla to follow with price cuts in the U.S. and across Europe.
Tesla mainly lowered the prices in China to counter BYD’s rising market share, and indeed the sales of the BYD Han and Seal were the most affected by the move. Nevertheless, we’re yet to see BYD cutting prices. BYD is the most important car manufacturer in China and is more than capable of sustaining a price war with Tesla if it chooses to. Nevertheless, BYD mostly sells in the mainstream market, where prices are already pretty low, being less affected by Tesla’s decision.
XPeng, on the other hand, felt threatened and promptly decided to slash the prices of its G3i, P5, and P7 models by up to 36,000 RMB (about $5,300). Xpeng had a stellar December, but it’s still a startup with limited resources. The cuts will likely affect its prospects in 2023, but XPeng had to prioritize volumes over margins. XPeng’s decision shows the tough choice Tesla’s rivals face. Keep prices unchanged, and you risk losing customers. Drop prices, and you risk everything unless you have a sizeable cash reserve and/or the ability to quickly slash costs to keep up.
XPeng is expected to generate negative gross margins in the cheaper segments, at least until battery cell prices come down. The XPeng P7 will be updated soon, and the new model is said to be more cost-effective to manufacture. XPeng will probably afford the cuts, thanks to a cash reserve of 35 billion RMB ($5.2 billion) at the end of Q3 2022. Nevertheless, lower-tier carmakers like Neta or Leapmotor would be squeezed, as their gross margins are already negative.
It all started in China, but Tesla’s price cuts will eventually trigger similar responses in western markets. Traditional carmakers will also feel the pinch, as the EV price war will also squeeze the space for ICE vehicles. We’re living in exciting times, and we can’t help but notice how Tesla is once again the disruptor of the status quo, even if mostly reluctantly in this case.
With its biggest production hub filling parking lots with thousands of cars, Tesla had no choice but to give up a sizeable part of its burgeoning margins. The latest price cuts operated in the first days of January were so significant that they startled everyone in the Chinese automotive market. It’s easy to underestimate the effect of this move, but early reports showed that people started canceling orders for other car brands and switched to Tesla in droves. Car companies set up late-night meetings to plan countermeasures.
Of course, not everyone was happy, and we’ve seen Tesla showrooms taken by storm by angry customers who paid for a Tesla the full price just before the new cuts were introduced. The jury is still out on whether anybody, including Tesla, would benefit from this aggressive price adjustment. Many argued that Tesla sacrificed its reputation as a luxury car maker, being degraded to a mass-market brand.
But the price cuts worked, there’s no denial about that, and Tesla quickly cleared cars in its inventories. Reports from China showed that orders increased a whopping 500% in the week of 9-15 January compared to the week before. It was the success in China that prompted Tesla to follow with price cuts in the U.S. and across Europe.
Tesla mainly lowered the prices in China to counter BYD’s rising market share, and indeed the sales of the BYD Han and Seal were the most affected by the move. Nevertheless, we’re yet to see BYD cutting prices. BYD is the most important car manufacturer in China and is more than capable of sustaining a price war with Tesla if it chooses to. Nevertheless, BYD mostly sells in the mainstream market, where prices are already pretty low, being less affected by Tesla’s decision.
XPeng, on the other hand, felt threatened and promptly decided to slash the prices of its G3i, P5, and P7 models by up to 36,000 RMB (about $5,300). Xpeng had a stellar December, but it’s still a startup with limited resources. The cuts will likely affect its prospects in 2023, but XPeng had to prioritize volumes over margins. XPeng’s decision shows the tough choice Tesla’s rivals face. Keep prices unchanged, and you risk losing customers. Drop prices, and you risk everything unless you have a sizeable cash reserve and/or the ability to quickly slash costs to keep up.
XPeng is expected to generate negative gross margins in the cheaper segments, at least until battery cell prices come down. The XPeng P7 will be updated soon, and the new model is said to be more cost-effective to manufacture. XPeng will probably afford the cuts, thanks to a cash reserve of 35 billion RMB ($5.2 billion) at the end of Q3 2022. Nevertheless, lower-tier carmakers like Neta or Leapmotor would be squeezed, as their gross margins are already negative.
It all started in China, but Tesla’s price cuts will eventually trigger similar responses in western markets. Traditional carmakers will also feel the pinch, as the EV price war will also squeeze the space for ICE vehicles. We’re living in exciting times, and we can’t help but notice how Tesla is once again the disruptor of the status quo, even if mostly reluctantly in this case.
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