Tesla has dropped pricing on its electric vehicles by up to 20% in the United States and Europe, adopting a strategy of aggressive discounting after falling short of Wall Street projections for 2022 deliveries.
The move, which resulted in a 4.5% drop in Tesla’s shares in pre-market U.S. trade, came as CEO Elon Musk cautioned that the potential of a recession and higher borrowing rates meant the company might have to lower prices to maintain volume growth at the expense of profit.
The reduced pricing throughout Tesla’s key markets is a departure from the automaker’s plan for much of 2021 and 2022 when orders for new vehicles surpassed supply. Musk admitted last year that pricing had gotten “embarrassingly high,” threatening demand.
More constant cost inflation also a role in lowering costs, according to a Tesla Germany spokeswoman, who confirmed price decreases in the company’s biggest European market.
The price cuts announced late Thursday on Tesla’s global best-sellers, the Model 3 sedan and Model Y crossover SUV, was between 6% and 20%, according to Reuters calculations.
The entry-level Model Y now costs $52,990, down from $65,990 earlier.
That was before a federal tax credit of up to $7,500 became available for certain electric vehicle models at the beginning of January.
In Germany, pricing for the Model 3 and Model Y was reduced by 1% to nearly 17% depending on the configuration. Prices were similarly reduced in Austria, Switzerland, and France.
The new Tesla price combined with the US subsidies amounts to a 31% reduction for a US buyer
The new Tesla price combined with the US subsidies amounts to a 31% reduction for a US buyer of the long-range Model Y. Furthermore, Tesla’s decision broadened the vehicles in its lineup that are qualified for the Biden administration tax credit.
Tesla also reduced costs in the United States for its Model X luxury crossover SUV and Model S car.
Before the price decrease, the five-seat version of the Model Y had been ineligible for that credit, a distinction Musk called “messed up”. The long-range Model Y will be eligible after the price reduction.
The price drops may make EVs more affordable to consumers who were previously priced out of the market.
Customers in France who purchase the Model 3 for 44,990 euros ($48,773) will now receive a 5,000 euro government incentive. The EV plan has a $50,000 threshold.
Volume versus margin
“This could greatly improve 2023 (Tesla) volumes,” tweeted Gary Black, a Tesla investor who has remained enthusiastic about the firm and its prospects despite the recent, dramatic share price dip. “It’s the proper decision.”
Still, shares in pre-market trading in the United States fell, as investors were concerned that the move will reduce profit margins, especially as competition heats up.
”Tesla is an outlier because it’s still got eye-watering valuations when it comes to the number of cars that it actually sells. But ultimately there are all the other providers that sell a hell of a lot more cars overall,” said Michael Hewson, chief market analyst at CMC Markets UK.
Some users on Tesla fan sites claimed that the price decreases harmed individuals who had recently purchased their vehicle, leaving them with a lesser second-hand value.
”Just reducing 10,000 euros like that – definitely makes you feel that you just paid far too much,” one user wrote on a ’Tesla Drivers and Friends’ forum.
In China, where Tesla dropped prices by 6-13.5% last week, owners protested at delivery centers, demanding recompense.
Prior to the reduction, Tesla’s inventory in the United States had been moving higher, as measured by models listed as instantly available on its website. Prices for used Tesla models had also been falling, adding to the pressure to lower new-car prices.
For 2021, the United States and China contributed over 75% of Tesla sales, though the company has been increasing sales in Europe, where its Berlin facility has been ramping up operations.
Sales management
Tesla lowered pricing in China and other Asian markets this week, its first big step since moving Tom Zhu, its chief executive for China and Asia, to oversee output and sales in the United States.
Analysts predicted that the Chinese price reduction would stimulate demand and put pressure on rivals, notably BYD, to follow suit, resulting in a price war in the world’s largest single market for electric vehicles.
Last month, Tesla’s Model 3 was the best-selling electric vehicle in Germany, followed by the Model Y, which outsold Volkswagen’s all-electric ID.4. Volkswagen has increased the price of its entry-level ID.3, bringing it in line with the Model 3’s now-discounted price.
Tesla fell short of Wall Street’s expectations for fourth-quarter deliveries. Full-year delivery growth was 40%, falling short of Musk’s own prediction of 50%.