Is this good news or bad news for Tesla? Late Tuesday, the company dropped the price US customers will pay for certain models again — the sixth time this year the company has done so. The big winners this time around are customers who want to buy or lease a Tesla Model Y, the company’s best selling car. The single-motor, rear-wheel-drive Model 3 also saw a price cut from $41,990 to $39,990.
BREAKING: @Tesla has reduced Model Y prices in the US. Here are the changes:
• Model Y AWD: $46,990 (from $49,990)• Model Y Long Range: $49,990 (from $52,990)• Model Y P: $53,990 (from $56,990)
After federal EV incentives, the Model Y now officially starts at $39,490. The… pic.twitter.com/lu7ZTTZ4tt
— Sawyer Merritt (@SawyerMerritt) April 19, 2023
The Tesla Model Y is eligible for the full $7,500 federal EV tax credit (assuming buyers meet certain income restrictions). The Model 3 RWD is eligible for one half of the federal EV tax credit, while the Model 3 Performance qualifies for the full tax credit. The price of the Model 3 Performance was not cut as part of this most recent round of price reductions.
What’s Going On At Tesla?
This is the sixth time this year that Tesla has adjusted prices downward for cars sold to US customers. According to Reuters, the company also recently lowered prices in Europe, Israel, Singapore, Japan, Australia, and South Korea. Lower prices began at the end of last year in China. That country ended many of its EV purchase incentives on December 31, 2022, which encouraged lots of Chinese customers to buy beforehand to avoid paying more for their cars in the new year. But that surge in demand led to lower demand in January, which Tesla hoped to partially offset by offering lower prices to stimulate new sales.
That opened the barn door, so to speak, as other Chinese car companies also started discounting their electric cars significantly, partly to respond to the end of EV incentives in China and partly to respond to Tesla’s price cutting strategy. In fact, the rush to lower prices has become a bit of a feeding frenzy in China, roiling markets and disrupting sales in new and unpredictable ways. Now the contagion of lower prices is spreading to the rest of the world.
Tesla is fortunate to have the headroom to be able to cut prices and still make money on its cars. Previously, its gross margin on vehicles sold was the highest in the industry and more than eight times what mighty Toyota, the world’s largest automaker by volume, earns on average across its entire model range. So, there is room for Tesla to sell for less and still be profitable.
Price Cuts & The Tesla Share Price
But the other side of the coin is that the price of Tesla shares has been historically high, kept aloft in part by its gaudy profit margins and in part by those who believe in Elon Musk’s vision of a zero-carbon future as outlined in his latest Master Plan 3. Reduced to its most basic terms, Tesla Master Plan 3 is a compendium of charts and graphs that demonstrate what is common knowledge to most people — it is cheaper in the long run to do things right in the first place than attempt to muddle through by relying on what has worked in the past. Taking the cheapest way out often costs more money in the end.
“Today, we are publishing Master Plan Part 3, which outlines a proposed path to reach a sustainable global energy economy through end-use electrification and sustainable electricity generation and storage. This paper outlines the assumptions, sources and calculations behind that proposal. Input and conversation are welcome,” the company said when it introduced the proposal a few weeks ago.
It’s fair to say that a portion of Tesla’s lofty stock price has been a willingness to accept that Musk has great things in mind and those who are smart enough to buy into his vision will profit from their trust in that vision. They want to believe Tesla is the next Amazon, or Apple, or Netflix.
But Tesla is also subject to the same scrutiny as any other publicly traded company where profits and performance matter. As the company prepares to release its first quarter deliveries this week, many analysts are worried that some of the air has gone out of the Tesla balloon. It may be delivering a lot of cars, but its profit margins are falling back to Earth because those cars are bringing in less money per unit.
They say that there are only two factors that affect the stock price of any company — fear and greed. For years, greed has propelled Tesla’s stock price into the stratosphere, but now reality is setting in among fears the gravy train might be ending. Tesla’s share price this morning, just an hour before the opening bell on Wall Street, is down slightly from yesterday’s close.
The Price Of Lithium
There are other market forces at play here that informed readers will be aware of. Until late last year, the price of lithium was exploding. Then CATL, the world’s largest battery manufacturer, began promising significantly lower priced batteries to customers who would commit to using its batteries for at least 80% of their cars’ battery needs.
CATL placed a huge bet on the market price for lithium carbonate falling dramatically from its lofty peak of $86,000 a ton last year to around $30,000 a ton by the end of this year. [A typical EV battery uses only 8 to 10 kilograms of lithium carbonate.] Sure enough, the price of lithium has been falling ever since. So, on one hand, Tesla is selling its cars for less, but on the other hand, its cost of batteries should be going down as well.
The Curse Of Future Expectations
The difficulty for Tesla is that as it continues to try to boost sales by cutting prices, it is simultaneously encouraging some potential customers to defer buying a car now because they believe prices will be lower still in the future. And who can blame them? Tesla has already lowered prices in the US six times this year and it’s only April. What if the Model Y Long Range drops another $5,000 by this fall? People who buy today are going to feel pretty foolish, knowing they overpaid because they couldn’t wait six months.
Marketing is not an exact science. So much of sales is based on emotion. Tesla needs to be careful not to annoy its existing customers — who will one day be interested in replacing their current vehicles — to the point where they decide to reward some other company with their business. It’s a delicate dance and Tesla probably knows what it is doing. At least we hope so.
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