The automotive industry was sent into a frenzy when Tesla began slashing prices, triggering fears of an all-out price war. While the initial price cuts sparked demand and forced other automakers to consider similar moves, Morgan Stanley warns that Tesla’s latest cuts aren’t having the same effect.
Tesla’s price war shook up the industry over the past few months, but it appears that the short-lived trend is ending, especially in the electric-vehicle battleground that is China. Tesla CEO Elon Musk had been reducing the prices of his vehicles in China for months. The cuts were initially a strategic move that helped Tesla shore up demand amid increasing competition. However, further price reductions haven’t seen the same positive reaction as the earlier adjustments, as consumers wait for additional cuts.
Morgan Stanley auto analyst Adam Jonas notes that “Tesla’s price cuts started a broader round of industry price reductions, unlike earlier cuts that triggered a strong demand-response, this round has not seen follow-through as consumers wait for further cuts.” In fact, some Tesla customers are demanding refunds for the price difference from when they bought their cars just weeks or months earlier at a higher cost.
China accounts for 30 to 40% of Tesla’s profitability, and its biggest competitor, BYD, has also introduced discounts. Still, waning reactions to those discounts mark another climax of the price battle. Morgan Stanley warns that April is the crunch to put a pause in the price war, as the market focuses on whether the relentless price war in the China car market can take a breather at least in April, with more new vehicle launches and fewer inventory risk of legacy models.
A similar price war is also underway in the US. Tesla made similar moves at the start of the year, with cuts of up to 20% on the Model 3 sedan and Model Y SUV. Interest in and demand for the vehicles skyrocketed, forcing others to consider price cuts of their own. Ford reduced prices on the Mustang Mach-E electric SUV, and even luxury gas-powered brands made cuts. However, some automakers, like GM and Volkswagen, opted not to engage in the price war.
The price cuts aimed to undercut rivals and boost the automaker’s market share, which fell from 79.4% of the EV market in 2020 to 65.4% last year, as other companies launched more EV products. Despite this, Tesla continues to attract brand converts. Nonetheless, some recent Tesla buyers felt duped that they just missed out on the cuts, and Tesla owners petitioned for free trials of Full Self-Driving software or free Supercharging miles to make up for it. Meanwhile, owners of used Teslas saw their vehicle values fall substantially.
Tesla made another round of cuts earlier this month, lowering the price of the Model S sedan by $5,000 and the Model S SUV by $10,000. However, it appears that the price war is a slippery slope to engage in, as now, customers feel trained to wait for additional cuts. Prolonged price competition will likely exacerbate consumer hesitancy in placing orders. Morgan Stanley remains bullish on the stock, but warns that a full-blown price war would urge consumers to stay sidelined and await more promotions/discounts to come. All of this suggests that Tesla has its work cut out for it.
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