Why did Tesla cut prices? The answer may not be so obvious.
We’re living in strange times indeed—Tesla’s recent announcement of major price cuts for most of its lineup represents a 180-degree reversal for the company, but the press, and the stock market, seem to see little or no downside. Normally in the auto industry, any form of price-cutting (including discounts, rebates or dealer incentives) is seen as unequivocal bad news, and until now, Tesla has held the line on pricing, come what may. Company insiders have described a strict policy—no discounts, not even for your mom.
Above: Tesla's Model 3 (Photo: __kimja / Instagram)
The morning after the announcement, everyone was asking: Is this good news or bad? The consensus seems to be that it’s neutral, or even good news, a sign that Tesla has been able to bring production costs down while preserving margins. “This is a smart strategic move…given the current macro and Covid environment,” Wedbush analyst Dan Ives told Barron’s. “The current cost structure gives Musk & Co. more flexibility to make these price cuts.” Other Wall Street observers seem to agree—TSLA stock briefly dipped on the news, but soon resumed its slow, steady climb.
Tesla’s main reason for the price cuts may seem plain: new car sales are tanking across the board, and all automakers are looking at ways to stimulate demand. However, it’s worth taking a look at several other factors that may be in play.
Elizabeth Lopatto, writing in The Verge, offered several possible reasons in addition to the obvious one. She noted that most of the price reduction applies to Tesla’s older, higher-priced vehicles—the company slashed $5,000 from the prices of Models S and X, trimmed $2,000 from Model 3’s sticker, and left Model Y pricing unchanged. This may be an indicator that demand for the two elder siblings has peaked. Since the launch of Model 3, other observers have surmised that it has cannibalized Model S sales, and a similar trend may be seen with Model Y. But Tesla has beaucoup bucks invested in the production lines cranking out the two larger models, and isn’t ready to retire them just yet.
Lopatto also suggests that the cuts may be a way to ensure that Tesla meets its delivery goals for the coming quarter. We know that meeting quarterly goals is a priority for the company—doing so keeps the cash flowing, reducing the need to raise capital in the stock market, and thus curbing vulnerability to predatory short-sellers. Despite the recent production pauses at its Chinese and US factories, Tesla still hopes to meet its goal of delivering 500,000 vehicles worldwide this year.
Above: Tesla Model 3 at night (Photo: __kimja / Instagram)
Another dynamic emerges when you consider the fact that Tesla is not just an automaker, but a Silicon Valley-style innovator. Unlike carmakers, tech companies are expected to reduce their prices as growing volume and improving technology allow them to reduce their costs. That’s how disruption works. This paradigm has been part of Tesla’s strategy from the beginning, and there have been several recent signs that it’s working (a rear underbody casting for Model Y, new battery form factors, no paint for Cybertruck, et al).
It might just be that the Silicon Valley improve-products-while-lowering-prices process is about to take a quantum leap forward for Tesla. Simon Alvarez, writing in Teslarati, suspects that the timing of Tesla’s price cuts, coming shortly before the long-awaited Battery Day, is no coincidence.
Tesla’s Battery Day event, at which the company is expected to reveal its next-generation battery tech, was supposed to happen this month, has, like so many other things, been postponed. What wonders will the California carmaker unveil when the glad day finally arrives? Some are expecting a million-mile battery, and/or a reduction in battery costs to the “magic number” of $100/kWh at the cell level. Either of these would be a major milestone, and both together would lock in Tesla’s lead over the legacy brands for years to come, while easily justifying the recent price cuts.
So, why did Tesla cut prices? All of the factors discussed above are probably part of the answer, but the main reason is surely the obvious one—other automakers will be slashing prices, and Tesla needs to remain competitive. Despite what credulous members of the mainstream press may tell you, Tesla has no credible competition in the EV space—Tesla models’ competitors are gas-burning vehicles in their respective segments. If BMW, Mercedes, Lexus et al slash their prices, then Tesla must follow suit.
But here’s something to remember: for the reasons discussed above, Tesla’s costs of producing its vehicles are on a downward trajectory, and future cost reductions are to be expected. No such dynamic applies to legacy vehicles. ICE powertrains represent a mature technology from which every nickel of savings has been squeezed out over decades. To put it in plain terms: electric vehicles will continue to get cheaper. Dinosaur-burners will not.