Jan 16, 2023 - Economy & Business

What's behind Tesla's drastic price cuts

Illustration of the Tesla logo in the center of a target bullseye.

Illustration: Maura Losch/Axios

A growing number of competitors are threatening Tesla's global EV dominance and putting it in an unfamiliar position — one of defense.

Why it matters: That pressure, coupled with less favorable economic conditions, has prompted the company to cut prices drastically in an effort to spark new demand for its cars.

  • "Tesla has always been an anomaly in the automotive space ... the outsider like a new, shiny bright object," Jessica Caldwell, Edmunds executive director of insights, told Axios.
  • "The move they just made to protect market share and their own growth [is] such a traditional automaker move," said Caldwell.

Catch up quick: Last week, Tesla dropped prices across its Model 3 and Model Y vehicles — among the best-selling cars in the world.

  • The cuts ranged from 1%to 20% in the company's key markets — the U.S., China and Germany.
  • In China specifically, Tesla's price slashing was the second in less than three months.
  • There were also cuts in Japan and South Korea of about 10%.

In the U.S., Tesla has one of the highest brand loyalty rates among luxury car names and continues to dominate new EV registrations.

  • But its market share has declined from 79% of new EVs in 2020 to 65% as of September last year, according to S&P Global Mobility.
  • "Tesla's EV-only strategy gives it a retention advantage — as few EV owners have returned to [internal combustion engines]. But as new EVs arrive, loyalty will be tested," the report concludes.
  • The most serious threats are coming from EVs priced below $50,000, "where Tesla does not yet truly compete."

Be smart: With the cuts in the U.S., more Tesla models will be eligible for newly revised tax incentives of $7,500 that kicked in Jan. 1 under the Inflation Reduction Act.

  • The credit applies to EVs under $55,000, which means models like the higher-end Model 3 Performance now at $53,990 (down 14% from $62,990) and the long-range all-wheel-drive Model Y at $52,990 (down 20% from $65,990) could be more attractive.

Worth noting: Tesla had been raising prices over the past two years as higher inflation increased the cost of its inputs. CEO Elon Musk said last year the company's prices had gotten "embarrassing," and he hoped to bring them down.

  • "I think inflation will decline towards the end of the year," he said. "I'm hopeful — and this is not a promise — but I'm hopeful at some point we can reduce prices a little bit."

What to watch: Customer loyalty.

  • People who bought their vehicles before the cuts have been lamenting the tens of thousands of dollars in savings they barely missed.
  • Irate customers in China have been demanding rebates and protesting the company in showrooms and distribution centers.
  • One measure of the company's favorability has fallen by 15 percentage points since the start of last year.

Our thought bubble, via Axios transportation correspondent Joann Muller: Tesla has just two major arrows in its quiver — the Model 3 and Model Y. And that may not be enough to entice shoppers whose heads may be turned by a far greater number of options from other manufacturers.

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