Tesla Price Cuts Spark Demand Surge

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It’s hard to believe the EV revolution in America is just a little over a decade old. The first Tesla Model S made its appearance as a 2012 model. It was preceded by the BMW i3, the Nissan LEAF, the Mitsubishi i-MiEV, and the Toyota RAV4 EV, but the Model S was the car that caught everyone’s attention.

Over the next 11 years, Tesla built most of its cars to fulfill a specific customer order. Demand exceeded supply by a significant margin and wait times could sometimes stretch to 6 months or more. But success began to catch up with Tesla in the fourth quarter of 2022. No longer the brash startup, it has been transitioning into a more mature company. One of the attributes of an established business is the need to manage demand.

No Annual Model Changes And No Dealers

The annual model change has been an integral part of the auto industry for the past 70 years or more. It’s a great way to spur customers to come into showrooms to view the next new thing. But Tesla has refused to play that game. It currently sells four models — the much ballyhooed S3XY lineup — and they look pretty much the same today as they did when they were introduced (apart from the new front fascia for the Model S that appeared several years ago when the Model X came out).

In late 2022, Tesla sales fell off alarmingly in China and began to soften in the United States. The factory in Shanghai went into a unprecedented multi-week shutdown and Tesla began offering incentives in the US to get people to buy now rather than later. To be fair, there are a number of factors at work here — a war in Ukraine, surging inflation worldwide, and a dramatic spike in Covid infections in China. In addition, lots of new electric cars became available from old line manufacturers like Ford and new companies like BYD and NIO. Another factor was the reaction by some potential customers to the bizarre behavior of Elon Musk in the last part of 2022 as he pursued his dream of acquiring Twitter.

Regardless of the reasons, Tesla last week elected to slash the prices of the Model 3 and Model Y in North America and Europe shortly after similar price cuts in China. The result has been electrifying. Pardon the expression. According to Edmunds, prior to the price cuts, the Model Y was the 70th most researched vehicle. In the week following the price cuts, it jumped to 2nd place. The Model 3 was 36th before and 11th after the price reductions.

According to Business Insider, Edmunds analyst Jessica Caldwell wrote on Thursday, “These price cuts, as well as inventory on the ground, will win Tesla market share and help consumers overlook the brand’s aging lineup. Lower prices and immediate availability undeniably resonate with the American consumer.” She added that Tesla’s price cuts also come at a time when shoppers are still struggling to find good deals on new vehicles, making discounts like Tesla’s all the more appealing.

Playing The Car Dealer Game

Some of that is due to the shenanigans that take place every day at auto dealerships across the county. For historical reasons, many of them promoted by dealers themselves, most new car customers expect to pay less than sticker price for their new chariot. The rug merchant model is similar to what gambling casinos do. They adjust the odds to make people believe they have a real chance of winning, and some of them do, but the majority get fleeced so gently they don’t even know their pocket has been picked.

When dealers start marking up cars that are in high demand — which most electric cars are — the rules of the game are violated and customers feel cheated. They expect to pay less than sticker price, not more. With Tesla, the price is the price. It might go up or down tomorrow, but if today is the day you decide to buy, you get the same deal as everyone else. People purport to like haggling, but in truth, most are happy not to play games with a dealer in the showroom.

Because Tesla doesn’t sell through franchised dealers and doesn’t have annual model changes, it can raise or lower prices as it sees fit whenever it thinks it should do so. The only thing that changes is its profit margin after a price adjustment. Since Tesla enjoys margins that are up to three times greater than most legacy automakers, it has the flexibility to lower prices significantly and still make a profit that would be the envy of any other automaker.

Excess Capacity Concerns

Analysts have worried for some time that a series of discounts and moves, like selling into rental fleets, were early signs of over-building at Tesla, an age-old struggle in the automotive industry, says Business Insider. But now that some Tesla automobiles are no longer priced as luxury vehicles, the company will compete with EVs marketed to mainstream buyers. The price cuts also allow Tesla’s vehicles to qualify for an additional $7,500 tax credit on new EVs as part of the Biden administration’s Inflation Reduction Act, which is another strong draw for shoppers.

Until the IRS finalizes the rules and regulations for the EV tax credit later this year, Edmunds analyst Ivan Drury advises interested Tesla buyers to act now before all or some of the federal incentives change. EV customers on waitlists with uncertain timelines may want to consider snapping up a Tesla instead, he said.

“Now is the time to research vehicle inventory, secure financing, and determine how current and upcoming EV tax credits will impact your purchase,” Drury wrote in a note. “Price cuts of 20% or more, with incentives, nationwide don’t come around often, so acting now is in your best interest before any corrections in the opposite direction.”

The Takeaway

Have the recent price cuts by Tesla increased sales? We won’t know the answer to that question until the figures for the first quarter of 2023 are announced in early April. After the regulations are announced, will Teslas be eligible for all of the federal tax credit, half of it, or none of it? We don’t know the answer to that question either. All we do know is that between now and the time the new regulations kick in, buyers are eligible for the full $7500 tax credit if they meet certain income requirements.

“He who hesitates is lost,” my old Irish grandmother liked to say. Gather your rosebuds while you may.

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Steve Hanley

Steve writes about the interface between technology and sustainability from his home in Florida or anywhere else The Force may lead him. He is proud to be "woke" and doesn't really give a damn why the glass broke. He believes passionately in what Socrates said 3000 years ago: "The secret to change is to focus all of your energy not on fighting the old but on building the new." You can follow him on Substack and LinkedIn but not on Fakebook or any social media platforms controlled by narcissistic yahoos.

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