Inside the industry: What have price cuts done to Tesla?

Tesla Model Y 2022 front quarter tracking

Model Y prices were cut by £5000 to £8000

Recent price cuts have boosted the firm’s share price, but also hurt residual values

It’s just over a month since Tesla cut prices by up to £8000, officially because it had sourced better deals with suppliers, unofficially because it had for the first time in its frenzied history more supply than demand.

For owners who had only just taken delivery, it was a devastating financial blow. Calculations for the UK’s 16,568 customers last December suggest they collectively paid in the region of £100 million for the pleasure of up to a couple of weeks of ownership; an extrapolation of Tesla’s 405,278 sales in the final three months of last year would suggest that a collective £1.6 billion could have been saved by people waiting 90 days or so.

Understandably, there was disquiet. Hundreds of owners picketed the firm’s headquarters in China, while in Europe and the US frustration was focused on social media, where complaints of being ‘duped’ were rife. For a tranche of owners, the dream of buying into the world’s most talked-about car brand had turned quickly sour.

What happens next is the subject of deep debate. Industry convention would suggest Tesla’s headline-grabbing move has laid it open to a potentially troubling sequence of events. This starts with the undermining of already shaky residual values by at least the amount of the price drops and subsequently puts at least that amount onto the cost of a lease term, in effect meaning its cars make less profit but have no price advantage. Given the EV market is so heavily driven by leasing, that latter point is especially moot.

It’s why all rivals bar Ford (which announced that it would drop Mustang Mach-E prices as a result of upping production and bringing in economies of scale) have resisted following suit. Having expended huge energy and marketing budgets stoking reputations and residual values to maintain the virtuous circle of competitive leases, they argue there are far more sensitive ways to stimulate the market than headline price cuts. Regardless, in the midst of the chip crisis, most are worrying more about reducing waiting lists than creating them.

But – and with Tesla, there’s always a but – there has been an immediate upside to the unorthodox move. It’s estimated sales in China rose 76% in the week after the announcement, at a time when overall sales fell by 15%. Anecdotally, other markets are reporting strong interest, and wavering buyers have been tempted in droves. And Tesla’s share price has bounced, today sitting at more than double its low at the start of the year.

The Elon Musk pendulum has swung yet again, but for how long? There’s an argument that buyers who moved quickly were smart, benefitting from the price drop before the lease deals took account of drops in residual values.

Never bet against Tesla, but if the market moves for the company as it would for any other car maker, the chance of sustaining the upswing looks perilous.

Source: Autocar

Leave a Reply