Tesla Kicks Off The 'great EV deflation,' Says a Bullish Morgan Stanley

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Tesla is launching the “great deflation of electric vehicles,” says Morgan Stanley, which is bullish on the manufacturer. TSLA shares continued to rise on Friday, adding more than $50 billion in value during the trading session to $559 billion.

Morgan Stanley confirmed its Outperform rating and $220 price target on Tesla. The firm believes the recent price cuts for its electric vehicles have led to what MS analysts call the “Great EV Deflation.” Analysts noted that they asked several dealers and automotive experts to find out if they had ever seen a car company cut prices by 13-20% on the vast majority of its product range at one time. None of them could remember a single precedent.

Morgan Stanley has addressed the fact that some investors believe that Tesla's price cut move has upset customers who recently paid much higher prices for the exact same car. However, analysts recalled that 110 years ago, Henry Ford introduced the Model T “Runabout” and reinvented mass production, which led to a sharp decrease in car prices.

The Model T entry-level “Runabout” cost $825 in 1909 (about $24,000 in today's dollars), or less than 1/3 the price of an average car at the time. However, the moving assembly line allowed for a significant increase in volumes, leading to even more deflation in car prices. By 1913, the price of a “Runabout” had dropped to $525, and by 1920 to $395. By 1925, the average price of the Model T “Runabout” was $260 ($3,790 in today's dollars), about 1/20th of the average inflation-adjusted price of a car in 1907.

Deflation changed the competitive landscape of the auto industry and squeezed out much of the industry. In 1907 there were 255 automakers in the US, but by 1929 there were 44 surviving automakers there. At the same time, 80% of sales came from General Motors, Ford, and Chrysler.

Analysts noted that nothing like the innovation that Henry Ford brought to manufacturing has yet to happen in the electric vehicle industry. They wrote that we are only in the early days of Tesla's price cuts, and this is the beginning of when changes in design, manufacturing technology, and scale will lead to a deep deflation in the price of electric vehicles.

“While it's still early days following the Tesla price cuts, we believe history will reflect upon this time as the moment when changes in design, manufacturing technology, and scale enabled profound deflation in the price of EVs. Potential changes to industry composition and market share may take years to play out. But we believe the EV forecasts and manufacturing plans of competing EV players (startup and legacy) may potentially need to be fundamentally reconceived.”

H/t @SawyerMerritt/Twitter

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