Tesla is cutting the prices of its cars around the world as higher margins make it possible. The move scares competitors as they cannot offer the kind of discount that Tesla can, which will continue to aggressively grab market share in 2023.

Tesla has slashed prices across its entire line of electric vehicles in the US and Europe, in addition to China. The price reduction varies by model, variant and country of sale and ranges from 1% to 20%. The aggressive discounting strategy was activated in response to the economic situation. Tesla CEO Elon Musk has previously warned that the prospect of a recession and higher interest rates mean the company could cut prices to support volume growth at the expense of profit. He also acknowledged last year that prices are “embarrassingly high” and could hurt demand.

In fact, Tesla cuts prices so easily because it can afford it, unlike other automakers who are going through very difficult times. Earlier this week, the Vice President of Tesla Global, Grace Tao, explained in an interview that the product price adjustment is actually a projection of how the company's costs will change over the next time period. The biggest difference between 2023 and last year is that the COVID-19 epidemic has largely passed. This has ensured that the supply chain has largely returned to normal and there will be no unpredictable shortages of materials as in previous years, leading to unexpected increases in production costs. In fact, the price adjustment largely reflects Tesla's better supply chain planning. The other major component is the improvement of production, which has enabled the company to produce more cars at a lower cost.

Price cuts for Model 3 and Model Y in the US ranged from 6% to 20%. For example, the base Model Y now costs $52,990, down from $65,990 previously. That is the cost before the federal tax credit of up to $7,500, which went into effect on many EV models in early January. In the case of the Model Y Long Range, the new price combined with the US federal subsidy is a 31% discount compared to the previous price. These prices are extremely attractive to buyers and are sure to stimulate the strongest demand, as we saw in China after the price cut was announced there on January 6.

Although Tesla's share price reacted negatively to the news, this is only temporary. Wedbush Securities analyst Dan Ives anticipates an initial backlash from the price cuts but is confident Tesla made the right strategic move. He recalled that Model Y is likely to receive tax breaks in 2023 in the US. The analyst also predicts that a wave of price cuts could spur global demand for Tesla vehicles by 12% to 15% this year, in an offensive move to grab market share.

“Tesla now has global scale (Austin, Berlin, further China build-out) it did not have a few years ago and has margin flexibility to make aggressive moves like this to gain further market share in this EV arms race,” noted Ives.

© 2023, Eva Fox | Tesmanian. All rights reserved.

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