Falling Demand or Tactics to Increase Sales?

DETROIT – When it comes to explaining why Tesla Inc. keeps slashing the prices of its electric vehicles, the auto industry is pretty much divided.

On one side are analysts who see an aggressive move by the electric vehicle leader to gobble up sales and market share from its rivals just as they begin to bring more vehicles to market.

On the other hand, critics argue that slacking demand for Tesla’s older vehicles has forced the company to cut prices to attract buyers.

Over the weekend, Tesla slashed the prices of its two most expensive vehicles from $5,000 to $10,000, or 4.3% to just over 9%. A Model S two-engine sedan now starts at $89,990, with the plaid “Performance” version starting at $109,990. A Model X SUV Dual Motor starts at $99,990 and the Performance version starts at $109,990.

It was the company’s second price cut this year in the United States. Tesla in January lowered prices on several versions of its electric vehicles, making some of them eligible for a new federal tax credit. The company has slashed U.S. prices on some versions of its best-selling Model Y SUV by nearly 20%. In addition, the base price of the Model 3, its most affordable vehicle, has been reduced by about 6%.

Morningstar analyst Seth Goldstein suggested that Tesla is trying to strike a balance between securing the best possible prices and maintaining buyer demand to keep its factories running fast enough to reduce the cost of producing each vehicle.

The company has higher profit margins than other automakers, Goldstein said, in part because it has developed more efficient manufacturing methods and because electric vehicles have fewer moving parts to assemble

“This could be a way for Tesla to keep some of the new entrants out of the electric vehicle market,” Goldstein said. The company is sending a message to its competitors that “you have to offer the best technology at a compelling price point while keeping costs down.”

Goldstein said he doesn’t see Tesla price cuts again this year unless the U.S. economy slips into recession.

Sales of the Model S and X account for just a fraction of Tesla’s total sales, but they’ve been growing over the past two years. Still, their sales fell a little over 8% from the third quarter of last year through the fourth quarter.

Sam Abuelsamid, electric mobility analyst at Guidehouse Research, noted that both models are expensive and unattainable for mainstream buyers. And they’re aging, another factor in their declining sales: the S debuted in 2012, the X in 2015.

Abuelsamid said he suspects Tesla decided to cut prices after demand for the two higher-priced vehicles fell in January and February. Since Tesla only reports quarterly sales, the sales picture won’t be clear until early April.

The recent price cuts, he said, should reduce the value of used Teslas simply because the new ones will cost less.

Although Tesla has updated the interior, electronics, and performance of its Plaid editions, their exteriors still look essentially the same as when they were first introduced. As a result, Abuelsamid said, the Teslas look older than similar models produced by startups and legacy automakers.

“Under the skin there are many differences” in the Teslas, he said. “Customers don’t really see these differences.”

During Tesla’s investor day last week, CEO Elon Musk acknowledged that affordability is still holding back sales.

“People’s desire to own a Tesla is extremely strong,” Musk said. “The limiting factor is their ability to pay for a Tesla.”

When Tesla announced its earlier price cuts in January, more versions of its popular Model Y small SUV were eligible for a $7,500 EV tax credit by bringing them below state price caps. This round of Tesla price cuts didn’t spark a price war, as some analysts had expected, though Ford lowered the price of its Mustang Mach-E, a Model Y competitor.

Abuelsamid noted that there is still limited availability for high-end luxury SUVs from BMW, Mercedes-Benz and others because automakers don’t produce many of them. Over time, he said, other automakers may be forced to lower prices on their luxury models.