Tesla sent ripples through auto showrooms around the world as it began slashing prices this year.
Rival manufacturers, from Detroit to Japan, have begun to see second-hand values of their battery models fall, while their stock prices have begun to fall amid expectations of a electric vehicle price war.
Tesla now he has promised to go even further. Elon Musk’s group is willing to sacrifice profitability to stimulate demand for its models as it seeks to meet ambitious sales targets that would make it the world’s largest automaker by the end of the decade.
But will the electric pioneer’s price cuts force others to follow suit? And will it lead to a faster uptake of electric vehicles among consumers?
Will there be an EV price war?
Most automakers have taken pains to stress that they won’t cut prices. They point out that while Tesla has new factories to fill and a dwindling order book, most manufacturers can’t make battery designs fast enough.
“Demand for our products is really stable, surprisingly so given the geopolitical headwinds and tariffs,” said Jim Rowan, chief executive of Volvo Cars, which had to stop taking orders for its new EX90 electric SUV after completed the one-year production schedule within weeks.
“I think we would be doing shareholders a disservice by doing anything other than maintain price discipline,” Rowan told the FT. “We don’t expect to get involved in price reductions.”
Ford has been the exception, slashing prices twice this year on its electric Mustang Mach-E.
Chief Executive Officer Jim Farley said this week that the company reduced vehicle costs by $5,000 this year, noting, “We won’t price it just to gain market share.” Lui also said the company has raised the price of its F-150 Lightning electric pickup truck by $11,000 since the model’s launch.
Behind the scenes, discounting has sneaked its way into the industry.
As Tesla sets prices centrally, most automakers allow their dealerships to offer discounts silently, often using money from the manufacturer’s marketing budget.
Dealers, analysts and leasing providers all say that under-the-radar discounts are starting to appear in EVs from mainstream brands, despite automakers still enjoying long order times for new battery-powered vehicles.
Will Chinese manufacturers lower prices?
The power to prevent an EV price war does not rest with current manufacturers. More than a dozen Chinese nameplates are targeting Europe, which has become the western melting pot for electric cars.
“There is growing competition in the electric car market, which should translate into lower prices,” said Elizabeth Connelly, an analyst at the International Energy Agency. “There is a growing number of new entrants to the electric car market, mainly from China but also from other emerging markets, who are offering progressively more affordable models.”
This will drive down mainstream prices and force established producers, especially in Europe, to cut tariffs to compete.
“You have too many attendees and now you’re getting more attendees,” Jefferies analyst Philippe Houchois said, adding that the high prices couldn’t continue, so “the only question is how it’s going to normalize.”
Does a price war benefit consumers?
There is evidence that price cuts could actually make some EVs more expensive, or at least slow down their journey to affordability.
This is due to the residual value or second hand value of a car.
Most new cars in developed markets are bought with deals that finance the amount of value a vehicle loses — its “depreciation” — rather than the overall sticker price.
If cars have lower second-hand prices, more money needs to be financed and the car becomes more expensive to rent.
“If you cut prices but your residuals go down, you haven’t changed your monthly price at all,” said the regional chief executive of a major automaker. “But all you’ve done is break down trust across the industry.”
Michael Shu, China’s BYD head of Europe, told the FT: “The last option is always to lower the price, because that would hurt the brand, the residual values,” noting that customers who pay full price are upset when the price of the same car then falls.
The resale value of Tesla’s models has plummeted over the past year, due in part to its price-cutting policy.
Leading figures in the leasing market say several banks have started charging more for EVs out of concern, making falling residual values across the industry a self-fulfilling prophecy.
Data from British leasing group Leasing.com shows the average monthly price of a Tesla is higher than in January, while payments for electric vehicles across all brands have also risen slightly.
But while the decline in residual values is bad for new-car buyers, it helps make EVs more affordable at the much larger second-hand automaker. “I’m thrilled that this will unlock more affordable EVs,” said one auto trader.
Which automakers have the most to gain from a price war?
Automakers with the largest margins on their battery models can afford to absorb more aggressive price cuts if they choose.
Volvo last month said margins on its electric models had reached 7% and will increase further this year as the price of lithium, a key metal in batteries, falls further.
Automakers that can only get a margin on their EVs will struggle to cut back, potentially leaving them sacrificing sales, analysts say.
Similarly, groups with the widest distribution of electric products will be able to flex their line-up while still selling some high-margin models.
“You still have to cover the market for what people can afford,” General Motors Chief Executive Officer Mary Barra told investors last month. “To get to a point where there are a lot of EVs being sold in the United States, while also acknowledging the competition, you have to meet the customer where they are from an affordability perspective.”
Behavior will also vary from country to country. Some large markets have EV shares, such as China, California and, starting next year, the UK.
In these places automakers may decide that the most profitable route is to discount EVs to loss levels purely to avoid fines for missing sales quotas and to allow them to continue to sell more profitable petrol cars. according to two top industry executives.
Will it increase sales of electric vehicles?
Battery-powered car sales are moving faster than most of the industry predicted.
The International Energy Agency raised its EV this week forecasts by 2030 from 25% of sales to 35%, driven largely by the US Inflation Reduction Act, as well as increased European competition.
Buying an electric car using a pay-monthly approach is cheaper than petrol-powered models in some segments, dealers say.
There’s also evidence that Tesla’s cuts have started to drive more interest in the brand than ever before rivals that they kept the prices.
“It certainly has improved the conversion of people who are looking into Tesla,” said Fiona Howarth, chief executive officer of Octopus EV, a group that specializes in leasing electric vehicles.
Jefferies’ Houchois said: “There will almost certainly be better deals for you and me as a customer. Automakers need to give up some profits, so they need to try and see what they can do to cut costs.
Many have started cutting costs to accommodate. Volvo Cars is planning cost cuts, while Jeep and Vauxhall owner Stellantis is offering to voluntarily lay off 33,000 US factory workers over the costs of its EV program.
“Some people say you can slow down the transition,” Houchois said. “I don’t think the automakers will materially change their investment plans. It could happen in five or 10 or 15 years, you might gain a few years here or there, but the direction of travel is pretty clear.
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