Tesla has caused a lot of buzz in the global car market by cutting prices across several regional markets. The US, China, Europe, and Japan have all seen a significant drop in prices of Tesla vehicles, with magnitudes ranging from 6% to 20%. The US, in particular, has seen the largest cut in the average price of Tesla vehicles. The price of the RWD version of the Model Y has come down to USD 13,000, showing a reduction of 19.7%.
Tesla Aims to Increase Market Share and Put Pressure on Competitors
Tesla sold 1.313 million battery-electric vehicles (pure electric vehicles) in 2022 and retained its leadership in this niche segment of the car market. However, its market share for battery-electric vehicles has been shrinking from 24.5% in 2020 to 20% in 2021 and just 17% in 2022. This in part has to do with the rising number of entrants this market as well as the rising number of battery-electric models that are being offered by these competitors. Furthermore, China accounts for more than half of the global electric car market. Therefore, Tesla has found that its sales performance in China significantly affects its overall market share.
In the Chinese electric car market, sales efforts are concentrated on “economical” or affordable models that are priced within the range of CNY 150,000~200,000. Before Tesla initiated its recent price cuts, the starting price of the Model 3 had been at CNY 265,900, which is way above the mainstream price range.
However, the price of the Model 3 has been slashed by 13.5%, with the starting price now arriving at CNY 229,900. Since the price difference between the Model 3 and the competing economical models has shrunk to 15%, Chinese consumers that are mostly residing within the CNY 150,000~200,000 range could be much more receptive to Tesla’s messaging. Also, many Chinese carmakers have lately raised prices on their electric models because of high cost pressure. Tesla is thus expected to benefit by taking the opposite approach for pricing.
Turning to the US, the biggest benefit that Tesla has touted for this round of price slashing is the eligibility of its vehicles in obtaining a tax credit of up to USD 7,500. The Inflation Reduction Act of 2022 contains a provision that subsidizes the purchasing of a new electric car with a tax credit. Electric SUV or vans that are priced no higher than USD 80,000 and other types of electric vehicles that are priced no higher than USD 55,000 are eligible. In the case of Tesla’s Model Y, the version with three rows of seats (i.e., a total of seven seats) can apply for the tax credit as an electric SUV, whereas the version with two rows of seats (i.e., a total of five seats) can apply for the same benefit as one of the other types of electric vehicles.
For consumers in the US, the price of the Long Range version of the Model Y in 2023 is now 31.1% lower than it was in 2022 because of the price cut and the tax credit. Besides turning consumers’ heads, Tesla is also putting a lot of pressure on its competitors with this undercutting strategy. After all, Tesla’s vehicle models tend to serve as the base standard for carmakers’ electrified offerings.
Tesla Has a Firm Grasp on Fluctuations in Prices of Key Components, Thereby Making Cost Sensitivity a Competitive Advantage
In addition to discussing the effects of Tesla’s price cuts on itself and competitors, and other important issue that needs to be addressed is why Tesla can lower prices when other carmakers are compelled to raise them. To answer this question, we first turn to Tesla’s profit margin. Compared with its competitors, Tesla has a larger room for profit. Therefore, it can lower prices in exchange for more vehicle sales and market share.
This leads to the question as to how Tesla has attained such a large profit margin. The answer is that Tesla is excelled at managing its cost structure and supply chain. With respect to supply chain management, Tesla takes a different approach and has gotten involved more deeply than do other carmakers. For instance, Tesla directly sources components and do not rely on Tier-1 suppliers for system integration.
By contrast, traditional carmakers assemble vehicles with the finished parts provided by Tier-1 suppliers. From Tesla’s perspective, directly sourcing components and doing its own system integration offer some notable advantages. First, this approach facilitates the adoption of the latest technologies at the component level. Second, Tesla is much more aware of costs and also exerts a greater control over them. On the whole, Tesla has a better sense of the price fluctuations in the upstream than do its competitors.
The degree of Tesla involvement in its supply chain is also reflected in its activities in the global lithium market. The soaring demand and the Russia-Ukraine military conflict caused lithium prices to rise rapidly during the 2021~2022 period. Carmakers now recognize that the only effective way to secure the supply of raw materials and control the costs of these materials is to manage the upstream.
However, Tesla is not simply securing lithium supply contracts. It is also thinking about getting involved in ore mining and metal refining. Tesla’s activities in recent years have led to a capacity crunch in the market for mining and processing lithium ores. Since lithium is incorporated into power batteries through multiple phases of additional processing, carmakers tend to suffer the most when it comes to lack of price transparency.
（Image credit: Tesla LinkedIn）