Tesla sent trials to car showrooms around the world when it started cutting prices this year.
Rival manufacturers from Detroit to Japan began to see the second-hand values of their own battery models fall, while their share prices began to fall amid expectations of a price war from electric vehicles
Now Tesla has promised to go even further. Elon Musk’s group is willing to sacrifice profitability to stimulate demand for its models as it tries to meet ambitious sales targets that will make it the world’s biggest carmaker by the end of the decade.
But will the electric pioneer’s price cuts force others to follow suit? And will it lead to faster adoption of electric vehicles among consumers?
Will there be an electric vehicle price war?
Most automakers have been at pains to emphasize that they will not cut prices. They point out that while Tesla has new factories to fill and a thinning order book, most manufacturers can’t make battery models fast enough.
“Demand for our products is really stable, surprisingly given the headwinds and geopolitical tariffs,” said Jim Rowan, CEO of Volvo Cars, which has had to stop taking orders for its new electric sport utility vehicle EX90 after filling the one-year production schedule within a deadline. weeks.
“I think we would be doing shareholders a disservice by doing anything other than maintaining price discipline,” Rowan told the FT. “We do not expect to engage in price gouging.”
Ford has been the exception, cutting prices twice this year on its electric Mustang Mach-E.
Chief executive Jim Farley said this week that the company had cut the vehicle’s costs by $5,000 this year, stressing: “We’re not going to price just to gain market share.” He also said the company had raised the price of its F-150 Lightning electric pickup truck by $11,000 since the model’s launch.
Behind the scenes, stealth discounts have crept into the industry.
While Tesla sets prices centrally, most automakers allow their dealers to quietly offer discounts, often using money from the manufacturer’s marketing budget.
Dealers, analysts and leasing providers say under-the-radar discounts are starting to happen on electric vehicles from major brands, despite automakers still enjoying long order times for new battery vehicles.
Will Chinese manufacturers cut prices?
The power to avoid an electric vehicle price war does not lie with the current manufacturers. More than a dozen Chinese nameplates are targeting Europe, which has become the Western melting pot of electric cars.
“There is increasing competition in the electric car market, which should lead to lower prices,” said Elizabeth Connelly, an analyst at the International Energy Agency. “There are a growing number of new entrants to the electric vehicle market, mainly from China, but also from other emerging markets, who are offering progressively more affordable models.”
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This will drive down overall prices and force established manufacturers, particularly in Europe, to lower rates to compete.
“You had too many participants, and now you have more participants,” said Philippe Houchois, an analyst at Jefferies, adding that high prices could not continue, so “the only question is how it normalizes.”
Does a price war benefit consumers?
There is evidence that price cuts may make some electric vehicles more expensive, or at least slow 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 lease.
“If you lower prices but your waste goes down, you haven’t changed the monthly price at all,” said the regional general manager of a leading carmaker. “But all you’ve done is gain confidence across the industry.”
Michael Shu, BYD’s European head of China, told the FT: “The last option is always to lower the price, because that will hurt the brand, the residual values,” noting that full-price customers are annoying when the price of the same car drops later.
The resale value of Tesla’s own models has declined over the past year, in part due to its price-cutting policy.
Leading figures in the leasing market say several banks have started charging more for electric vehicles out of concern, making the fall in residual values across the sector a self-fulfilling prophecy.
Data from British leasing group Leasing.com shows the average monthly price of a Tesla is higher than it was in January, while payments for electric vehicles across all brands have also risen fractionally.
But while falling residual values are bad for new car buyers, they help make the automaker’s used electric vehicles more affordable. “I’m excited that this will unlock more affordable electric vehicles,” said one car dealer.
Which automakers have the most to gain from a price war?
Automakers with the biggest margins on their battery models can afford to absorb more aggressive price cuts if they want to.
Volvo said last month that margins on its electric models had reached 7% and would rise this year as the price of lithium, a crucial battery metal, falls further.
Automakers that can only make a margin on their electric vehicles will have a hard time cutting them, which could leave them sacrificing sales, analysts say.
In the same way, the groups with the widest diffusion of electrical products will be able to flex their offer despite selling some high-margin models.
“You still have to cover the market for what people can afford,” General Motors Chief Executive Mary Barra told investors last month. “To get to a point where a lot of electric vehicles are being sold in the US, while also recognizing the competition, you have to know the customer where they are from an affordability perspective.”
Behavior will also vary from country to country. Some large markets have EV quotas, including China, California and, from next year, the UK.
In these places, automakers may decide that the most profitable route is to discount electric vehicles to loss-making levels just to avoid fines for lost sales quotas and to allow them to continue selling larger numbers of EVs. profitable gasoline, according to two senior executives in the industry.
Will it drive faster EV sales?
Battery car sales are moving faster than most in the industry expected.
The International Energy Agency this week raised its 2030 forecast for electric vehicles from 25% of sales to 35%, driven in large part by the US Inflation Reduction Act, as well as the ‘increase in European competition.
Buying an electric car with a monthly payment approach is cheaper than gasoline models in some segments, dealers say.
There is also evidence that Tesla’s cuts have begun to generate greater interest in the brand relative to rivals that have held prices.
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“It’s definitely improved the conversion of people looking for Teslas,” said Fiona Howarth, chief executive of Octopus EV, a specialist electric vehicle rental group.
Jefferies’ Houchois said: “It’s almost certain that there will be better deals for you and me as customers. Automakers have to give up some profits and then try to see what they can do to reduce their costs”.
Several have begun to cut costs to accommodate. Volvo Cars is planning cost cuts, while Jeep and Vauxhall owner Stellantis is offering voluntary redundancies to 33,000 workers at US factories due to the costs of its electric vehicle program.
“There are people who say you can slow down the transition,” Houchois said. “I don’t think automakers will materially change investment plans. It could happen in five years, 10 or 15 years, you might gain a few years here or there, but the direction of travel is pretty clear.”
