Let’s take another look at the sharp drop in prices
What if Tesla just decided to corner the market by cutting the price of the Model 3 and Model Y by 20%? Last week, the American manufacturer reversed the trend by slashing the price of its models in France by more than 10,000 euros. The Model 3 is now under €40,000 as it can again benefit from the environmental bonus (€5,000 from January 1, 2023).
There is little comment within the administration on the reasons for this dramatic decline after months of hikes and an economy suffering from inflation. Internally, we are talking about developing manufacturing processes that continuously lower production costs. But elsewhere, among experts, the strategy was already imagined, even feared. Tesla wants to corner the market at a time when most manufacturers are struggling and new brands can’t easily access new capital with investment funds.
From the current economic situation, Tesla is one of the brands that is doing the best. It makes more money on its cars than Ford, General Motors and others. A Bank of America analyst explained: “Tesla has higher margins than other manufacturers, further reducing the price drop” more than others. You’ll get it: at a time when everyone is trying to position themselves to match the first manufacturer of electric cars, going through a price drop risks putting more than one in a difficult position.
Tesla and others
Unlike most new car brands, Tesla was able to establish itself in a macroeconomic environment characterized by very low interest rates, where it was easier to obtain funds for investment. Of course, the brand also went through the valley of death where any startup must be able to transition from being dependent on investor capital to its own revenue, but then it was able to take advantage of carbon credits, which Tesla sold to all the other brands that still needed it to continue. sale of thermal machines.
This context has changed. Carbon credits are no longer worth the same price, and demand for them has declined significantly. Prices have risen sharply and competition in the market for electric models has increased. Tesla can then apply pressure and try to make it more difficult for its competitors by adding a barrier to deployment: a price war. Only BYD, the Chinese manufacturer, can have the shoulders to keep up (its margins are also very high). However, the manufacturer has not yet made any statement on the matter. So far, only XPeng has decided, offering discounts of 2,700 to 4,900 euros in yuan equivalent, including SUVs.
The stranglehold strategy may be paying off, and demand for Teslas in the US responded directly to last week’s price drop. This was reported by a source close to Tesla “Unprecedented Demand” In North America as recently quoted by the media Electrek. If the bet goes ahead, Tesla could limit the fallout from this price drop and protect its bottom line. Faced with the macroeconomic situation, Elon Musk has already warned that Tesla’s earnings may be lower than in previous years, and that the company may even lose its balance sheet during this period.
Whether or not the bet hurts Tesla, it will be more disastrous for the competition. Caution should still be in order, as playing with fire is never a very favorable solution, especially when the brand’s shareholders have never been so turned away from it. Other parameters, of course, will explain the choice of brand. On the one hand, there is an increase in demand in the second-hand market and the need to satisfy Tesla’s shareholders by presenting them with increased sales figures at the end of the first quarter.
All this certainly boosted the motivation of the teams, but let’s not forget the slightly more hidden side of the strategy, which will certainly lead to more results in the long run.