Tesla revived the competition in the automotive market

The misfortune of some is the happiness of others. The person who bought a Tesla Model 3 on Thursday January 12, 2023 had to pay €53,490. But, the next day, the price of the same car dropped to €44,990. And that does not count the ecological bonus, of the order of €5,000 for the purchase of this electric vehicle.

If some consumers are biting their fingers, Tesla is rubbing their hands. By lowering its prices, Elon Musk’s company intends to relaunch its deliveries. A change in the automotive market that could reignite the “price war” between manufacturers…

Almost 20% off price

The Model 3 is not the only vehicle from Tesla to experience a drop in its selling price in Europe. On Friday January 13, the company also reduced the price of its Model Y, which now costs €46,990. The two models, the brand’s most popular, also saw price cuts of nearly 20% in the United States.

Bringing prices to just under €47,000 in France is no accident. This is the ceiling at which the ecological bonus can be used. Reserved for electric vehicles weighing less than 2.4 tons, the ecological bonus allows the buyer to get help of up to €5,000 (and €7,000 for households whose reference income per unit is less than €14,089).

The logic is the same on the other side of the Atlantic. In the United States, Joe Biden implemented legislation encouraging the purchase of electric vehicles with the Inflation Reduction Act (IRA), which was passed last summer. On its site, Tesla indicates the possibility of getting a tax credit of 7,500 dollars for the purchase of its vehicles. A boon for wealthy buyers interested in Tesla models… at least for those who didn’t buy new last Friday.

Tesla wants to maintain its dominant position

This is not the first time that Tesla has carried out such an operation: in recent months, the company has lowered its prices in China twice. By the end of 2022, it is also offering promotions for American customers who agree to buy a new car before the new year.

However, since 2020 and the Covid-19 crisis, prices on the car market – including Tesla – have tended to rise. Due to the partial unemployment of the States but also to difficulties in supplying semiconductors, manufacturers have reduced their production capacities. Without losing profitability, because they have a “pricing power” to consumers: “there was a reversal of the balance of power between the seller and the customer, who had to pay more to get a car quickly”explained Bernard Jullien, lecturer in economics.

But then, why is Tesla now starting such a policy of lowering prices? “Today, Tesla is no longer sure that it will remain the undisputed champion of electric, complete the economist. The management decided to give up part of the profitability in order to maintain important market shares and remain number 1.

Because the company sees the emergence of new competitors, such as Volkswagen, Stellantis (PSA / Fiat) or Renault-Nissan, driven by the need to electrify their vehicles (new vehicles with thermal engines will be prohibited from being sold in European Union by 2035 ).

The company led by the eccentric Elon Musk is also concerned to see its stock market decline for more than a year. “It’s no secret that demand for Tesla, amid a global economic slowdown in 2023, is starting to show some cracks”, said Dan Ives, analyst at Wedbush. By lowering the prices of some of its models, the company hopes to increase its deliveries by 12 to 15% by 2023. In the longer term, its goal is to increase its sales by 50% per year .

The return of “price war” ?

For Bernard Jullien, Tesla’s offensive could lead to the return of “price war” : “Tesla’s lone ride could mark the beginning of the end of this enchanted parenthesis for car manufacturing”. We will find a pre-Covid situation where demand is stronger than supply. A classic configuration in the automotive market, where manufacturers compete on price to encourage consumers to renew their cars.

Will Tesla be followed by its competitors? The company “is now global in scope and there is an opportunity to take aggressive action like this”, observes Dan Ives. Thanks to strong profitability (its sales will increase by 40% in 2022) and a limited catalog, Elon Musk’s baby can easily vary its prices, but this is not the case for all manufacturer.

“If we lower prices, we must have the production capacity necessary to meet customer demand”, warns Bernard Jullien. This is especially necessary to obtain electronic components, essential for new cars but difficult to obtain since the pandemic. It remains to be seen if Tesla will be able to meet the stronger demand. And if its competitors choose not to let the firm take the lead.

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