Tesla has made headlines in the past month with a series of price cuts on its vehicles. As a result, the Model 3 sedan is now being sold at a price that is $4,930 lower than the average new vehicle sold in the United States. This means that the Model 3 is now the cheapest it has ever been relative to the average price of a new car in the country.
A recent analysis by Bloomberg confirms this. Tesla’s Model Y SUV has also seen a price drop of $13,000 at the beginning of the year. Despite this, it was already the third best-selling SUV in the US in 2021, following Toyota RAV4 and Honda CR-V. After the Model Y sold out its build slots for at least the first quarter in the US, Tesla slightly increased its prices again.
The price cuts by Tesla came suddenly and steeply on January 12, and other automakers soon followed suit. For example, Ford Motor Co. also slashed the prices of its electric Mustang Mach-E. The shakeout phase of the electric vehicle market is starting to emerge, with General Motors Co. set to launch electric versions of its Chevrolet Blazer and Equinox SUVs later this year.
At the same time, gasoline-powered cars are getting more expensive. Due to the shortage of computer chips, raw material inflation, and manufacturers’ decisions to keep inventories low while spending heavily on electric car development, the average cost of a new car has increased by over $10,000 since the start of the pandemic, reaching $47,920 in January. As a result of two more price cuts to the Model 3, Tesla’s cheapest vehicle starts at $42,990, excluding the $7,500 US tax credit for electric vehicles that went into effect in January. For those who qualify for the tax credit, the price drops to $35,500, which is nearly $12,500 less than the average price paid for a new car in the US.
Tesla’s lower prices for its electric vehicles are driving the competition to lower their prices as well. In addition, the company is expanding its production by building new plants in Austin, Texas, and near Berlin, and expanding capacity in Shanghai. However, if demand does not keep up with the production, Tesla may need to continue lowering prices to attract new customers.
On the other hand, Bloomberg has reported that Tesla is planning to retool its Model 3 production lines in preparation for a facelift to the five-year- old model. This happened before when Tesla upgraded the higher-end Model S and Model X interiors in January 2021. At that time, prices also fell to record lows relative to the US average. After the upgrades, Tesla increased prices by 12% to 15% and continued to raise them over the following 18 months. It remains to be seen if Tesla will do the same after the Model 3 refresh.
PRICE PARITY
Electric vehicles have long been seen as the future of the automobile industry, but the key question has always been when they will become price competitive with traditional combustion vehicles. While it is difficult to say exactly when that moment will arrive, there is no denying that Tesla’s Model 3 has already surpassed this benchmark.
The price of the Model 3, even without credits or fuel savings, now sits $800 below the cheapest BMW 3 Series, one of its closest competitors. This is a significant milestone for the electric car industry and a testament to the advancements in technology and production efficiency achieved by Tesla.
But the price parity doesn’t stop there. Even when comparing the cost of a three-year lease, the Model 3 has a similar monthly payment to an entry-level Toyota Camry LE with similar lease terms. This underscores the affordability and accessibility of electric cars, making them a more compelling option for the average consumer.
However, Tesla’s unique pricing strategy, which is subject to frequent change, can sometimes make it difficult to predict the direction of their pricing in the future. While they have been steadily lowering prices recently, the automaker’s CEO Elon Musk could reverse course and raise prices again.
Nonetheless, Tesla is expanding its production capacity in anticipation of growing demand for electric vehicles. The company is building new plants in Austin, Texas, and near Berlin, as well as increasing capacity in Shanghai. If demand doesn’t keep up with this increased production, Tesla may need to further cut prices to attract new buyers.
On the other hand, reports from Bloomberg suggest that Tesla is retooling its Model 3 production lines in preparation for a facelift to the five-year-old model. This could signal a repeat of the trend that occurred when the company refreshed the higher-end Model S and Model X interiors in January 2021. At that time prices of those models had similarly fallen to record lows relative to the US average. However, immediately after the upgrades, Tesla boosted prices by 12% to 15% and continued to raise them over the following 18 months.
Regardless of the direction of Tesla’s pricing strategy, the current affordability of electric vehicles, particularly the Model 3, marks a significant milestone for the industry. With technology and production efficiency constantly improving, electric cars will only become more competitive with traditional combustion vehicles in the coming years.
