Two cuts do not an EV price war make.
Ford discounted the price on its plug-in Mustang Mach-E car last Monday, weeks after Tesla slashed prices by up to 20 per cent across models. The motor industry seemed on the brink of further reductions for electric vehicles. Headlines declared a price war was on.
Then other carmakers stayed on the sidelines. General Motors chief executive Mary Barra said on Tuesday that the company’s EVs were priced correctly. Volkswagen declined to cut prices, as did Hyundai and Kia.
For now, industry analysts say, EV prices seem likely to stay where they are. “It’s not a price war, it’s a regional skirmish,” said Tyson Jominy, the vice-president of data and analytics at JD Power.
Prices of EVs rose in 2022 because of a shortage of chips, rising costs for battery materials and high petrol prices that drove demand. They remain significantly more expensive than cars and trucks with traditional engines.
Making them more affordable is crucial to attracting more buyers. In the US, the Biden administration has set a goal for half of all new vehicles sold in the US to be electric by 2030.
Subsidies worth up to $7,500 are an important selling point for US car buyers. On Friday, the US Treasury helped ease pressure on carmakers to cut prices, however, when it changed its interpretation of the Inflation Reduction Act climate law to allow more high-priced EVs to qualify for consumer tax credits.
Tesla fired the first shots in the skirmish about three weeks ago. It cut prices by up to a fifth in the US and Europe after first reducing prices in China a second time. The price for models sold in the US fell by $13,000.
Tesla dominates EV sales in the US, but more competitors are entering the market. Elon Musk’s company accounted for 72 per cent of the 487,000 new EVs sold in 2021, according to research from Kelley Blue Book. A year later the manufacturer’s market share fell to 65 per cent of 810,000 electric vehicles, even as its own sales grew by nearly half.
“There’s new competitors coming at Tesla so [the price cut] was the weapon they used to combat that,” said Cox Automotive analyst Michelle Krebs.
Tesla’s best-selling crossover sport utility vehicle Model Y directly competes against Ford’s Mustang Mach-E. Ford sold 39,000 Mach-Es in 2022 — the best sales performance for any electric model not made by Tesla — but Tesla sold more than six times as many Model Ys.
The Model Y now starts at $53,000, down from $66,000. The Mach-E’s six versions now sell for between $46,000 and $64,000, the price dropping 1 per cent for a lower-end specification and 8 per cent for the highest.
Ford plans to boost production of the Mach-E this year, even as it continues to struggle with supply chain problems, and more Mach-Es to sell gives the company a reason to keep prices even with a key competitor. “They want to keep the momentum going,” Krebs said.
Yet Ford has raised the price on the F-150 Lightning, the electric version of its flagship truck, three times. It now starts at $56,000 and has a long waiting list.
Morgan Stanley analyst Adam Jonas argued last week that the supply of electric vehicles is likely to outstrip demand in 2023. He pointed to Tesla’s price cut, the falling price of used Teslas, fewer reservations at Lucid Motors and a possibly lower order backlog at Rivian, which stopped reporting reservations. Rivian said on Wednesday it plans to cut 6 per cent of its workforce.
Tesla’s price cuts will force traditional carmakers to recalculate how long it will take their EV strategies to pay off, Jonas said. For new EV manufacturers, the price cut “raises important questions of burn-rate versus capital sources and long-term business model viability”.
“Everybody will need to cut price, but we don’t think everybody will be able to cut costs and fund the business without significant capital raises,” he added.
Carmakers certainly are vying for customers’ loyalty during this technology shift, because today’s buyers are more likely to stick with them when they purchase their second electric vehicle, said Nick Nigro, the founder of Atlas Public Policy, a research company.
The 10-year horizon of the consumer tax credits in the IRA also gives manufacturers some assurance that the market will grow over the decade, which might make them “willing to make less money in the short term to make more money in the long term,” Nigro said.
Under the IRA’s subsidy rules, cars must have a manufacturer’s suggested retail price of $55,000 or less, with the cap rising to $80,000 for vehicles classified as a larger clean-energy SUV, truck or van.
However, carmakers had complained that the US government was categorising some SUVs as cars, meaning they were subject to the lower $55,000 cap.
The confusion over the two categories led to some larger EVs including Tesla’s Model Y being ineligible for the credits because they were subjected to the $55,000 price cap, instead of the higher $80,000 cap.
The changes announced by the Treasury will move more cars including the Model Y and the Mach-E into the SUV category, meaning they may qualify for the credits if priced at under $80,000, instead of $55,000.
It is too early to tell how the competition among carmakers will play out this year because the federal tax credit is introducing so much change into the market, Nigro said. But so far he sees no slackening in demand for electric vehicles. “There isn’t as big an incentive for a manufacturer to drop their prices.”
Source: Financial Times