Two cuts don’t make an EV price war.
Ford slashed the price of its Mustang Mach-E plug-in car last Monday, weeks after Tesla slashed prices by up to 20% on all models. The auto industry seemed on the verge of further cuts for electric vehicles. Headlines said a price war was underway.
Then other automakers stayed on the sidelines. General Motors Chief Executive Mary Barra said on Tuesday that the company’s electric vehicle prices were okay. Volkswagen refused to lower its prices, as did Hyundai and Kia.
For now, according to industry analysts, EV prices seem likely to stay where they are. “This is not a price war, this is a regional skirmish,” said Tyson Jominy, vice president of data and analytics at JD Power.
Electric vehicle prices rose in 2022 as a shortage of chips, rising battery material costs and high gasoline prices 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 United States, the Biden administration has set a goal for half of all new vehicles sold in the United States to be electric by 2030.
Grants worth up to $7,500 are a big selling point for American car buyers. The U.S. Treasury, however, helped ease pressure on automakers to cut prices on Friday, when it changed its interpretation of the Climate Act of the Inflation Reduction Act to allow more high-priced electric vehicles to benefit from consumption tax credits.
Tesla fired the first shots in the skirmish about three weeks ago. It slashed prices by up to a fifth in the United States and Europe after first slashing prices in China a second time. The price of models sold in the United States dropped by $13,000.
Tesla dominates electric vehicle sales in the United States, but more competitors are entering the market. Elon Musk’s company accounted for 72% of the 487,000 new electric vehicles sold in 2021, according to research by Kelley Blue Book. A year later, the manufacturer’s market share has fallen to 65% of 810,000 electric vehicles, even as its own sales have increased by almost half.
“There are new competitors coming to Tesla so [the price cut] was the weapon they used to fight this,” said Cox Automotive analyst Michelle Krebs.
Tesla’s best-selling crossover sport utility vehicle, the Model Y, competes directly with 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 previously. All six versions of the Mach-E now retail for between $46,000 and $64,000, with the price dropping 1% for a low-end spec and 8% for the highest.
Ford plans to ramp up Mach-E production this year, though it continues to battle supply chain issues, and more Mach-Es for sale give 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 of 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 electric vehicle supply is expected to outpace demand in 2023. He pointed to Tesla’s price drop, used Teslas’ price drop, fewer bookings at Lucid Motors and a possibly weaker backlog at Rivian, which has stopped reporting bookings. Rivian said Wednesday he plans to cut 6% of his workforce.
Tesla’s price cuts will force traditional automakers to recalculate how long it will take for their electric vehicle strategies to pay off, Jonas said. For new EV makers, the price drop “raises important questions about the rate of utilization versus sources of capital and the long-term viability of the business model.”
“Everyone will have to cut prices, but we don’t think everyone will be able to cut costs and fund the business without a significant capital increase,” he added.
Automakers are certainly competing for customer loyalty during this technological shift, as today’s buyers are more likely to stick with them when purchasing their second electric vehicle, said Nick Nigro, founder of Atlas Public Policy, a research company.
The 10-year horizon for consumption tax credits in the IRA also gives manufacturers some assurance that the market will grow over the decade, which could make them “ready to make less money at short term to make more money in the long term,” Nigro said.
Under IRA 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 an SUV, truck or van at bigger clean energy.
However, automakers had complained that the US government categorized certain SUVs as cars, meaning they were subject to the lower cap of $55,000.
Confusion between the two categories led to some larger EVs, including Tesla’s Model Y, not being eligible for credits because they were subject to the $55,000 price cap, instead of the higher $80 cap. $000.
Treasury announced changes will move more cars including the Model Y and Mach-E into the SUV category, meaning they can qualify for the credits if priced below $80,000, up from $55 $000.
It’s too early to tell how competition among automakers will play out this year because the federal tax credit introduces so many changes to the market, Nigro said. But so far, he sees no slowdown in demand for electric vehicles. “There’s not as much incentive for a manufacturer to lower their prices.”