Teslas are finally getting cheaper. It's a sign Elon Musk's back is against the wall.

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Teslas are finally getting cheaper. It's a sign Elon Musk's back is against the wall.
Elon Musk in front of a TeslaGetty
  • Tesla cutting prices by up to 20% on its models is a sign of trouble for Elon Musk.
  • The EV maker wants to spur demand as rising interest rates pose challenges.
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If you're in the market for a brand new Tesla, now might be the moment to splash out: Elon Musk just made it a whole lot cheaper to join the electric vehicle club.

The EV firm has cut prices on some of its top models – including the Model Y SUV and Model 3 – by up to 20% across the US and Europe, per changes made to prices of vehicle listings on its site on Thursday.

Though the cars remain relatively expensive, it's a big drop on premium pricing. And it's a sign that Tesla is in defense mode after months of gradual price rises to its vehicles.

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Price drops come on the heels of the company missing market estimates for deliveries last year amid an economic downturn that has wiped its market capitalization from a $1 trillion high to less than $400 billion.

And though Musk has previously talked about making Teslas more affordable, it's more likely that his hand has been forced by circumstance.

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Interest rate woes

Since taking over at Twitter, Musk has increasingly used the platform to make clear that he is unhappy with the way the Fed has been pursuing aggressive interest rate hikes to bring inflation back down to its target of 2%.

In November, the billionaire tweeted that the "Fed needs to cut interest rates immediately" over concerns that "they are massively maplifting the probability of a severe recession."

Rising interest rates have taken a toll on Tesla.

Investors soured on its stock for the same reasons tech stocks are down more generally — speculative companies betting on the future are less appetizing to investors right now than safe-haven value stocks like commodities.

That's triggered rethink about whether or not Tesla should be priced as a normal car company or a tech company, with the latter traditionally enjoying significant markups on the promise of an industry-shaking innovation. Rate rises are forcing investor clarity on this.

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Interest rate hikes have also increased the costs of financing the purchase of a Tesla, making it harder for consumers already battered by inflation to make the switch.

In response to a Twitter thread about consumers who took out loans before the interest rate rises took effect — and now face steeper repayments — Musk tweeted that it could potentially trigger "the biggest financial crisis ever."

Demand is a bigger problem than the Fed

In a research note, Dan Ives, senior equity research analyst at Wedbush Securities, said "it's no secret that demand for Tesla is starting to see some cracks" as a global slowdown of the economy that started in 2022 continues into 2023.

And a "softening demand for the global EV market" is a bigger driver of price cuts than interest rate hikes, Simon Moores, CEO of Benchmark Mineral Intelligence, a price reporting agency for the EV supply chain, told Insider.

Moores added that when it comes to demand, "backlog orders have come down significantly for Tesla," making price cuts is "a good way to increase the immediate- and medium-term sales pipeline".

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The EV battle gears up

Finally, Tesla is no longer the only name in the EV game. After years of being the only real player in the industry, traditional automakers have started to catch up, bringing rival offerings to consumers looking to switch from gas.

Teslas made up 65.4% of new EV registrations in the US from January to September in 2022, according to figures from an Experian report on the automotive industry published in December – down from 68.2% in 2021 and 79.4% in 2020.

Teslas are finally getting cheaper. It's a sign Elon Musk's back is against the wall.
Tesla remains EV leader, but Ford and Kia have increased their share of the market.Experian

That trend is only set to continue, which means Tesla needs to take competition and affordability seriously. Chris Beauchamp, chief market analyst at IG, notes the price cuts replicate similar moves Tesla has made in China, where cuts earlier this month led to protests.

Price cuts will of course be welcomed by consumers. The Model Y's cheaper price in the US makes it eligible for the Inflation Reduction Act incentive – a tax credit offering from the US government aimed at making EVs more affordable for potential buyers, added Moores.

Though the cuts hurt Tesla's share price in the short term, it's a move the firm can currently afford to make: a rapid global expansion to plant Gigafactories in places such as Berlin and Shanghai has given it more scope to be flexible.

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Wedbush's Ives estimates that "all together these price cuts could spur demand" by 12-15% globally in 2023. It shows that Tesla is ready to go on the offensive.

"This is a clear shot across the bow at European automakers and US stalwarts (GM and Ford) that Tesla is not going to play nice in the sandbox with an EV price war now underway," he said.

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