Tesla and Ford are fighting for market share by lowering the prices of their electric cars. Other automakers like GM and Volkswagen say they won’t engage in that kind of price war. A price battle could accelerate the adoption of electric vehicles, but automakers will have to sacrifice profits. Something is loading.
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When Tesla lowered prices for some of its most popular models in early January, the news shocked the industry. This drove up demand for Teslas and threatened rivals already trying to overtake Elon Musk’s market share.
Ford went next, lowering the price of its Model Y competitor, the Mustang Mach-E, by as much as $5,900.
Other automakers remain stable: General Motors and Volkswagen executives recently said they don’t plan to cut prices for their electric vehicles.
Even without full participation, a price battle could be good for the auto industry’s $1.2 trillion push toward electrification through 2030 — and the people expected to buy all those battery-powered cars.
“Anytime you have competition in the space,” said Ed Egilinsky, chief executive of financial products company Direxion, “it could represent pricing pressures that aren’t as significant for automakers, in the short term as much as for, potentially, the consumer.”
GM has no intention of participating in the price war and lowering the cost of its electric vehicles, such as the Cadillac Lyriq. Wade Payne for General Motors With Cheaper Electric Vehicles, Cheaper Electric Vehicles
Despite automakers’ efforts to cut costs, electric vehicles are too expensive for most people, selling for an average of $61,448 in December, according to Kelley Blue Book.
Today’s price war (coupled with new federal tax credits for electric vehicles) could stimulate demand, helping automakers increase volume, which would further help reduce costs.
“Scale will contribute to price parity,” said Steve Patton, head of mobility industry at EY Americas. “We need to build more electric vehicles and batteries before we bring prices down.”
This week, Ford and GM mentioned plans to increase production of electric vehicles this year, although Ford is more ambitious than GM. Increased demand caused by price cuts could accelerate these plans.
“At the end of the day, it’s scale that’s going to drive those costs down,” Ben Prochazka, executive director of the Coalition for Electrification, told Insider in early January. “This is what will ensure that this market becomes accessible to everyone.”
Ford’s recent Mach-E price cuts mean the company won’t prioritize profitability, just yet. Photo courtesy of Ford Motor Co. The problem is profitability
But Tesla and Ford’s price cuts mean they will prioritize profitability for now, which worries industry analysts.
The cuts “highlight the conundrum automakers face in improving the profitability of electric vehicles by increasing production volumes in a competitive market,” said Rene Lipsch, vice president and chief credit officer at Moody’s, in a press release.
The cuts could also “extend Ford’s timeline for a meaningful contribution from its electric vehicle offering to profitability,” Lipsch added, “and underscores the need to reduce vehicle costs through lower battery costs and efficiencies of manufacturing, in addition to higher production rates”.
Bank of America analysts called the automakers’ moves “strange” in a Monday note.
The two companies “cite demand that exceeds supply, which means that a price reduction would directly impact the bottom line today and unnecessarily degrade future earning power,” the note said. “The current EV price declines seem to defy logic… This will make the unprofitable low-yield EV business all the more difficult until massive scale is achieved.”
Consumers are unlikely to be as upset, as they will benefit at the expense of automakers, Garrett Nelson, senior equity analyst at CFRA Research, told Insider via email.
“We believe the price war is good for consumers and should help overall EV sales and adoption,” Nelson said. “We don’t think this will be a good thing for automakers, as it will put additional pressure on EV margins.”