2023-05-07 06:04:31
In just four months, Tesla, the world’s leading maker of electric vehicles, has cut the price of its models by 20% to stimulate demand and protect itself from the growing competition that stalks it. A movement in which Elon Musk’s company is willing to persevere. “It’s better to ship a lot of cars at a lower margin and achieve that margin in the future as we refine range”Musk told analysts at a conference in April in which he presented quarterly results that worry investors precisely because of that margin cut, which fell almost 8 percentage points, to 11.4%.
Tesla’s move, as the market leader that it is, has opened the debate in the sector: Is it the knock on a price war on electric vehicles that many have been waiting for for years?
In an analysis of Tesla’s price cut, investment bank Morgan Stanley concludes that Musk’s decision is not temporary but rather will set the tone. In his opinion, the company is in a position to consolidate these cuts because it has economies of scale in its production processes that it can implement massively in its short range of vehicles to reduce costs or services for its customers to update the software of their cars that bring you additional profit in the years following sales. A vision that shares José Luis Portela, professor at IE Business School, expert in electric mobility. In his opinion, Tesla has three levers that allow you to do it. First of all, your vertical integration. “Tesla controls much of its supply chain, which allows it to cut costs and be less reliant on third-party suppliers. This includes the production of batteries, electric motors and electronic components, something that other brands do not do”, explains Portela. In addition, the company “is constantly working on the research and development of more efficient and economical battery technologies, and manufactures them in-house, which avoids paying additional markups to external suppliers.” Finally, Portela points out, the firm “began manufacturing only in the United States and now also produces in Europe and China. Large-scale production allows them to lower the prices of their vehicles“, Add.
Portela considers that “Tesla’s price cut strategy could spark a price war as other brands must follow the leader in sales and technology”. In addition, he adds, “the anchoring effect (the effect by which the brain associates a product or service with a price and then compares it with that initial data) influences the perception of the initial price when a product is new. And Tesla can take advantage of his dominant position to force his competitors to lower prices, “he analyzes.
rivals
Like Morgan Stanley or Portela, some of its rivals, such as FordThey are also clear that Tesla is not something temporary. His CEO, Jim Farley, has predicted a “price war.” In his opinion, Tesla’s moves to fuel his growth are “completely rational and shouldn’t surprise anyone”. The strategy that Musk is promoting, according to Farley, is the same one that the founder of Ford, Henry Ford, applied with the price of his Model T, which popularized the mass production of automobiles at the beginning of the 20th century and facilitated their access to the middle class. “Tesla’s strategy of reducing prices is not new, since its objective is to democratize the electric vehicle so that more and more people can acquire it”, influences this idea Portela. Ford has, in fact, lowered the price of its Mustang Mach-E model, a direct competitor to Tesla’s Model Y, to match its cuts.
But Ford is not the only one that has followed in the wake of Tesla. Several manufacturers have already begun to lower prices of its electric models in a market as competitive in this segment as China. The latest to join the price war have been BMW and Volkswagen. But before them there were a few more. In January, XPeng cut the prices of its electric cars by between 10% and 13%. It was then followed by Nio, who reduced them in early February. And the last to do so was BYD, which announced two drops, one in February and one in March.
In Europe, one of the main groups in the sector, Renault, has also begun to rethink things. In February, the CEO of the Renault Group, Luca de Meo, assured that they were not considering lowering the prices of their electric models. However, last month, the CEO of the Renault brand, Fabrice Cambolive, said that the French automaker is reviewing its prices after Tesla cutswhich have caused the Musk company’s Model 3 to start at a price in France of 41,990 euros, compared to 42,000 euros for the Megane E-Tech Electric.
Other big manufacturers, like General Motors, is reluctant for the moment to touch the prices. However, in a recent analysis, CFRA Research assured that it will be difficult to maintain this policy when it is expected that in the United States there will be a hundred electric models on the market in 2025 from which consumers can choose.
More models at affordable prices is what, according to this year’s industry outlook report from the International Energy Agency, are needed to democratize the electric vehicle throughout the world beyond China, where competition is already fierce not only from Tesla. Although it is not the only factor, the price is still the most determining factor when buying an electric car. “Although the main reason to buy an electric vehicle should be to reduce pollution in cities, price is still a deciding factor”says José Luis Portela. “Electric vehicles are becoming more affordable, and consumers should consider not only the purchase price, but also the total cost of ownership (TCO), which is lower in electric vehicles due to no servicing, less wear and the lower cost of electricity compared to gasoline,” he explains.
However, to promote these vehicles, Portela believes that it is also “fundamental to raise awareness among the population about the advantages of these vehicles and to disprove myths related to their autonomy and the ability to make long trips. At the moment, travel across Europe is possible without problems and the existing charging network is sufficient for the current volume of electric vehiclesalthough it is true that it will have to expand in the future due to the growth in sales”, he concludes.
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