Tesla’s Price Cut Hints at Limits to EV Demand

The $2,000 price cut Tesla announced this week may hint at bad news for electric vehicles, as the darling of the new technology appears to be taking a hit to maintain demand as tax credits are phased out.

On January 2, the company slashed the prices of its Model 3, S and X models by $2,000 each to partially offset lower federal tax credits for buyers. Because Tesla surpassed a cumulative sales total of 200,000 vehicles last year, the maximum federal credit for buying its cars has been cut in half from $7,500 to $3,750. In the second half of this year, it will fall again to $1,875 unless automakers can persuade the government to change the rules it set in 2009. (Customers can also get state and local subsidies in some areas.)

The news, which Tesla announced in an SEC filing along with Model 3 delivery figures that fell short of some analysts’ expectations, helped to send the company’s shares down on Wednesday. The stock (TSLA) was down nearly 7% by the close of the market. But the cut could have broader implications for EVs as General Motors, Ford, Volkswagen and other automakers pour resources into battery-electric powerplants as the next wave of vehicle propulsion. GM announced last year it would double investment in electric and autonomous vehicle development even while closing factories and cutting about 14,000 jobs.

The federal tax credits were intended to help manufacturers increase EV production volume to the point where the cars could compete with traditional vehicles on price.

Tesla’s bold embrace of all-electric platforms for a whole line of premium-priced vehicles has helped it quickly grow from a small startup to a brand that challenges the biggest luxury marques. Its success has helped to drive the mainstays of the industry toward battery electrics, too. If Tesla really needed to cut prices as soon as federal tax breaks declined, underlying demand for EVs could be less robust than it appeared.

Another test could come soon when GM joins Tesla in the over-200,000-EVs club. The company has said it expected to pass that point in sales by the end of 2018, and CNBC reported on Wednesday that it had, citing an unnamed source. GM said last fall it would increase production of its Chevrolet Bolt EV to keep up with global demand. List price for the Bolt starts at $37,495, lower than any current Tesla offering.

Tesla’s announcement on Wednesday wasn’t all bad news. Fourth-quarter deliveries of the Model 3 reached 63,150, falling short of analyst expectations of around 63,700, according to a Bloomberg report. But the figure was 13% higher than Q3 shipments. The company struggled over much of last year to increase production and delivery numbers.

For the full year, Tesla delivered 145,846 units of the Model 3 and 99,934 of the Model S and X combined. The company said total deliveries for the year were nearly equal to all preceding years combined. (Tesla started selling cars in 2008. The Model 3 was introduced in 2017.)

Model 3 shipments will expand beyond North America to Europe and China beginning in February, Tesla said, and reach more markets later this year, including with a right-hand-drive version. This should generate more sales to help Tesla remain profitable. The company reported its first quarterly profit in last year’s third quarter.

But Tesla also disclosed that more than three-quarters of Model 3 orders in the fourth quarter came from new customers rather than reservation holders. That could mean many of the consumers who reserved a Model 3 in advance — more than 450,000 by the end of Q1 2018 — are holding out for the promised $35,000 version. That might be a sign that there’s demand for EVs out there, but only if the price is right.

Stephen Lawson is a freelance writer based in San Francisco. Follow him on Twitter @sdlawsonmedia.

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