Tuesday's Market Minute: Tesla (TSLA) & the E.V. Industry

Tesla TSLA dropped prices on the U.S. Model X & S for the second time this year yesterday, by about 9% and 5%, respectively. Tesla’s earlier price cuts in January, which were as high as 20%, were possibly to make the luxury cars eligible for federal tax credits. Elon Musk claimed in Tesla’s last earnings call that the company is receiving orders at almost double the rate of production, and “price changes really make a difference for the average consumer.”

However, the Model 3 remains Tesla’s best-selling and most affordable cars, with X & S just over 5% of deliveries last year. The cheapest Model S is now around $90K and Model X is around $100K – these cuts are not for the average consumer and could signal an inability for Tesla to move their more expensive models. Because these cars make up a small section of sales, any price changes and demand they might stir will have less of an impact on the bottom line. 

What the price cuts accomplish is pressure on Tesla’s E.V. rivals to follow suit. In the regular auto industry, manufacturer price changes aren’t nearly as dynamic, typically happening only about once a year. Tesla running its own outlets and being a market frontrunner provides the power and flexibility to set expectations for consumers. Ford (F) cut prices by around 8% on its Mustang Mach-E in January, following Tesla’s announcement. It’s also hitting rivals in China, a bigger E.V. market, as they scramble to cut prices, too. Of course, the cuts have hit their stock prices, with Warren Buffett-backed Chinese E.V. maker BYD’s shares falling 14% since February.

The most interesting thing for Tesla, though, is the recent executive announcement that it is developing a motor that can be built without rare earth metals. If Tesla succeeds, that could not only cut costs, but would have great environmental implications, and could even disrupt that entire mining industry if rivals and electronics companies take notice.

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