Tesla price cuts threaten image as a tech leader

Tesla has long sold itself as a technology firm more than an auto company. But its recent price cuts suggest otherwise, at least in the short term, analysts say.

CEO Elon Musk's decision to slash stickers in order to maintain growth and keep its new factories humming is a tactic familiar to auto industry analysts who warn Tesla's brand value may be at stake.

"These actions certainly help in the short term to increase sales volume and fend off the growing number of competitors," said Jessica Caldwell, executive director of insights at Edmunds. "In the long term, however, Tesla is walking a razor's edge between maintaining its brand prestige while simultaneously attempting to grow volume."

Musk said last month that moving metal is Tesla's top priority, given high interest rates and economic uncertainty. In the near future, he promised, Tesla will offer vehicle autonomy with software it calls Full Self-Driving, giving it a wildly profitable tech product.

But Musk has made the same promise for years.

Tesla also sells energy-storage products, solar installations and is working on a humanoid robot. But most of its profits still come from its automotive business, which is subject to economic downturns and rising interest rates.

While Tesla vehicle sales are growing in the U.S., its EV market share is falling and competitors are getting better at challenging the dominance of the Model 3 sedan and Model Y crossover, analysts say.

"Teslas are still hot must-haves, but the alternatives are getting way better and more appealing to consumers," said Robby DeGraff, insights analyst at AutoPacific.

"As such, Musk is feeling the heat of the competition as we've seen by another round of price cuts on his two highest-volume models," DeGraff said. "We're awaiting a lot of promises that Tesla hasn't delivered yet."

Those include a reliable version of Tesla's Full Self-Driving software, which is currently classified as advanced driver assistance and not autonomous, despite its name and $15,000 price tag. On Tesla's earnings call last month, Musk declined to say what percentage of Tesla buyers are opting for the FSD software.

Tesla is also behind on plans to release its Cybertruck pickup, designed to challenge Detroit automakers in the segment. Musk said last month that Tesla is building test vehicles at its year-old factory in Texas and may hold a launch event in the third quarter to deliver the first Cybertrucks to customers.

More recently, Tesla has focused on future growth from a new platform for lower-priced vehicles, with a planned factory in Mexico that will make them using new manufacturing techniques to slash costs. Without a lower-priced vehicle, Tesla has leaned on price cuts — and EV incentives — to push the Model 3 and Model Y into the mainstream.

That's good for consumers, since Teslas have been priced like luxury vehicles for the past two years because of past price increases that Musk blamed on rising costs from supply-chain issues.

Tesla prices today are much closer to mainstream gasoline-engine vehicles, especially with federal tax incentives of $3,750 for the base Model 3 and $7,500 for all versions of the Model Y.

"The fact that a Model 3 now starts just a hair below $40,000 before any kind of federal tax credit kicks in, is a good preview of what's to hopefully come: actual, affordable EVs. People clearly want Teslas but are often priced out of them," DeGraff said.

According to AutoPacific data, most shoppers considering a Tesla in the next three years are looking for a mainstream brand and not luxury. The median price they plan to pay for their next vehicle is $40,000. Toyota is the top runner-up brand for buyers interested in a Tesla.

Tesla recently introduced a less expensive version of its Model Y, in addition to slashing prices for the more expensive ones by up to 30 percent. The new Model Y standard range starts at $48,630 with shipping, which is less than the average transaction price for a new vehicle in the U.S. as of late April.

Despite the growing EV competition from automakers such as General Motors and Korean brands, Tesla remains king of the hill, DeGraff said.

"Tesla will likely continue to be the champion for cutting-edge software and of course the excellent charging network," he said, referring to Tesla's Supercharger stations across the U.S.

According to Cox Automotive, Tesla likely sold 161,630 vehicles in the first quarter this year for a 25 percent increase over the same period last year. Tesla does not break out U.S. sales from its global delivery numbers. Cox said Tesla's EV market share fell to 62 percent from 72 percent a year earlier.

The Model Y was by far Tesla's best seller at an estimated 95,362 deliveries in the first quarter. The Model Y was not only the best-selling EV in the U.S. but outsold the venerable Toyota RAV4 crossover, which had deliveries of 84,704, according to Toyota. The RAV4 comes in gasoline and hybrid versions.

But despite Tesla's dominance of the EV market, analysts are concerned that price cuts may not be enough to keep the automaker growing at its internal target of 50 percent per year. Tesla is ramping up production of the Model Y in Texas, and there are signs that inventories are growing across its four-vehicle lineup.

Financial firm Jefferies downgraded Tesla stock this week to "hold" from "buy" on concerns that aggressive price cuts will erode the automaker's margins.

While Tesla outperforms rivals in software development and manufacturing productivity, it "has fallen behind in building skills in marketing and product planning," Jefferies said in a research note.

Tesla does not pay for traditional advertising, which Musk deems unnecessary to drive demand. It also does not regularly freshen the exterior design of its models. While Tesla has teased a less-expensive model on and off since 2020, it's still in the development stages, the company said in March.

Karl Brauer, executive analyst at iSeeCars.com, said that Tesla needs to quickly introduce a mainstream EV model that more buyers can afford.

"Until that happens, Tesla will be up against more established premium brands with newer vehicles, and no automaker has ever solved its problems with price cuts," Brauer said. "This tactic can also damage a brand over the long-term — just ask Chrysler, Ford, and GM. Tesla has often been compared to Apple, and when was the last time Apple cut its prices to sell more product?"