Tesla announced on Monday that it’s slashing prices for its Model Y long-range and performance versions in China, effective from August 14th. This move has raised concerns about potential profit margin pressures and caused a dip in the company’s shares.
In a break from its trend since January, Tesla has taken the step of reducing its car prices in China to tackle heightened competition. The automaker had previously been using various incentives to boost sales in the region.
This move follows a notable 31% decline in July’s sales for Tesla’s China-made vehicles when compared to June, marking the first month-on-month decrease since December. This was due to a temporary production halt as the company readied for the launch of an updated Model 3. In contrast, China’s BYD experienced sales growth over the same period.
The adjustments involve cutting the Model Y Long Range’s starting price by 4.5% to 299,900 yuan, and the Model Y Performance’s starting price by 3.8% to 349,900 yuan.
Furthermore, Tesla announced it will offer insurance subsidies of 8,000 yuan for purchasers of entry-level, rear-wheel-drive versions of Model 3 vehicles in stock. This subsidy is valid from August 14th to September 30th.
Analysts foresee the possibility of Tesla applying similar price reductions in the U.S. and Europe, potentially putting around 100 basis points of pressure on the company’s Q3 margins. This outlook caused Tesla’s shares to drop by 2.7%, hitting a two-month low of $236.15 in early trading.
Despite previous commitments to avoid “abnormal pricing,” Tesla had recently offered cash rebates. This, along with the new price cuts, raised concerns about ongoing price wars impacting industry profitability.
Tesla CEO Elon Musk had hinted at further price cuts, even if they squeezed the company’s margins. Market watchers also anticipate that the impending launch of a refreshed Model 3 in China (referred to as Project Highland) might lead to price adjustments for the outgoing version.
Tesla has been actively reducing prices across the U.S., China, and other markets in response to competition and economic uncertainties. This strategy aims to maintain its competitive edge and market share. Some attribute these moves to Tesla’s aggressive push to secure sales and outpace rivals entering the market, while others point out that dwindling demand for older models has necessitated price cuts.
One factor that contributed to Tesla’s increased sales was the reinstated eligibility for federal tax credits on certain models, like the Model 3 and Model Y. These credits, offering up to $7,500, made the vehicles more attractive to consumers.
This strategic combination of price reductions and federal tax credit eligibility during Q1 2023 led to significant sales growth in the United States. For instance, Tesla witnessed a substantial 79% increase in Model Y sales during Q1 2023 compared to Q4 2022.