Tesla cuts prices on most models—bad news or good news?

Tesla has slashed prices for most of its lineup. Model 3 got a $2,000 price cut across all powertrain options, bringing the base price of the Standard Range Plus down to $37,990. There’s no word yet on whether the price of the “off-menu” $35,000 version has been cut. The price of the Chinese-made Model 3, which got a price cut a few weeks ago to bring it into eligibility range for government subsidies, remains the same.

Models S and X got $5,000 price cuts across the board, and now start at $74,990 and $79,990, respectively.

Model Y is the only car in the stable that hasn’t gotten a price cut, which is understandable, as deliveries are just beginning, and Tesla says it has a large backlog of orders.

So, is this good news or bad news? The answer to that one depends on whether you consider Tesla an automaker or a tech company.

In the auto industry, price cuts (including backhanded ones, such as discounts, rebates or dealer incentives) are seen as bad news for a company, a sign of weak demand. Tesla has historically shunned any such measures, knowing that naysayers would pounce on any sign of softness. The company is said to enforce a strict policy—no discounts for anyone, ever. However, demand for new cars is expected to plummet across the board in the months ahead, and Tesla won’t be the only automaker easing its prices. In such unusual circumstances, a sign of weakness may not be a sign of weakness, if you will.

Furthermore, if you take the view that Tesla is a tech company, price cuts appear in quite a different light. Tech products are expected to become cheaper over time, as technology improves and volumes increase. The (correct) assumption that the costs of batteries and other components would steadily decline has been baked into Tesla’s strategy from the beginning. It’s also worth noting that Tesla has several innovations in the pipeline that could substantially lower manufacturing costs (a rear underbody casting for Model Y, new battery form factors, no paint for Cybertruck, et al).

TSLA stock took a moderate hit the morning following the price cuts, but most analysts don’t seem to expect any long-term damage. “This is a smart strategic move…given the current macro and Covid environment,” Wedbush analyst Dan Ives told Barron’s. “The current cost structure gives Musk & Co. more flexibility to make these price cuts.”

Source: Barron’s, Electrek