Elon Musk's Tesla has declared an electric-vehicle price war in the US. Since the start of 2023, the automaker has dramatically cut the cost of buying a Model 3, Model S, Model X, or Model Y — heaping pressure on other EV makers as well as traditional automakers like Ford and GM.
While it's too soon to call a winner in the price war, there are signs Tesla is making early gains.
Tesla started lowering prices in mid-January, cutting the cost of an entry-level Model 3 sedan — the company's best-selling vehicle — by 6.4%, to $43,990. It also slashed the cost of the basic Model Y SUV to $52,990 — 20% cheaper than the previous price tag of $65,990.
Tesla also lowered prices for its Model S sedan and Model X SUV in January, then reduced them again in early March. The basic Model S now retails at $89,990, down 14% from the start of the year, while the entry-level Model X costs $99,990 — a price cut of approximately 17%.
Ford is the only traditional automaker to have followed Tesla in cutting EV prices in 2023, discounting its plug-in Mustang Mach-E range by between about 1% and 8.8%.
Dramatic price cuts such as Tesla's are aimed at undercutting rivals and boosting market share. But while price competition isn't uncommon among automakers, the size of Tesla's cuts suggest the company is seeking to dominate the entire industry — not just EVs.
"Tesla's competition isn't just other EV makers, it's other carmakers," Seth Goldstein, an analyst at Morningstar, told Insider. "They're cutting prices so that the Model 3 can eventually compete with other sedans and the Model Y can compete with other SUVs."
Musk believes the discounts will attract new buyers who previously saw a Tesla as being outside their price range. "There's just a vast number of people that want to buy a Tesla car, but can't afford it," he said during Tesla's fourth-quarter earnings call in January. "These price changes really make a difference for the average consumer."
Jessica Caldwell, the executive director of insights at the car-shopping website Edmunds, told Insider: "We saw interest spike for the Model 3 and the Model Y after the price cuts, so it definitely did move the needle."
The cuts have generated comparatively more interest in the Model 3 and Model Y — Tesla's cheaper models — than the more upmarket and more expensive Model S and Model X, she added.
Meanwhile, buyer waiting times for the Model Y have climbed by between two and four weeks since January, research by AllianceBernstein found.
A case study of Tesla's success in undercutting a competitor with price reductions can be found in China. BYD, the country's leading EV manufacturer, suffered an $18 billion valuation wipeout between February 1 and March 3, which analysts attributed to BYD's efforts to discount its vehicles in the face of Tesla's own cuts.
Tesla's model of selling directly to consumers through its website means price cuts are more easily communicated to would-be buyers. That isn't the case for traditional automakers that rely mainly on sales via dealer forecourts.
Caldwell said price-cutting is "a lot more complicated" for traditional automakers, "because they are selling to their dealer who has final say in the price, whereas Tesla doesn't operate like that." She added that consumers generally like Tesla's approach to price cuts "because it's very straightforward."
However, there's a big downside for Tesla in making dramatic price reductions: angering recent buyers. After the January cuts, some customers expressed frustration that a vehicle they'd just purchased had plunged in value overnight.
"Price cuts also annoy customers," Caspar Rawles, the chief data officer at Benchmark Mineral Intelligence, a price-reporting agency, told Insider. "Maybe people will also hold out for another price drop in another two months, which is also a problem," he said.
Tesla is reportedly working on a new, more affordable vehicle that's expected to cost around $25,000.
Some Tesla stockholders said they were disappointed the company didn't unveil the so-called Model 2 at its recent investor day — and some analysts believe the new vehicle might not come to market until 2025.
But the launch of a Tesla priced in the same ballpark as a Chevy Trax or Ford Focus would land a crippling blow to traditional automakers, Dan Ives, an analyst at Wedbush, told Insider.
"The lower-priced future Model 2 is key to going after the masses, with the golden goose being a sub-$30,000 vehicle," he said. "It's Tesla's world with everyone else paying rent."
It's too early to declare Tesla the victor in the price war it started but it seems to be taking ground — with potentially more to come in the form of the Model 2.