Tesla on Friday cut prices in Europe, Israel and Singapore, the latest in a series of price reductions that has taken the starting prices of certain models down as much as 20%. Investors sent Tesla shares down in early trading.
Tesla’s not alone. Cox Automotive reported this week that average prices paid for new vehicles in the United States fell below sticker prices in March for the first time in 20 months.
The physics of overcapacity in the auto industry are like the laws of gravity. You can deny them, but they always work the same way.
In the United States, the auto sector is set up to deliver 17 million vehicles a year. The market is traveling currently at an annualized pace of less than 15 million vehicles a year. That 2 million vehicle gap is a gravitational force that confronts automakers with three choices: Cut production, cut prices – or act like everything’s fine as unsold vehicles pile up, losing value by the hour.
Option Three – build inventory and hope for the best – has been tried many times and is a proven recipe for trouble. The CEOs of the Detroit Three have all promised shareholders that this time, Option Three is off the table.
Right now, the easiest way to support production plans is to give back some of the extraordinary price increases pushed through when chip shortages made new cars and trucks scarce.
Overall, average prices for new vehicles were 3.8% higher in March than a year earlier, Cox data shows. (Cox’s price changes by manufacturer and brand are here.)
But between February and March, average prices fell by 1.1%. Among the brands leading that month-to-month drop: Ford, BMW, Mercedes and Nissan.
Tesla’s U.S. prices in March were 6.9% lower than a year ago, but up 0.4% from February.
Industry executives will be reluctant to concede that prices are shifting into reverse, because costs for developing new electric vehicles, building battery plants and paying higher wages to workers are not.
First quarter investor calls are starting soon. The trajectory of pricing should be a featured topic.
