Tesla strikes first, but there’s no EV price war yet

Tesla's surprise price cuts last month have sparked lower stickers and lease deals from some competitors, but it's still too early to call it an electric vehicle price war, analysts say.

While Ford trimmed up to $5,900 off some versions of the Mustang Mach-E last week after Tesla's $13,000 cut on the Model Y, most other automakers say they are sticking to current EV pricing.

General Motors, Volkswagen, Hyundai and Kia — the top EV players in the U.S. after Tesla and Ford — said they are sitting out the current round of EV price reductions for now. So are luxury brands such as Mercedes-Benz and Polestar, which are still small players in the U.S. EV market. BMW said it wasn't sharing its pricing plans.

"I think it's too early to say for sure if it turns into a price war," said Stephanie Brinley, principal automotive analyst at S&P Global Mobility. "We're seeing different reactions from different automakers. It's not settled that just because Tesla dropped prices, everyone else has to."

Brinley said that Ford's price cuts, which were the most significant response to Tesla, were focused on higher-end trim levels of the Mach-E. The base model received only a $900 reduction to $47,495 with shipping. "I don't think Ford's price drop was as dramatic as it sounds," she said.

GM, which has competitively priced its Bolt EV hatchback and Cadillac Lyriq crossover, said it is working on a portfolio of mainstream EVs at a variety of price points.

"When we look at our strong product portfolio and the interest that we have at the prices that we've already announced, we feel that we're well-positioned," CEO Mary Barra said on an earnings call last week. "Of course, we're going to monitor it and we'll make sure we remain competitive."

Chevrolet expects to launch a $30,000 version of its new Equinox crossover EV next year.

Volkswagen and Hyundai made similar statements in response to Tesla's price cuts. The most inexpensive VW ID4, at $40,290 with shipping, is already less expensive than Tesla's base Model Y at $55,130 with shipping. Hyundai's Ioniq 5 starts at $42,785 with shipping.

Brian Moody, executive editor for Kelley Blue Book, said legacy automakers can't ignore Tesla because of its dominance of the EV market, but they also don't have to follow Tesla's strategy of cutting prices to juice demand.

"Another strategy is: We're not going to lower our prices on our current models because we think they are priced right," Moody said. "But we are going to offer a small truck at a lower price and a small sedan at a lower price. Those things are coming."

Also stirring the price question now is the new federal tax incentive of up to $7,500 on EVs. Unlike the old tax break that had few restrictions, the new one applies only to vehicles made in North America and puts price caps of $55,000 for many models and $80,000 for certain trucks.

"It's very difficult right now to figure out what you should pay for an EV," Brinley said. "It's fairly confusing right now and unclear who gets what" since the rules around the tax incentive are subject to change and some provisions are being challenged by lawmakers in Washington.

Tesla's price cut put the Model Y, the bestselling EV in the U.S., below the $55,000 price cap for the two-row model with extended-range battery. Ford's reductions put more versions of the Mach-E below the cap. Hyundai no longer qualifies for the tax break because its EVs are imported from Korea.

"Hyundai has not taken any specific actions in response to competitor pricing changes, but we constantly evaluate the entire marketplace to ensure our vehicles are priced competitively," the automaker said. Hyundai, Kia and Genesis — all part of Hyundai Motor Group — are planning U.S. EV production.

Some automakers have announced lease deals on EVs since a loophole in the new tax incentives allows the $7,500 credit to go to leasing companies without price caps or restrictions on where the vehicles are made.

Lucid Motors, with its Air sedan priced above the $55,000 cap, sent a message to customers late last month that the $7,500 tax break can now be built into leases through Lucid Financial Services.

Vietnamese automaker VinFast, which is just entering the U.S. market, also announced a lease deal on its VF 8 electric crossover after Tesla's price cuts. The lease deal reduces the sticker price of the entry-level City Edition Eco to $50,200 including shipping, from $56,700.

One factor holding back more widespread price reductions on EVs is a lack of supply, analysts say. Legacy automakers have been slow to roll out EVs, allowing Tesla to capture 65 percent of the U.S. EV market last year from its factories in California and Texas.

In a recent research note, Bank of America analyst John Murphy characterized the Tesla and Ford price reductions as "odd," given that consumer demand appears to easily outstrip production capacity.

"Both Tesla and Ford are citing demand that exceeds supply, which means that cutting prices would be a direct hit to the bottom line today, and unnecessarily degrades future earnings power," Murphy said. "The irrational pricing spiral that appears to be beginning on EVs will hopefully be quickly remedied by criticism by investors."

Brinley said she doesn't see automakers reliving past mistakes when incentives pushed prices below manufacturing costs in an attempt to inflate demand and keep factories running.

"To cut prices in order to increase sales is dangerous," she said. "It can put you in a position where you are not making a profit."

Tesla is in something of a unique position. It is forecasting gross vehicle margins above 20 percent, even after the price reductions.

It also has new factories in Texas and Berlin, along with a recent expansion in China, and it needs growing vehicle orders to support the ramp-up of those facilities.

Tesla produced 1.3 million vehicles last year and is forecasting 1.8 million this year.

But unlike much bigger automakers, Moody said, Tesla does not have the ability to quickly develop new models at lower price points. So to maintain its market share, it is lowering prices on the models it has, pushing price points down from luxury levels.

"I don't see Tesla being able to come up with two to five more models in the next five years," Moody said. "Even though they have a dominant part of the electric car marketplace, they also have to pay attention to a very large number of high-quality competitors coming into the marketplace."

Tesla is expected to announce new products on March 1, possibly including an entry-level model starting below the current sticker of its Model 3 sedan at $45,630, including shipping.

Rather than a price war, Moody sees the current situation as a value war.

While early adopters are willing to pay a premium for EVs, mainstream buyers will be more focused on an apples-to-apples comparison with combustion vehicles and hybrids, Moody said. That will require mainstream EVs at mainstream prices with fewer compromises.

"If you price people out of the market because it costs you so much to build the thing, maybe that needs to be reassessed," Moody said. "The strategy of other automakers — Kia, for example — is probably not to reduce prices but to build lower and lower priced cars that are complementary with what they already have."