Tesla (NASDAQ: TSLA) is reducing the price of its most popular models by as much as 20% in an effort to increase sales in the U.S. and Europe. The cuts will make more of Tesla's vehicles eligible for the federal electric vehicle tax credit, including the carmaker's most popular and cheapest long-range EV, the Model Y.
The news of the price reductions was followed by a drop in Tesla's share price, but the cuts are also expected to help Tesla attract buyers in an increasingly competitive market.
"This is a clear shot across the bow at European automakers and U.S. stalwarts (GM (NYSE: GM) and Ford (NYSE: F)) that Tesla is not going to play nice in the sandbox with an EV price war now underway," Wedbush analyst Daniel Ives wrote in a note. "Margins will get hit on this, but we like this strategic poker move by Musk and Tesla."
On an earnings call in the fall of 2022, Tesla CEO Elon Musk first suggested that price cuts might be coming sometime this year, and the company has continued to struggle since then. 2022 was the worst year Tesla has had so far, with the company suffering a $700 billion loss in market value.
The Model 3, which already met the EV tax credit's $55,000 price cap, will soon have a base price of $43,990, down $3,000 from its current price.
On the other hand, currently, only one version of the Tesla Model Y, the 3-row, is lower than the tax credit price cap, and that's only because it qualifies for a higher price cut-off. Following the price reduction, the Model Y will have a base price of $52,990, making it eligible for the $7,500 credit.
The vehicles might meet the criteria for the tax credit, but some buyers still won't qualify. The federal EV tax credit also has income restrictions for recipients: only individuals making up to $150,000 annually, households making up to $300,000, and heads of households making up to $225,000 are eligible for the credit.
Tesla has long dominated the market for EVs, but many major automakers have entered the market at a lower price point, slowly undermining Tesla. Along with that pressure to bring down prices, Tesla is also getting some relief from supply chain issues that had been keeping costs high.
Affordability is a growing priority for automakers in general as they become more concerned about pricing out potential buyers. Thanks to diminishing supply chain issues, the number of cars available on the market is also increasing, and analysts expect carmakers to start bringing down prices in response.
Unlike its competitors, Tesla doesn't negotiate with customers on its prices, making it easier for the company to change its prices in comparison. This means Tesla can adjust prices more quickly and easily in reaction to changing market forces.