Winter tends to come around this time every year, but don’t tell that to Elon Musk.
The Tesla CEO is blaming the onset of colder temperatures for a $1,000 discount off the price tag of his Model Y. The vital crossover is responsible for two out of every three cars his company sells worldwide and any material weakening in demand could endanger his already tepid guidance for this year.
The latest in a series of price cuts that have wreaked cascading harm to the value of used Teslas now reduces the Model Y’s starting price to $42,990, before a federal tax credit that can cut up to $7,500 of the sticker price of EVs.
“Since most people don’t love to buy cars in the middle of winter, Tesla is offering a $1,000 incentive to do so,” Musk posted on Sunday, discovering a new excuse for discounting.
All automakers that compete in the U.S. market are naturally subject to the same conditions, the arrival of winter being one. There is however one weather-related factor that certainly didn’t help demand for Tesla as the domestic EV leader.
A raft of headlines warned prospective car buyers the January cold snap that sent temperatures plunging throughout much of the country could rapidly drain EV batteries, reduce driving ranges appreciably and lead to malfunctioning EV charging stations.
Tesla claims this particular discount will only be valid through February, but there is absolutely nothing requiring it to do so. As long as his ageing Model Y lacks a refreshed version, speculated to arrive in the U.S. next year, there really is only one potential catalyst that could drive prices higher: a Federal Reserve interest rate cut.
Musk’s decision to keep cutting threatens to reignite a nearly year-long debate over whether repeated discounting, occasionally punctuated by a token raise, should be the only lever for stimulating demand.
Critics argue Musk has trapped Tesla in a vicious circle by training consumers to postpone their purchase in the hopes of getting a better deal in the future. Instead they believe he should finally get off his high horse and embrace advertising rather than stigmatize it.
At $7M for a 30 second Super Bowl ad, $TSLA would have to sell 875 incremental cars (@$8k gross profit per car) to justify the cost of the ad. And the follow up interest from TSLA paying for a Super Bowl ad would be huge. Instead $TSLA cuts price by $1,000 per Model Y in the US… https://t.co/ZrqxUpRCcB
— Gary Black (@garyblack00) February 12, 2024
Why you won’t hear much about price cuts from rivals
This isn’t to say that legacy carmakers don’t do the exact same thing by pulling the price lever. They have just gotten better at hiding it.
In the past, incumbent brands all too often resorted to the blunt tool of cash rebate off the hood—GM extending its employees discount to every car buyer is one of the industry’s most (in)famous examples.
Yet in the 2010s they increasingly took a stealthier approach to price cuts. This typically involved subsidies to their dealers, who could in turn choose to pass these savings on to their customers. This made slower selling models more affordable, without triggering a flat, across-the-board drop in resale value that harmed existing owners.
Tesla doesn’t have this option since they have no franchise dealers, and there is only one standard price harmonized across an entire market like the U.S. or Germany.
Another reason why discounting it much easier to spot with Tesla is its limited product range, with just five EV nameplates including the new Cybertruck. That’s the same number of EVs as Mercedes-Benz and only one more than BMW brand, both of which also have an entire line-up of combustion engine cars to boot.
The Model Y is also easily the most visible, since its 1.2 million units helped it become the best selling car in the world last year. The other four models collectively only accounted for a third of the brand’s 1.8 million volume from last year.
Every other American new car buyer can afford a Model Y
All throughout last year, Musk has repeatedly dismissed the notion that Tesla is now demand constrained, saying there is a whole cohort of consumers just waiting to order a Model Y once they can finally stretch their budget.
But industry data shows that the average price paid for a new car made by a non-luxury brand was $45,283 in December, comfortably higher than the Model Y’s price even last week. That means every second American car buyer can afford his crossover—they just simply are not buying them.
The problem is Musk’s four car plants can currently build over 2.35 million vehicles a year, accoding to his own figures. So to keep his factories running at full capacity, it would have to sell roughly 30% more cars this year.
Adding to the pressure building up in the pipeline is his Model Y plant in Germany, which can build up to 375,000 cars annually but hasn’t come anywhere near that number. The Grünheide facility, located an hour’s drive from Berlin, halted its assembly line on Jan. 29, blaming the stoppage on parts held up due to shipping attacks near the Suez Canal.
On Monday, they resumed operations, according to reports in the local media, despite speculation it already has plenty of inventory to still sell.
Musk indirectly admitted that he had in fact proceeded too quickly with the expansion his company’s expansion, and there is in fact a limit to how many people want a Tesla after all—at least for the time being.
“This is the essential quandary of manufacturing: factories need continuous production for efficiency, but consumer demand is seasonal,” he complained on Sunday.
This might help explain why Tesla has a been dragging its feet with the construction of its Mexico plant.