Tesla sent ripples through car showrooms across the world when it started cutting prices this year.
Rival manufacturers from Detroit to Japan began seeing the second-hand values of their own battery models fall, while their share prices began slipping amid expectations of an electric vehicle price war.
Tesla has now promised to go even further. Elon Musk’s group is willing to sacrifice profitability to spur demand for its models as it tries to hit ambitious sales goals that would make it the world’s largest carmaker by the end of the decade.
But will the electric pioneer’s price cuts force others to follow suit? And will it lead to faster EV take-up among consumers?
Will there be an EV price war?
Most carmakers have been at pains to stress they will not cut prices. They point out that, while Tesla has new factories to fill and a thinning order book, most manufacturers cannot make battery models fast enough.
“Demand for our products is really stable, surprisingly so given geopolitical headwinds and tariffs,” said Jim Rowan, chief executive of Volvo Cars, which has had to stop taking orders for its new EX90 electric sport utility vehicle after filling a year’s production schedule within weeks.
“I think we would be doing a disservice to shareholders by doing anything other than keeping price discipline,” Rowan told the FT. “We don’t expect to get involved in cutting prices.”
Ford has been the exception, cutting prices twice this year on its electric Mustang Mach-E.
Chief executive Jim Farley said this week the company had reduced costs in the vehicle by $5,000 over this year, stressing: “We are not going to price just to gain market share.” -150 Lightning pick-up truck by $11,000 since launching the model.
Behind the scenes, discounting by stealth has crept into the industry.
While Tesla sets prices centrally, most carmakers allow their dealers to offer reductions quietly, often using money from the manufacturer’s marketing budget.
Dealers, analysts and lease providers all say that under-the-radar discounting is starting to happen in EVs from mainstream brands, despite carmakers still enjoying long order times for new battery vehicles.
Will Chinese manufacturers drive down prices?
The power to prevent an EV price war does not sit with the current manufacturers. More than a dozen Chinese nameplates are targeting Europe, which has become the western crucible of electric cars.
“There is a growing competition in the electric car market, which should result in lower prices,” said Elizabeth Connelly, analyst at the International Energy Agency. “There is a growing number of new entrants to the EV car market, primarily from China but also from other emerging markets, that are offering progressively more affordable models.”
This will drive down headline prices and force established manufacturers, especially in Europe, to cut rates to compete.
“You have too many participants, and now you’re getting more participants,” said Philippe Houchois, analyst at Jefferies, adding that high prices could not continue so “the only question is how it normalises”.
Does a price war benefit consumers?
There is evidence the price cuts may actually be making some electric vehicles more expensive, or at least slowing their journey towards affordability.
This is because of the residual value, or the second-hand value of a car.
Most new cars in developed markets are bought on deals that finance the amount of value a vehicle loses — its “depreciation” — rather than the overall sticker price.
If cars have weaker second-hand prices, more money needs to be financed and the car becomes more expensive to lease.
“If you cut prices but your residuals go down, you haven’t changed the monthly price at all,” said the regional CEO of one leading carmaker. “But all you have done is knocked confidence across the whole industry.”
Michael Shu, European boss of China’s BYD, told the FT: “The last option is always to drop the price, because that will hurt the brand, the residual values”, noting that customers who pay full price are upset when the price of the Same car later drops.
The resale value of Tesla’s own models has tanked over the past year, in part because of its price-cutting policy.
Senior figures in the leasing market say several banks have started charging more for electric vehicles out of concern — making falling residual values across the sector a self-fulfilling prophecy.
Data from UK leasing group Leasing.com shows the average monthly price on a Tesla is higher than it was in January, while EV payments across all brands have also risen fractionally.
But while falling residual values are bad for new car buyers, they help make EVs in the much larger second-hand carmaker more affordable. “I’m excited that this will unlock more affordable EVs,” said one auto trader.
Which carmakers have most to gain from a price war?
Carmakers with the largest margins on their battery models can afford to absorb more aggressive price cuts should they want to.
Volvo last month said margins on its electric models had reached 7 per cent, and would climb higher this year as the price of lithium, a crucial battery metal, falls further.
Carmakers that can only just eke out a margin on their EVs will struggle to cut, potentially leaving them to sacrifice sales instead, analysts say.
Similarly, the groups with the widest spread of electric products will be able to flex their line-up while still selling some high-margin models.
“You still have to cover the market for what people can afford,” General Motors chief executive Mary Barra told investors last month. “To get to a point where there’s many EVs being sold in the US, recognizing competition as well, you have to meet the customer where they’re at from an affordability perspective.”
Behavior will also vary from country to country. Some large markets have EV quotas, such as China, California and, from next year, the UK.
In these places carmakers may decide the most profitable route is to discount EVs to lossmaking levels purely to avoid fines for missing sales quotas, and to allow them to continue selling larger numbers of profitable petrol cars, according to two senior industry executives.
Will it drive faster EV sales?
Battery car sales are moving faster than most in the industry expected.
The International Energy Agency this week raised its EV forecasts for 2030 from 25 per cent of sales to 35 per cent, driven largely by the US Inflation Reduction Act, as well as increased European competition.
Buying an electric car using a pay-monthly approach is cheaper than petrol models in some segments, dealers say.
There is also evidence Tesla’s cuts have started to drive higher interest in the brand relative to rivals that have held prices.
“Certainly it has improved conversion of people who are looking into Teslas,” said Fiona Howarth, chief executive of Octopus EV, a specialist electric vehicle leasing group.
Houchois at Jefferies said: “There will almost certainly be better deals for you and me as customers. Carmakers have to give up some profits, then have to try and see what they can do to reduce their costs.”
Several have begun trimming costs to adapt. Volvo Cars is planning cost cuts, while Jeep and Vauxhall owner Stellantis is offering voluntary redundancy to 33,000 US factory workers because of costs in its EV programme.
“Some people say you can slow the transition,” Houchois said. “I don’t think carmakers will materially change investment plans. the direction of travel is pretty clear.”