Every price war has a point at which someone decides the conflict has lasted too long. Tesla might be getting close to that point, but it’s unclear if Elon Musk is prepared to acknowledge it.
Tesla has drastically reduced the cost of its cars over the last two years in the US, China, and a number of European markets. The long-range Model Y was reduced in price from $67,000 to $50,490. The Model S’s price dropped from almost $130,000 to $96,380. According to some estimates, the average price of a Tesla dropped by about 25% in just one year. As Musk has made clear, the reasoning is straightforward: give up margin now, gain market share later.
The issue is that tomorrow keeps getting pushed back. By mid-2023, Tesla’s gross margin, which had previously been comfortably above 26%, had dropped to 18.2%, the lowest in four years, and was still declining. In just a single year, free cash flow fell from $3.4 billion to $848 million. Revenue fell short of Wall Street expectations.
Deliveries actually decreased in some areas, despite the fact that they were expected to soar due to lower prices. These figures are significant for a business that established its reputation in part by being the only automaker with truly healthy margins. “I can’t think of another point in the history of automotive when a brand that wasn’t going out of business cut prices 20% a year,” noted Mark Schirmer of Cox Automotive.
Musk continued to cut despite this. He openly acknowledged the uncertainty during a call with analysts, saying, “One day it seems like the world economy is falling apart, next day it’s fine.” I have no idea what the hell is happening.” For someone who seldom expresses doubt in public, it was an exceptionally honest moment. But what it exposed was a strategy based more on gut feeling than data—a wager that if Tesla can outlast its rivals by sheer cost advantage, the suffering will eventually be worthwhile.
That reasoning has merit. According to most analyses, Tesla’s manufacturing costs per car are still lower than those of the majority of its competitors. For each EV they sell, traditional automakers like Ford lose thousands of dollars. Although BYD is expanding quickly in China, it still has a small market share in the United States. In that regard, Tesla’s readiness to reduce its profit margins appears more like attrition than desperation—grinding down the competition before they can grow.
However, attrition tactics have risks of their own. According to Wharton School marketing professor John Zhang, price wars necessitate ongoing dedication. “You have to plan ahead,” he advised. “That’s how you win.” Additionally, winning suggests a point at which prices level off, margins rebound, and the sacrifice is deemed worthwhile. When that time comes for Tesla is still genuinely unknown.
Unlike Ford or GM, Tesla does not have a traditional combustion-engine business to rely on while it waits, which makes this particularly delicate. The lights are not kept on by internal subsidies. Every margin point that Tesla loses on an EV sale is a margin point that it is unable to recoup elsewhere. Competitors are aware of this asymmetry, and it’s difficult to avoid wondering if some of them are quietly happy to watch from a safe distance while Musk runs this race at his own speed.
As this develops, there’s a feeling that the EV market is still figuring things out, and that the ongoing price war may reveal more about how uneasy the entire sector is than who is winning. Adoption by consumers is slower than anticipated by the industry. According to one analyst, the pie is expanding crumb by crumb. In order to close the gap left by lower prices, Tesla staked its short-term strategy on volume growth. That trade-off hasn’t materialized completely yet. The most crucial question facing the electric vehicle industry at the moment may be whether it ever does.
