14 Jan 23

Tesla slashes prices by up to 20% as EV residual values fall

Tesla has dramatically reduced the price of its Model 3 and Model Y cars in key markets to bolster demand, in a move that will alarm leasing companies and any fleets with residual value risk exposure to electric cars.

In Germany, price cuts were as high as 17% on the Model 3 and the Model Y, the two best-selling electric cars in the country last month.

In the UK, Tesla cut up to £7,000 (€7,900) off the price of the two models; in Italy, the price of Model 3 cars has fallen by between 11 and 22 %, while Model Y cars are now between 6 to 18% cheaper; and in France, Tesla has axed up to €8,500 off the Model 3 and €3,000 off the Model Y. Reuters reports that Tesla has also cut prices in Austria and Switzerland.

Outstanding orders

Tesla has said that it will pass on the price cuts to any cars that customers have ordered, but which have not yet been delivered.

Across the Atlantic, the price cuts range from 6 to 20% in the US, with real term reductions as high as $21,000.

Government subsidies

Importantly, in France and the US, the reductions allow some Tesla models to benefit from government grants, which had been limited to cheaper EVs. This means buyers in France can access a subsidy of €5,000 on the Model 3, which will lower the acquisition cost of the entry level model to below €40,000. In the US, the combination of the price cut and a $7,500 federal subsidy will reduce the cost of a long-range Model Y by 31%.

A statement from Tesla said: “Our focus on continuous product improvement through original engineering and manufacturing processes have further optimised our ability to make the best product for an industry-leading cost. At the end of a turbulent year with interruptions to the supply chain, we have achieved a partial normalisation of cost inflation, which gives us the confidence to pass this relief onto our customers."

Analysts suggest the price cuts are designed to stimulate demand, with Tesla looking for higher volumes to compensate for smaller profit margins.

There is no indication yet of whether Tesla's price cuts will trigger a price war, with rival OEMs forced to match Tesla’s price cuts to maintain their own sales volumes, although the reductions now pitch the previously premium-priced Tesla cars against mainstream rivals.

Residual value impact

The longer term question for fleets is how the price cuts will impact Tesla residual values, especially of vehicles already out on lease. While the reductions will undermine the values of nearly-new cars (under 12 months old), forecasting experts insist there is no direct link between the price of a new vehicle and how much it will be worth in three or four years’ time. But leasing companies do use percentages of 'cost new' as a key element in their forecasts.

Philip Nothard, Insight & Strategy Director, Cox Automotive, International said it was inevitable that the price cut will impact residual values, but added that the used prices of ex-lease EVs are still significantly higher than when they were forecast three years ago, before the pandemic.

“EVs have benefited from the 20 to 30% hike in residual values across Europe, so leasing companies are not facing negative residual value exposure,” he said. “Prices are dropping from a very high point.”

EV RVs weaken

However, it’s clear that the supply of used EVs from several OEMs will rise sharply over the next couple of years, raising questions about how ready secondhand car buyers are to buy a plug-in car. The difference in charging infrastructure between European markets, allied to national incentives (such as the grants available for used EVs in Germany), is creating a fragmented outlook for residual values depending on local conditions, said Nothard.

He added that all EV residual values are evolving, with cars still finding their position in the used market, presenting a risk that is likely to see leasing companies develop second and third life leases to mitigate depreciation over a significantly longer period.

Fleet Europe spoke to one leasing company which had delayed remarketing a batch of Model 3 cars at the end of last year due to diminishing demand, and residual value expert cap hpi has reported declining consumer appetite for used EVs in the UK, weakened by a combination of the cost of living crisis and rising used EV volumes.

“The fleet market has continued to be much more challenging throughout December,” said cap hpi. “Electric vehicles are clearly the most challenging to shift with much reduced trade interest compared to earlier in the second half of the year. With circa five figure premiums over the equivalent ICE versions, equating to much higher monthly payments, it is not surprising that the used car retail consumer possibly doesn’t seem quite ready to make that jump into an EV just yet. Dealers who have stocked used EVs are reporting an unpalatable increase in days in stock, which is now leading to some sizeable price reductions, and in some cases, prices being slashed in order to move them on.”

In December, this led to cap hpi reporting that values for three years old Tesla Model 3s had fallen by -9.6% (£3,000), while Mercedes-Benz EQC values were down by -10.6% (£4,500) and Polestar 2 prices were -7.8% (£3,400) lower.

“With increasing EV used car supply and the continued rise in the cost-of-living dampening consumer demand, it will be interesting to monitor how this impacts the used electric vehicle market throughout 2023,” said cap hpi.

Image: Tesla

Authored by: Jonathan Manning