/electric%20car%20being%20charged.jpg)
Ford (F) lowered the prices of its F-150 Lightning pickups by as much as $10,000 yesterday. While F stock understandably sank on the news, the price cut on the model, whose internal combustion engine (ICE) model has been America’s best-selling pickup for 46 straight years speaks volumes about the price war in the US electric vehicle (EV) industry.
The EV price war began in 2022 when Tesla (TSLA), which sells the most battery electric cars (BEVs) globally started lowering vehicle prices. Here it is worth noting that while Tesla sells the most BEVs, China’s BYD (BYDDY) is the biggest seller of NEVs (new energy vehicles) – which includes both BEVs and plug-in hybrids.
Tesla lowered car prices in October shortly after its Q3 2023 deliveries missed consensus estimates. The Elon Musk-run company followed up with yet another major price cut in January after its Q4 2022 delivery report also missed estimates.
The company's deliveries rose 40% YoY to 1.31 million units in 2022, which was below the 50% growth that it was aiming for. Tesla is targeting a long-term CAGR of 50% but even its 2023 delivery guidance of 1.8 million would imply a growth below that threshold.
The fortunes of startup EV companies like Lucid Motors (LCID) have nosedived over the last year. While the slump in loss-making growth companies took a toll on their stock prices, the EV industry price war hasn’t helped matters either.
Even Tesla’s operating profits and margins plunged in Q1 2023 after the company’s massive price cuts.
Why the EV price war in the US could escalate further
I believe the EV price war could escalate even further in the coming years because of the following reasons:
- EVs are no longer an exclusive product and buyers are getting spoilt for choices. Automotive companies – which include both legacy automakers as well as startup EV companies – have outlined massive EV expansion plans. For instance, Ford expects its EV production capacity to hit 2 million by 2026 while General Motors (GM) is targeting a 2025 production capacity of 1 million units. Currently, both these automotive giants sell small percentage of EVs compared to Tesla which has a nearly 60% share of the US EV market.
- New automakers are entering the US EV market. While Vietnam’s VinFast is setting up a new plant in North Carolina with an annual capacity of 150,000 units, Polestar (PSNY) is building a plant in South Carolina. Chinese automakers like NIO (NIO) also fancy an eventual entry into the US market. As the number of EV players in the US market increases, it might only worsen the price war as new entrants might look to capture the market with attractive prices.
- While the supply of EVs is increasing, the EV adoption rates in the US market haven’t seen a commensurate rise. In 2022, US EV sales increased 57% to 756,534. While the growth sounds healthy, it might not keep pace with the expected increase in supply.
- As the EV production capacity increases, companies would be under pressure to ramp up production as running plants at less-than-optimum capacity leads to higher per-unit production costs. Automakers are anyways struggling to sell EVs profitably and even Ford expects its EV business – which it rechristened as Model e – to lose $3 billion in 2023. As for startup EV companies, many are struggling to post even gross profits and would need to ramp up production significantly to bring down their production costs.
- Finally, Tesla made it amply clear during the Q1 2023 earnings call that the company is looking to prioritize deliveries over margins in the hope of making up later through sales of autonomous driving. So far, other automakers have tended to follow Tesla's price cuts but this time around, Ford has lowered F-150 Lightning prices ahead of the launch of Tesla's Cybertruck signaling the company's aggressive stance to protect its market share
As Tesla strives to hit its goal of producing 20 million cars annually by 2030, I believe price cuts would be inevitable. While TSLA stock crashed initially amid the price cuts, it has since recovered and more than doubled in 2023. That said, the EV price war is among the risks that Tesla investors should watch out for as it could take a toll on the company's margins and its mammoth valuation.
High interest rates and the macroeconomic slowdown could dampen car sales
While these factors would play out over the next several years, I believe there are a couple of factors that could impact the EV price war in the short term. Firstly, we have a macroeconomic slowdown which could dampen the overall vehicle sales environment. Secondly, interest rates are still quite high which means that car ownership costs continue to stay elevated and automakers might need to entice buyers with offers and discounts. During Tesla’s Q1 2023 earnings call, Musk too admitted that these factors are “tricky” for the industry.
Finally, some lessons from China’s failed EV truce
Earlier this month, China’s automobile association attempted a truce in the brutal price war and over a dozen automakers agreed to avoid “abnormal pricing." However, within days it retracted its statement saying it violated the country’s antitrust laws. The truce anyways looked shaky as shortly after the announcement Tesla, which was the only foreign automaker part of that truce, offered a referral bonus to Chinese car owners.
In the US, free market dynamics would be at play leading to an escalation in the price war, which I believe would lead to more bankruptcies in the EV industry. The signs are already visible and Electric Last Mile Solution and Lordstown Motors are among the startup EV companies that have announced bankruptcy.
Overall, I believe sanity might not return to the EV market anytime soon as EV production rises multifold leaving companies with little options rather than price cuts to spur sales.
On the date of publication, Mohit Oberoi had a position in: NIO , F , GM . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
