EV Price Wars: Good or Bad for Consumers?

Tesla, Ford, and other automakers have slashed prices on new EVs. Is this race to the bottom good for buyers, bad for the market, or both?

EV Price War by the Numbers

As the recently red-hot EV market has cooled off, and carmakers are responding by cutting prices. The cascading effects of these price cuts are already being seen on the used EV market, raising questions about our currently bumpy transition from internal combustion to electrification.

Ford Drops Price on Mustang Mach-E EV

Ford’s recently announced round of price cuts to their premier EV, the Mustang Mach-E, offers a case in point. The entry price for the Mustang Mach-E Select (rear-wheel drive) was slashed from $42,995 to $39,895, a reduction of $3,100 dollars. An even bigger reduction comes with the Premium trim with extended range battery pack. This version saw its price go from $53,995/$56,995 (RWD/AWD) to $45,995/$48,995, that’s $8,100 from the prior MSRP.

Because of changes to Federal EV tax credits that took effect starting Jan. 1, the Ford Mustang Mach-E is not eligible for the full $7,500 credit unless it is being leased. Ford’s credit arm is offering a “Red Carpet Lease” cash incentive of an additional $7,500. Changes to the EV tax credit now require manufacturers to build those EVs in the US and source a certain percentage of battery components from the US and trade allies. The loss of those federal tax credits could have something to do with the dip in sales of the Mustang Mach-E, which fell 11 percent in January 2024.

Ford isn’t the only EV maker offering deals. Volkswagen has kicked up the incentives on their ID.4 EV from six percent to 17 percent of the average transaction price (ATP). Hyundai has been doing the same, raising incentives on the Ioniq 5 from three percent to 18 percent of ATP, year-over-year.

Tesla Initiates EV Price War

Changes to the federal EV tax credit system are secondary to the moves made by Tesla over the last year. The country’s leading EV manufacturer has slashed prices for its new vehicles multiple times over in recent months, totaling a reduction of 21 percent year-over-year, from around $61,000 per unit to an average of $50,000. The current price for a 2024 Tesla Model Y is listed at $42,990 while the Tesla Model 3 is now down to $38,90.

Why Tesla Started a Price War

Traditionally, economists will tell you price wars end up hurting all parties within a sector. Driving prices downward can spark a tit-for-tat steadily eats away at margins and lowers the value of a product in the eyes of consumers. So why would Tesla risk starting an EV price war with an uncertain end game?

Two big reasons: the first being slowing growth in the EV market. A few years ago, when supply chains were snagged and inventories were low, prices were high and Tesla’s stock was soaring. Today, the landscape has shifted dramatically, a glut in inventory and slowing demand mean EVs are sitting on lots for double the time of their ICE (internal combustion engine) counterparts (roughly 50 days for ICE vehicles versus over 110 days on average for EVs). The slice of the market that makes up EVs continues to grow, even as some ICE segments stagnate, but the rate of that growth has slowed considerably.

The second reason for Tesla’s price reductions is simply the increase in competition. Though the company still commands around 60 percent of the EV market in the US, their share of that market has been steadily eroding as traditional automakers have made their entries into the EV market. According to Reuters, the Chinese EV maker BYD surpassed Tesla in the third quarter of 2023 as the world’s largest EV maker. Missing growth targets have put a significant dent in Tesla’s share price, which has fallen for the year 22.1 percent as of mid-February. In addition to the hit to its shares, the reduction in prices will inevitably impact Tesla’s profitability. Elon Musk’s gamble is that Tesla’s market share will be enough to weather the storm while fledging competitors and legacy automakers take big losses trying to match an unprofitable price point.

What an EV Price War Means for Buyers

This game of chicken with EV prices has major implications both good and bad for prospective buyers, current owners, and our collective transition toward greater electrification. First, the good. New car prices, EV and ICE alike, have a direct impact on used car prices. As new EV’s become more affordable, so have used EVs. While used car prices for ICE vehicles fell by roughly five percent over 2023, used EV prices dropped by a massive 30 percent over that same time. Notably, many EVs are classified and priced as luxury vehicles, a segment already known for steep depreciation curves.

For example, prices for a used 2017-19 Tesla Model 3 have now dipped to under $30,000, closing in on the requisite $25,000 mark for federal tax credit eligibility. That number, $25,000 for a used EV, was a significant and somewhat unrealistic hurdle for buyers when it was announced back in mid-2022, but today it appears easily within reach for buyers.

The reduced cost for entry into the used EV market, while welcome, has a flipside. The reduction in new EV prices means the value of currently owned EVs also drops as well. A car is the second largest expenditure for Americans, after their house. The expected residual value of this depreciating asset is critical to the overall math of such a purchase. When the EV market takes a significant slide downward, current owners can be left owning more on their vehicle than it’s worth.

It’s not hard for those who bought EVs at the height of the market in 2021 and 2022 to regret it today. Between an overall cooling automotive market and the reduction in EV prices (and attendant used EV values), the financial hit can be significant. Beyond precipitous depreciation, high interest rates further complicate the picture for those considering an EV purchase. Some experts worry the current math might keep already hesitant shoppers from pulling the trigger on a new or used EV.

Prospects for an Electrified Future

And yet, the current price war looks to alleviate one of the two biggest hurdles to EV adoption, the other being a lack of charging infrastructure. And it turns out Tesla might be coming to the rescue there as well, as most major manufacturers, from Ford and GM to BMW and Kia, have announced a switch to Tesla’s charging standard. Time will tell how quickly American’s will adopt EVs and what their market ceiling proves to be, but lower prices might at least help in the short term, whatever the long-term implications.