Tesla price cuts offer long-term benefit to Mercedes, BMW: analyst
Tesla's (TSLA) price cuts hit the electric vehicle maker's bottom line in the first quarter, generating consternation among investors and industry watchers this week. Many, including Ford's (F) Jim Farley, believe an electric vehicle price war is coming soon to the US.
"Price wars are breaking out everywhere," Farley said at an event on Thursday, according to a Bloomberg report. "Who's going to blink for growth?"
But there might be a reason why Ford and other mainstream automakers are concerned about it more than others.
That's because the big winner in this EV price war could be the luxury automakers.
"[Mercedes and BMW are] still holding onto their brands," London-based Bernstein Research analyst Daniel Roeska wrote in a note to clients on Thursday. "In the long-run, this may actually be good for the premium OEMs."
Roeska added Tesla's price cuts mean "Mercedes and BMW's offerings have now moved clear out of Tesla's price range."
European automakers that remain in what Roeska called the "firing line" of Tesla's price cuts are automakers like Volkswagen, Stellantis, Renault (in Europe), and to a smaller extent Volvo.
"The competitive setting in the EV market seems to have taken a dramatic step-shift," Roeska wrote. "Tesla will weaponize its higher standing gross margins, cut prices and try to grow (or maybe just secure) market share."
The fear for luxury automakers like BMW, Mercedes-Benz, and Audi has been that price cuts for Tesla's Model 3 and Model Y would hurt sales of popular models like the BMW 3-series, Mercedes C-class, and Audi's A4 and Q4 lines.
In the US market, Tesla overtook BMW as the top "luxury" automaker in terms of overall sales for the first time at the end of last year.
But the question is what constitutes a luxury brand versus a premium brand — if not for factors like price.
As prices came down for the Model Y and Model 3 — for instance the Model Y LR price went from $65,900 at the start of the year to $49,900 today — these entry-level Tesla models are no longer playing in the rarefied air of German luxury vehicles, but are now doing battle in the realms of Ford and Volkswagen.
"The residual value of any Model 3 should now be much lower," Roeska wrote. "Individuals who financed their Tesla have now seen the value of their asset fall. Fresh Tesla customers should be quite angry."
On the company's first quarter earnings call on Wednesday, Tesla CEO Elon Musk said, "We've taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin. However, we expect our vehicles, over time, will be able to generate significant profit through autonomy."
In price-conscious markets like the US, price cuts and the ubiquity of brands can hurt perceptions among consumers — and give an edge to brands who retain an air of exclusivity, Roeska argued.
"Tesla is not only sacrificing its EV margins to achieve its volume ambitions," Roeska wrote. "To some extent it is also placing the goodwill and brand equity that it has built up on the altar too. This is most important in the premium-end of the market, where brand perception and social status are the crux of sales."
Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.
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