A Tesla showroom is seen in the City Center shopping center on January 17, 2023 in Washington, DC.

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DETROIT — Tesla vehicles in the U.S. are seeing significant price cuts, and that’s proving to be a double-edged sword for the electric carmaker and the greater automotive industry.

Tesla earlier this month slashed prices of its new cars by as much as 20%, making the vehicles more affordable and likely eligible for federal tax credits. But it also tanks the resale values of cars for current owners and is sending ripple effects through the auto industry.

CEO Elon Musk hasn’t directly addressed the price cuts, which are counterintuitive to his claims that the company’s cars will be appreciating assets — a rarity for the market aside from classics and collectible vehicles.

Analysts say the price cuts suggest Tesla is prioritizing sales over profits, potentially signaling a demand problem.

“There’s demand weakening, and they want to improve their sales — or it’s a market share grab,” said Michelle Krebs, Cox Automotive executive analyst.

For the industry at large, Tesla’s price cuts put pressure on other automakers to offer more affordable EVs despite rising commodity costs, creates havoc for used vehicle retailers that will need to write down the vehicles and has Wall Street concerned about the first EV pricing war amid recessionary fears.

“Tesla’s price cuts make all other EVs and [internal combustion engine vehicles] look incrementally more expensive, is margin compressive and sends a chill across the used car market,” Morgan Stanley analyst Adam Jonas wrote in a Friday investor note.

Automakers change prices regularly on new vehicles. It’s typically done through incentives or when a new model year comes out. But the adjustments, upward or downward, are historically small to avoid upsetting the automotive ecosystem for both consumers and car dealers.

Musk foreshadowed such a move last month in predicting a recession later this year.

“Do you want to grow unit volume, in which case you have to adjust prices downward? Or do you want to grow at a lower rate, or go steady?” Musk said Dec. 22 during a Twitter Spaces conversation. “My bias would be to say let’s grow as fast as we can without putting the company at risk.”

Tesla is due to report fourth-quarter earnings Wednesday after market close.

Used prices

Tesla’s stock performance over the past year.

Cars.com reports list prices for used vehicles on the consumer-shopping website declined 3.3% for the Model Y and Model 3 as owners attempt to hold the line on resell pricing despite cuts to the new vehicles.

“The Tesla price cuts will affect consumers quite differently depending on which side of the news they sit,” Ivan Drury, Edmunds’ director of insights, said.

On one hand, Tesla owners have complained to billionaire CEO and Twitter owner Musk on the social media platform that the price cuts devalue their vehicles. In China, where price cuts took effect earlier than in the U.S., protesters reportedly gathered at the automaker’s showrooms and distribution centers demanding rebates and credits.

Recent Tesla buyers who missed out on the fresh price cuts are petitioning Musk and the company to make them whole. They have sought free, premium driver-assistance upgrades, free Supercharging and other pluses to offset their higher price tags.

At the same time, Cars.com and Edmunds both report interest in and searches for Tesla vehicles have skyrocketed since the reductions.

CarMax, the nation’s largest seller of used vehicles, quickly sold hundreds of Teslas after realigning prices. It only had about 150 Tesla cars for sale as of Tuesday, down from hundreds before the company cut prices.

“We continuously adjust retail vehicle pricing in real time to match market conditions and offer competitive pricing,” CarMax Chief Operating Officer Joe Wilson said in an emailed statement. “As such, we adjusted pricing to respond to the market conditions related to new car price reductions and this has been received positively from consumers looking to purchase a used Tesla.”

Peer pressure

Wall Street analysts were largely positive on the cuts for Tesla as a boon for sales.

Tesla has enjoyed significantly higher profit margin on its EVs compared to traditional automakers. Its software and subscription offerings, including its advanced-driver assistance systems and in-vehicle Wi-Fi, could help cushion anticipated profit losses due to the recent price cuts, as could EV tax credits.

Plus, the price reductions pressure other automakers, or OEMS, to cut prices on their own EVs.

“Most OEMs are currently losing money on EVs, and these price cuts are likely to make business even more difficult, just as they are attempting to ramp production of EV offerings,” BofA Securities analyst John Murphy wrote to investors earlier this month.

Gerald Johnson, General Motors’ head of global manufacturing, said Tesla’s cuts don’t change the company’s manufacturing plan for electric vehicles. The automaker currently sells its sub-$30,000 Chevy Bolt EV models — among the most affordable in the industry — as well as higher-priced models on a new battery system.

“We believe we have an EV for every price bracket and every market segment that we’re rolling out here,” Johnson said Friday during an event in Flint, Michigan. He said Tesla’s price cuts signal that the vehicles “may have been overpriced to begin with.”

GM cut the prices of its Bolt models by thousands of dollars last year, only to recently raise them by hundreds of dollars, citing industry pricing pressures.

– CNBC’s Lora Kolodny and Michael Bloom contributed to this report.

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