What does Tesla slashing car prices really mean for the company?

Supply, demand, and the art of keeping shareholders happy

Well, I was going to write about the historic crewed launch and SpaceX, Tesla’s overachieving older sibling, but then the launch got scrubbed. Instead, let’s discuss money.

Tesla cut prices on several vehicles earlier this week: the Model S and X now cost $74,990 and $79,990 — respectively — for their base model, a $5,000 drop. The Performance versions of both cars, which are more expensive, have also dropped by $5,000. The Model 3’s cheapest model, the Standard Range Plus Model 3, is now $37,990, a $2,000 decrease. All Model 3s are also now $2,000 cheaper. (The pricing is slightly different for the Model 3s in China, however.)

The Model Y, introduced this year, remains unchanged. So did Tesla’s closing stock price the day after the announcement.

Remember when Tesla CEO Elon Musk decided to reopen the Fremont factory on the weekend of May 9th, ahead of the May 18th date targeted by local health officials? This should suggest high demand. The price cuts suggest the opposite.

Sales of all autos, generally, tanked in the last two months: in March, sales plummeted and April wasn’t much better. Tesla isn’t the only automaker attempting to lure buyers back — 0 percent financing, deferred payment plans, and other incentives are popping up all over the place. Maybe that’s because trend forecaster IHS Markit has projected a 22 percent drop in the global auto market this year, as rising unemployment means less demand for cars. Electric vehicle sales are expected to fall 18 percent worldwide this year, according to Bloomberg New Energy Finance.

There might be more clarity on what the price cuts mean if we knew how many cars Tesla sold in March and April, but like many automakers, Tesla shares its numbers on a quarterly basis.

The explanations of what the price cuts mean vary. The explanations are as follows:

1. Tesla isn’t immune to the pressures facing other automakers.
2. The price cuts target older vehicles and suggest they have peaked in demand.
3. Tesla relied on federal tax incentives for electric vehicles and a strong economy to boost sales — and now both are gone.
4. Other automakers are offering deals, so Tesla needs to offer deals to remain competitive.
5. Tesla wants to meet its delivery goals.

Let’s talk for a moment about camp number five, the “delivery goals” camp. Now, Tesla had a surprisingly good first quarter! Despite shutdowns at its Chinese and US factories, Tesla told its investors it might still meet its goal of delivering 500,000 vehicles worldwide this year. Price cuts sure seem like one way of making sure that happens.

The first quarter of 2020 was “pacing to be the strongest quarter of deliveries until our operations were interrupted in March,” the company said in its quarterly results. Price cuts will lower Tesla’s profit margin, but if the goal is demonstrating that Tesla can meet its goals for deliveries, that may not matter. Historically, Tesla investors don’t seem to care much about profits — the first quarter profit in 2020 was just its fifth in the last three years. It’s also possible that Model Y sales are strong enough that they’ll make up for whatever money is lost on the older cars.

There’s also the proxy statement released yesterday. In it, James Danforth, who owns 850 shares of Tesla stock, suggests spending $50 per car on paid advertising. “Its [sic] self-evident that advertising can increase brand value, product awareness, and interest,” Danforth’s statement says — the “[sic]” apppears in the filing and is not my addition. Advertising may also allow Tesla to respond to “misinformation campaigns sponsored by competitors and detractors worldwide, and steer the narrative more favorably.”

Tesla’s board of directors recommends that shareholders vote against this proposal, saying it “would not serve the best interests of Tesla or our stockholders.” Further, Danforth “presents no evidence that Tesla has insufficient visibility with prospective customers or that paid advertising, whether at the arbitrary amount suggested by the proponent or at all, would increase such visibility in a manner favorable to the Company or its shareholders.” Tesla delivered “a record 367,656” vehicles, an increase of 50 percent from the previous year, the statement notes.

Tesla’s directors have a pretty good point! This week alone, Jay Leno featured the forthcoming Tesla Cybertruck and Elon Musk on CNBC, Teslas were used to drive astronauts to the scrubbed SpaceX launch, and an influencer posted a video of a Model Y durability test.

The goal of this price cut may be more about reassuring shareholders that Tesla can meet its goals, even in the face of factory shutdowns, than it is about anything else. That doesn’t make the other possible explanations wrong — all of them can be true at the same time. But keeping shareholders happy may be the most important part.