Always innovating, Tesla has now come up with a new novel way to likely wind up losing money faster: Reuters reported that the electric car maker is going to be cutting the price of its Model X and its Model S Vehicles in China. The announcement from the company, which not surprisingly came on Thanksgiving, will see Tesla bear the brunt of costs associated with the ongoing trade war between China and the United States that it once said it would pass on to customers. In totally unrelated news, it sounds like demand is just fine.
Tesla has come out and said it’s going to cut the prices on these models by between 12% and 26% in order to make them "affordable" in the world's top automobile market. This comes at the same time that trade tensions are near an all time high between China and the United States. China has seen tariffs slapped onto US imports into the country, which is a substantial detriment to Tesla, who imports all of the cars that it sells in China.
Tesla told Reuters: “We are absorbing a significant part of the tariff to help make our cars more affordable for customers in China.”
The price cuts mysteriously come at a time when EV sales in China have been the silver lining of the entire industry, as we recently documented in an article about the global automobile collapse. EV sales were the sole area of growth last month in China, posting a gain of 51%. For the first 10 months of the year, sales were up 76% to 860,000 fueled by government subsidies and favorable policies, as well as still prevailing novelty.
Even more quizzically, back in July, Tesla was one of the first automakers to respond to tariffs by raising prices. At that point, it had the goal of moving up prices for the same two model vehicles by about 20%. Tesla also noted on its most recent conference call that setting up shop in China was going to be more difficult than originally anticipated due to the current trade tensions.
The company noted then that trade tensions with China "have resulted in an import tariff rate of 40% on Tesla vehicles versus 15% for other imported cars in China." The company said:
Tesla continues to lack access to cash incentives available to locally produced electric vehicles in China that are typically around 15% of MSRP or more. Taking ocean transport costs and import tariffs into account, Tesla is now operating at a 55% to 60% cost disadvantage compared to the exact same car locally produced in China. This makes for a challenging competitive environment, given that China is by far the largest market for electric vehicles.
Given that the Chinese auto market has recently began grinding to a halt, as we have been documenting – combined with the fact that many Tesla skeptics feel as though demand may have finally peaked - lowering prices while making their "big push" into what is supposed to be the most opportunistic automobile market in the world doesn’t come off as a move of confidence by the automaker. Rather, it comes off as one more creative way to keep costs higher and revenue lower, a business model that Tesla and shareholders should be all too familiar with already.