We were driving in a caravan to a friend’s dock the other day on a beautiful late-summer Midwestern day. The line of cars winding through the back coastal roads near Lake Michigan was notable not for our vehicle (a V8 truck) but for what was absent: a Tesla. All four other cars in our group were Tesla Model Xs, all of which had been purchased in recent months by friends who previously drove a mix of fully loaded GMCs, Suburbans, Expeditions, and other similar vehicles.
This proves that Tesla’s ingenious pricing strategy is working.
On January 1 of this year, a Tesla Model X (the three-row SUV) cost $120,990. The exact same car in September was priced at $79,990. Comparable gas or electric top-end large SUVs from Ford, GM, BMW, Mercedes, and others still cost $100K and up. That’s a roughly 34% price drop, for those keeping score. Other Tesla models have followed a similar downward pricing trend. A Model S (the larger sedan) cost $104,900 at the start of the year. By March, the price had fallen to $89,990. Following subsequent price drops, the cost of a Model S stood at $74,990 on September 1—with a fully loaded Plaid model, which races from 0-60 in 1.9 seconds, costing only a small premium over the base model.
While this may seem like an unheard-of price drop in today’s automotive world, Tesla is, in fact, channeling a company that similarly revolutionized the industry exactly a century ago: Ford. When Ford introduced the Model T in 1909, it cost $850. But by 1924, the company was able to reduce the price to $260 while still turning a profit through its famous SKU standardization (one color: black), production efficiency, and perhaps most importantly, volume. Over its production run, Ford produced more than 15 million Model Ts, a number even more impressive considering the population of the U.S. was a fraction of what it is today.
On many levels, Tesla is pursuing a remarkably similar strategy to Ford, and this extends beyond pricing. Like Ford a century ago, Tesla is expanding its factory footprint and building new facilities, including locations in both the U.S. and China. The company is also vertically integrating, producing its own batteries, software, and even investing in proprietary chip designs. When it comes to product standardization, if Henry Ford were alive today, he could learn a thing or two from Tesla. Factory options are virtually non- existent and are almost entirely software-based (including self-driving features). Interestingly, for those who do want to add the very limited factory options, prices are actually increasing. The Tesla “Yoke” steering wheel, which makes the cockpit of a top-end model look more like an F-22 fighter jet than a car, previously cost $250 earlier in the year but now fetches $1,000.
Tesla’s strategy is especially cunning as its overall market share continues to decline in the EV market while competitors ramp up production. But while automotive analysts forecast that Tesla will own only 18% of the EV market by 2026 (down from a high of 78% in 2018), the per-unit growth rate is astronomical. In Q1 of 2023, Tesla produced 440,808 Model Xs. By Q2, this number climbed to 479,700 units, representing an 85.51% year-over-year quarterly increase. In the current high-interest-rate climate, where car payments for Teslas and similar models often exceed $1,000 per month due to lending rates approaching or exceeding 10%, this is even more remarkable.
Investors are taking note. In early September, Morgan Stanley raised its rating on Tesla to “Overweight,” increasing its price target to $400 (from $250). The firm suggests, no SpaceX pun intended, that it continues to spot “plausible, scalable Moonshots that have not yet been fully discounted by the market,” specifically citing Tesla’s proprietary hardware (e.g., chips) and software/AI (including autonomous capabilities) investments.
All of this suggests a recipe for continued growth.
As for us, we still love the menacing growl of our V8. But when it comes time to buy our next family vehicle, we know one thing: there’s no way we’re going to pay a 30+% premium for it.
And since this is Surplus Record after all, we need to mention that indeed the price for Used Tesla’s has also dropped nearly $20,000 in the past year!
And while used car prices have fallen recently (from their all time high’s in 2021 & 2022 thanks for covid supply chain shortages) the average price of a used Tesla has fallen approximately 17.7% compared to 5.5% for the rest of the used car market!
So we appear to be seeing a new level of affordability in the Tesla car market which has never been seen before.
