Tesla's Price Cuts in China - Is This Bad?

Tesla's Price Cuts in China - Is This Bad?

Tesla has announced some price drops in China. As expected, this news has been viewed a negative and Tesla's stock price has taken a big hit. What do these prices drops mean?

First, here are the price drops in China:

Model 3 RWD: 279,900 yuan to 265,900 yuan
Model 3 Performance: 367,900 yuan to 349,900 yuan
Model Y RWD: 316,900 yuan to 299,988 yuan
Model Y Long Range: 394,900 yuan to 357,900 yuan
Model Y Performance: 417,900 yuan to 397,900 yuan

In terms of dollars, the price cuts are as follows:

Model 3 RWD: $40,060 to $38,140
Model 3 Performance: $50,650 to $48,180
Model Y RWD: $43,630 to $41,300
Model Y Long Range: $54,370 to $49,280
Model Y Performance: $57,540 to $54,780

The costs of Tesla's vehicles are certainly much cheaper in China. The biggest stand out here is that the long range Model Y shows a drop of about 9.4%. Wow! Does this mean Tesla has a demand problem in China? Is Tesla going to reduce prices in the U.S. now?

I think that Tesla will continue to sell every vehicle they make as Elon Musk said on the Tesla earnings call. There has already been an influx of orders for Tesla vehicles in China, even crashing Tesla's website in China. Just this price drop has caused a flood of orders.

Tesla's Increase In Market Share With a Decrease in Cost of Vehicles

Tesla will likely reduce prices in the U.S., but probably only for models that have short wait times, like the Model 3 standard range. When the tax credit takes place next year, I believe we are going to see a huge increase in orders for Tesla vehicles, and Tesla may instead RAISE prices to match increasing demand.

There would be some concern if Tesla hasn't dropped prices actually. We are most likely headed into a recession like environment and these price cuts were inevitable. I think that there are going to be multiple bankrupt EV companies in China as well.

Nobody else besides Tesla can make an EV at a profit. Tesla has done an outstanding job with manufacturing to get to where they are today. China isn't doing well right now and without some major changes there, it will continue to be a difficult environment.

Tesla in China has made a lot of progress, now having a run rate of 1 million vehicles per year. China has generated a great cash flow for Tesla. However, Tesla China was a bonus. Tesla didn't even need any joint ventures there. Tesla was leant money to setup its factories. CATL is near Tesla and everything in China is cheaper.

Even if China were to completely disappear, I think in the long game, Tesla will be OK. Still, the profit from the factories in China is pretty high. But, Tesla's future isn't in China, though a compact Tesla in China would be good. China is the largest car market in the world, but the cost is low. The U.S. is a larger car market and the prices are higher.

Even with the price drops in China, they are still going to sell every vehicle they make for years to come in China, for a great profit. Tesla's earnings may drop slightly. But it won't be significant because Tesla will sell every vehicle they make.

The price cuts may have some short term and minor effect on Tesla, but long term will be insignificant.

Do you think the price drops in China are good or bad? Why do you think so?

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Jeremy Johnson is a Tesla investor and supporter. He first invested in Tesla in 2017 after years of following Elon Musk and admiring his work ethic and intelligence. Since then, he's become a Tesla bull, covering anything about Tesla he can find, while also dabbling in other electric vehicle companies. Jeremy covers Tesla developments at Torque News. You can follow him on Twitter or LinkedIn to stay in touch and follow his Tesla news coverage on Torque News.

Image Credit, Tesla Daily, Screenshot