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It's War in the EV Market

| February 06, 2023

In case you missed it, Tesla cut prices on most of their cars.  Anywhere from 6% to nearly 20%.  See the chart below.

As you can see in the chart, this gets many of their lower priced vehicles under the tax credit limit.  Here’s how that works.

Depending on the size of the battery used, the credit can range from $2,500 to $7,500 and one requirement is the final assembly must be in North America, so cars like the BMW i4 do not currently qualify for that credit.

In addition to the two requirements above, the credit also depends on a taxpayer’s MAGI (Modified Adjusted Gross Income). Basically, your adjusted gross income plus any non-taxable social security income or tax-exempt interest added back in. The MAGI thresholds look like this:


Oh, one other minor thing. The MSRP cannot exceed $55,000 for passenger cars and $80,000 for pickups and SUVs.

If you were paying close enough attention above, you noticed that the Model Y Long Range qualifies for the credit, but the Model Y Performance doesn’t (far right column). Why is that you ask? Well, the Model Y is marketed as an SUV, but the IRS doesn’t classify it as an SUV, so the $55,000 MSRP limit makes the Performance Y just above that threshold. More on this in a bit…but let’s first look at some Econ 101 – Supply and Demand.

If we look at the supply/demand curve and factor in Tesla lowering prices, we would expect demand to go up. 

And this is what Tesla got after cutting those prices.


It’s really the opposite of the lower left chart below. Instead of increasing supply, which lowers price, Tesla lowered prices which increased demand (quantity). In fact, the Tesla cuts were a response to waning demand for their vehicles. That would be the upper right chart. 

In light of the fact that Tesla lowered prices, what do we think would be a normal response from other car makers? At a minimum, if other companies don’t lower their prices, some of those buyers will opt to buy a Tesla instead of Brand X. Maybe that other company is ok with that. Or…maybe they respond this way.

Sitting on the Tesla earnings call, it was interesting to see the power of the Tesla brand and how powerful their balance sheet has become. It was noted that Tesla now has over $22 billion in cash and equivalents on their balance sheet. Elon made a comment that it’s not an insignificant number when you consider how much money they are making on that pile of cash and equivalents. If we use 4% as a number, Tesla is making over $850 million a year in interest. That’ll pay a couple bills, huh? Of course, if we go back a year ago, that cash wasn’t yielding much at all. It was a half-step better than putting it in the mattress.

To bring this around to a broader slowing economy, we have mentioned many times that autos were big contributors to inflation in 2021 and early 2022, but have since become one of the main deflationary forces in the markets. Here’s the latest update of what the wholesale used car market looks like.

You can see a slight uptick in the last month, but I think you will see that was more of an anomaly than a new upward trend, for lots of reasons I don’t need to go into. But you can see we are back to May 2021 levels at this point.



So now, the Performance edition Model Y as well as many other car models that were previously too expensive (more than $55,000) have been reclassified as SUVs, which makes the credit available up to $80,000. Who says lobbying the government isn’t good for business?

Anyhow, for those looking for a new (or new to you) car, you are seeing those prices come down fairly quickly. That should also help continue putting some pressure on inflation, as other parts of the economy are still showing inflation (food and even gasoline has started to go back up recently).

I hope you have a good week. January finished nicely positive, which theoretically bodes well for the rest of the year. If you have any questions or want to talk through something, let’s schedule a time.