The slashing of EV prices is underway.

Ford lowered prices of its Mustang Mach-E SUV this week, following on Tesla’s decision in mid-January to cut some prices of its own. It prompted some analysts to predict a price-slashing battle as automakers fight for EV market share. 

Here are four reasons why Ford and Tesla are willing to take a hit on their EV markups: 

1. Technology is getting cheaper. EV lithium-ion battery pack costs fell by 89 per cent from 2008 and 2022 (in 2022 dollars), as manufacturing volume increased and technology has improved, the U.S. Department of Energy said in January.

In an earnings call last week, Tesla CEO Elon Musk said, “It’s always been our goal at Tesla to make cars that are affordable to as many people as possible.” 

2. Qualifying for U.S. Inflation Reduction Act and other rebates. Tesla’s and Ford’s price cuts allow more models to qualify for the IRA EV tax incentives, which cap prices at US$55,000 for sedans and US$80,000 for SUVs.

Tesla’s Model 3 also became eligible for Canada’s $5,000 federal rebates when prices dropped, and a third Ford Mach-E model trim became eligible on Jan. 30. The iZEV program caps prices at $55,000—or $65,000 with trims—for cars, and $60,000—$70,000 with upgrades—for larger passenger vehicles. 

3. Bursting the bubble of high prices and rising interest rates before they lose buyers. Tesla CFO Zachary Kirkhorn estimated on the earnings call that rising interest rates effectively hiked its U.S. prices by nearly 10 per cent last year, adding that Tesla is “unwinding cost increases created for multiple years of COVID-related instability.” 

Supply-chain issues left dealership-inventory levels at historic lows last year, with demand exceeding supply. Scotiabank economist Laura Gu estimated in January that Canadian new-car prices are 30 per cent above 2019 prices, at around $45,500, rising faster than household disposable income. 

“We feel a strong demand from people that want to change to electric vehicles, but their budget is around $20,000 to $40,000,” said Bruce Wu, CEO of EV used-car seller Carnex. “In the Canadian market, there’s not too many choices. Tesla is $56,000 for the entry-level Model 3—that’s still a very high price.” 

Cara Clairman, CEO of the Toronto-area EV education non-profit Plug’n Drive, said she hopes falling prices are part of a larger trend toward price parity between EVs and gas-powered vehicles, with many Canadians struggling to afford an EV. 

“Some of the lower-priced EVs, maybe they won’t change. Right now GM is saying they’re not changing their price on the Bolt,” she said. “What it does do is send a signal to the market in that higher-end category. … I do think we’re going to continue to see prices come down.”  

4. Creating economies of scale. “With higher production, we’re reducing costs, which allows us [to] share these savings with customers,” Ford CEO Jim Farley said.

Automakers like Tesla and Ford are also likely watching Chinese EV firms that are expected to undercut prices in Europe, but have yet to become mainstream in North America amid COVID-related manufacturing shutdowns last year.

“Tesla’s making a lot of EVs, but nobody else is really making them in high quantities, except maybe for China,” said Clairman. “Now we’re seeing plants in the United States, in particular, for [making] hundreds of thousands, as opposed to thousands. And that has got to change the price.” 

One downside to the price-slashing strategy, said Wu, is that the move may prompt some potential buyers to sit on the sidelines to see if prices go down further, for fear their car’s value would depreciate. 

“Right now, the market is not stable. Customers, if they’re really rushed to get a car, they make the switch with the electric vehicle. If they’re not, they’ll wait and see what’s going on with the market,” he said.

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