EV Shakeout: Tesla Undercuts Average US Car by Almost $5,000

Purchasing a Tesla has never been this affordable.

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After a series of price reductions over the past month, the Model 3 sedan from Tesla now costs $4,930 less than the typical new car bought in the US. According to a recent Trade Algo research, that is the lowest price Tesla has ever experienced in comparison to the average US automobile.

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Similar circumstances apply to Tesla's more expensive Model Y sport utility vehicle, whose price dropped dramatically by $13,000 to begin the year. After the Toyota RAV4 and the Honda CR-V, it was the third best-selling SUV in the US last year even before those price drops, according to Tesla, which then raised Model Y prices somewhat.

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The price gap between Tesla's top-selling models and the monthly average for new cars in the US is depicted in the chart below.

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A Tesla has never been more affordable.

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Comparing Tesla's US price premiums to the typical new car

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On January 12, Tesla made its first price reductions, which have since continued to have an impact. Following closely behind with price cuts on its electric Mustang Mach-E, Ford Motor Co. also announced additional layoffs while Lucid Group Inc. gave $7,500 savings. 

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In the midst of America's first EV price battle, General Motors Co. plans to introduce electric versions of its Chevy Blazer and Equinox SUVs later this year. The "shake-out phase" of the electric vehicle business may be beginning, according to Morgan Stanley analyst Adam Jonas.

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The cost of gasoline-powered vehicles has also changed in the other way. Since the pandemic began, the average price of a new car has increased by more than $10,000, reaching $47,920 in January. A lack of computer chips, rising prices for raw materials, and manufacturers' deliberate decisions to maintain low inventories and high pricing while investing extensively in the development of electric vehicles have all contributed to this.

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With two additional price reductions, Tesla's entry-level Model 3 starts at $42,990. A $7,500 US tax credit for electric vehicles that became effective in January would reduce the price to $35,500 for those who qualify, which is over $12,500 less than the national average for new car purchases in the US.

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A concern with pricing parity

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Auto investors have been speculating for a long time as to when electric cars would become competitively priced with their gasoline-powered equivalents. Exactly when that finish line is reached is difficult to pinpoint because it depends on the automobile types being compared and whether fuel savings are taken into account. Nonetheless, the Model 3 has undeniably crossed the boundary whichever one chooses to assess it. The upfront sticker price is currently $800 less than the least expensive BMW 3 Series, one of its main rivals, without credits or fuel savings.

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Examine the cost of a three-year lease for an even more jarring comparison. When set up with comparable lease terms, the Model 3 now has almost exactly the same monthly payment as a base Toyota Camry LE.

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Another Indicator of Price Parity for Electric Vehicles

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Expense of leasing a Tesla Model 3 and a Toyota Camry

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Elon Musk's constantly fluctuating costs are unheard of in the auto industry, and he could easily change course instead of keeping them low. Tesla, though, is increasing capacity in Shanghai and ramping up production at its new facilities in Austin, Texas, and close to Berlin. Further price reductions might be necessary to draw in new customers if demand doesn't keep up with supply.

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But, according to Trade Algo, Tesla is retooling its Model 3 production lines in anticipation of a facelift for the five-year-old vehicle. When Tesla updated the more expensive Model S and Model X interiors in January 2021, it was the second time this had happened, and costs had similarly dropped to all-time lows in comparison to the US average. Tesla increased costs by 12% to 15% right away following those enhancements, and they continued to rise over the next 18 months.