Big discounts for electric cars
What does a price war mean for consumers and industry?
February 25, 2024, 11:46 a.m
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After the funding ends, electric car manufacturers sometimes offer discounts of up to 10,000 euros. Word of a “price war” is making the rounds. Like in a real war, is there a loser in the end? And who is the winner?
5,000, 7,000, sometimes even 10,000 euros: After the funding ends, there are generous discounts on new electric cars. The manufacturers want to stimulate declining demand; experts and managers expect new registrations to fall by 200,000 units compared to 2023. At the same time, the Chinese are entering the market with inexpensive electric models. And Tesla has been tormenting the competition for months with a confusing pricing policy. The word “price war” is already making the rounds. But what does this mean for consumers and industry?
What is a price war?
Even though it may sound like it: “Price war” does not come from the blatant headline repertoire of tabloid media, but is also a term in business administration. A price war refers to a situation in which companies aggressively lower their prices in order to gain or maintain market share. This can have a negative impact on the profitability of all market participants – as in a real war, there are mostly losers in the end. Unless a player succeeds in weakening the competition by driving down prices to such an extent that they gain a dominant market position. This is a real opportunity, especially in industries with oligopolies – but probably not in the auto industry, which is comparatively diverse globally. Representatives of the auto industry are therefore more likely to warn of a price war than to declare it or actively encourage it. Maybe with the exception of Tesla.
Is the market already in a price war?
The market for electric cars has been doing somersaults since the state environmental bonus was abolished, says car expert Ferdinand Dudenhöffer. According to its current discount analysis, Dacia is making the biggest price concessions with a 44 percent discount on the Spring, which is also a discontinued model and is about to undergo a comprehensive facelift. The Chinese are just behind with up to 31 percent. There is currently a discount of around 19 percent on the VW ID.3, and 9 percent on the electric bestseller Tesla Model Y. The Californians are still considered to be one of the triggers of the current discount battle after they reduced prices in various markets, some of them massively. Last year, the average price for a car of this brand fell from $52,000 to $45,200. Dudenhöffer even sees further potential for reductions.
Who benefits from a price war?
First of all, the new car buyer, who can look forward to some relief after a phase of extremely high prices. In addition, vehicles could become attractive to groups that previously could not or did not want to afford them – in the case of e-mobility, this would accelerate market penetration. However, if the undercutting competition leads automakers to lower quality or invest less in future technologies, this could have a long-term negative impact on consumers. In addition, prices could rise again in the long term. Especially if the strong competition leads to a reduction in market participants.
Could the price war also harm e-mobility?
Car expert Ferdinand Dudenhöffer at least sees a concrete danger: “An upside-down world is opening up. With increasing discounts, i.e. falling prices, buyers’ interest is decreasing. A wave has spread, fueled by fear Buying an electric car involves a risk of loss of value.” A comparison of current leasing offers for electric cars and combustion engines shows that the lessors have already taken into account high losses in value. He sees politics and the surprising removal of the electric car bonus as a trigger for the problem.
Who else is suffering from a price war?
Companies often see their profits shrink as a result of a price war, and sometimes they even suffer losses. In the long term, they may be forced to make savings, for example in the quality of their products or in investments in research and development. This applies above all to the manufacturers. Dealers, landlords and car banks, on the other hand, potentially suffer from the uncertain development of residual values. If, for example, the price of a model falls sharply after a leasing contract has been concluded, the subsequent resale value of the leasing return will also fall. Losses are imminent. Large car rental companies such as Sixt and Hertz have recently reduced their Tesla inventories in particular. From their point of view, the Californians’ erratic pricing policy led to risks that were difficult to calculate.
From what situation does the industry go into the price war?
The auto industry is coming out of a period of high profits. Especially in the wake of the supply chain problems and the associated shortage of new cars, it was able to increase the prices of the vehicles sold while demand remained stable. The relatively few cars they built were often particularly high-priced and well-equipped models. Inexpensive entry-level cars have often been dropped from the range. Despite lower sales, sales and profits increased.
Who would win a price war?
“The one with the highest margin survives, the one with the lowest return is the first victim,” said Stellantis boss Carlos Tavares in the spring of 2023. Those who earn a lot of money per car can best afford to lower the price. Seen this way, Tesla and probably also the Chinese manufacturers have a good chance of surviving in a discount battle with their low production costs. And Stellantis has also made strong profits in the past and has achieved double-digit margins in recent years, as is usually the case with German premium manufacturers such as Mercedes and BMW. On the other hand, volume manufacturers such as VW, which recently had to make do with low single-digit figures and were actually aiming for a significant increase in the near future, have more problems with their margins.
Which strategies can make sense in a price war?
The business and economics textbooks usually list three strategies. In the “price leadership” approach, a company attempts to take control of prices by lowering its prices and hoping that competitors will follow suit. In doing so, it runs the risk of making losses without gaining market share. This could happen if the competition relies on the “differentiation strategy” and instead of entering into a price war, designs its vehicles in such a way that they are unique and difficult to copy. This way it can stand out from the competition and charge a higher price. Premium manufacturers have been doing this for a long time. The “niche strategy” works in a similar way, in which a company tries to serve a specialized target group and thus stand out from the masses. Sports car manufacturers or manufacturers of tough off-road vehicles could be an example.
Have there been price wars before?
New car prices come under pressure from time to time, triggered by competitive pressure, excess production capacity or other market conditions. The best-known recent example may have been the period during and after the German scrapping bonus in 2009, during which many manufacturers and dealers lured customers with additional bonuses. After the bonus was abolished at the end of 2009, demand fell and the discount battle really intensified. As a rule, the price reductions were achieved through discount campaigns or by trading in the old car at top prices. The list price was usually not touched – unlike what Tesla does today.