Tesla’s Model 3 now sells for $5,000 less than average U.S. new car after recent price cuts

After a hopscotch of price cuts over the past month, Tesla’s Model 3 sedan now sells for $4,930 less than the average new vehicle sold in the US. That’s the cheapest price Tesla has ever had relative to the typical US vehicle, according to a new Bloomberg analysis.

It’s a similar story for Tesla’s more expensive Model Y sport utility vehicle, which started off the year with a staggering $13,000 price drop. Even before those cuts, it was the third best-selling SUV in the US last year, after the Toyota RAV4 and the Honda CR-V. Tesla brought Model Y prices back up slightly after it sold out build slots through at least the first quarter in the US.

Tesla’s first price cuts, on Jan. 12, were steep and sudden, and they continue to reverberate. Ford Motor Co. quickly followed by slashing prices of its electric Mustang Mach-E. Lucid Group Inc. offered $7,500 discounts, and Rivian Automotive Inc. announced more layoffs.

General Motors Co. is slated to launch electric versions of its Chevrolet Blazer and Equinox SUVs later this year, right in the thick of America’s first EV price war. As Morgan Stanley analyst Adam Jonas put it, “the EV market may be entering the ‘shake-out’ phase.”

At the same time, prices of gasoline-fueled cars have moved in the opposite direction. The average cost of a new vehicle has risen more than $10,000 since the start of the pandemic, to $47,920 in January. This has been driven by a shortage of computer chips, raw material inflation and deliberate decisions by manufacturers to keep inventories low and prices high while they spend heavily on developing electric cars.

After two more cuts to Model 3 prices, Tesla’s cheapest vehicle starts at $42,990. That doesn’t include a $7,500 US tax credit for electric vehicles that went into effect in January, which for those who qualify would bring the price down to $35,500 — almost $12,500 less than the average price paid for a new vehicle in the US.

A question of price parity

For years, auto investors have placed bets on when electric cars would reach price parity with their combustion counterparts. It’s hard to determine exactly when that finish line is reached, as it depends on which types of cars are being compared and whether fuel savings are taken into account. But no matter how one measures it, the Model 3 has clearly crossed the line. The upfront sticker price, without credits or fuel savings, now sits $800 below the cheapest BMW 3 Series, one of its closest competitors.

For an even starker comparison, check out the cost of a three-year lease. The Model 3 now has almost exactly the same monthly payment as an entry-level Toyota Camry LE, when structured with similar lease terms.

Elon Musk’s ever-changing prices are unique in the auto world, and he could just as easily reverse course rather than continue to lower them. But Tesla is ramping production at its new plants in Austin, Texas, and near Berlin, and expanding capacity in Shanghai. If demand doesn’t keep pace, more price cuts could be required to attract new buyers.

On the other hand, Bloomberg has reported that Tesla is retooling its Model 3 production lines in preparation for a facelift to the five-year-old model. The last time something like this happened, when Tesla refreshed the higher-end Model S and Model X interiors in January 2021, prices had similarly fallen to record lows relative to the US average. Immediately after those upgrades, Tesla boosted prices by 12% to 15% and kept raising them over the following 18 months.