Price war? Tesla drops the Model Y starting price below the average U.S. vehicle cost

Tesla Inc. is now charging less for the cheapest version of the Model Y sport utility vehicle than what the typical new vehicle sells for in the U.S., a threshold Elon Musk crossed in blazing fashion.

At $46,990, the base Model Y now costs $759 less than the average amount paid for a car or truck in the U.S. The differential between these figures has changed by more than $20,000 since the middle of last year.

Since January, Tesla has lowered the Model Y starting price by 24%, the biggest drop of any of its vehicles. No carmaker has made such a dramatic reduction to a high-volume vehicle in the modern age of the automobile. The Model Y was the bestselling EV in the U.S. last year and one of the top SUVs of any type.

Although Musk has denied that Tesla is starting a price war, his peers see it differently. Ford Motor Co. Chief Executive Jim Farley, whose Mustang Mach-E SUV lost considerable share to the Model Y last quarter — despite some discounting — said last week that price battles are “breaking out everywhere.”

Indeed, Tesla has been slashing prices beyond America’s borders. French carmaker Renault last week called Tesla’s cuts a challenge and said it was examining its pricing strategy in response. In China, automakers have followed Tesla with steep discounts, and at least one analyst has warned that some companies might not survive.

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Morgan Stanley analyst Adam Jonas said last week that Musk’s U.S. cuts are so aggressive, they may lead some automakers to slow down their breakneck pace of investment in electric vehicles, rather than compete with Tesla on price in an uncertain economy.

“We are questioning whether this is the ‘moment’ where the boards of the legacy OEMs [original equipment manufacturers] can reconsider dialing back the magnitude and timing of their EV capex [capital expeditures] and R&D plans,” Jonas said.

Tesla’s Model Y already became one of the three bestselling SUVs in the U.S. last year. That was remarkable considering the starting price of the Model Y was more than double that of the Toyota RAV4 and Honda CR-V, the market’s perennial favorites.

Now, that cost barrier has been reduced to a speed bump. On top of that, the Model Y became eligible for $7,500 federal tax credits for the first time.