Implications of the Tax Credit Change
Tesla has clarified that the performance trim level of the Model 3 will still be eligible for the tax credit. However, the more affordable versions will not qualify. There is a possibility that the automaker may pass on some savings to consumers. According to the Inflation Reduction Act rules, all Model 3 trim levels will still be eligible for the $7,500 tax credit when leased. The financing company can then decide whether to offer favorable lease terms and pass on the savings to the consumer.
Despite this, the removal of the tax credit for Tesla’s cheapest vehicle is likely to impact Model 3 sales. It is easy to imagine a scenario where the loss of these tax credits reduces demand enough for Tesla to lower prices again, sparking another round of price competition within the EV industry. The Model 3’s effective price, including the tax credit, was just below $35,000 – an appealing threshold for consumers considering EVs. To sustain demand for its mass-market vehicle, Tesla will need to keep the effective price below this threshold.
While the prospect of further price cuts in the EV market may worry investors, it may not be as troublesome for Rivian. Rivian has managed to sidestep the price war so far, and it should continue to do so if Tesla decides to reduce prices again.
A key reason behind Rivian’s ability to avoid participating in the price war is that its EVs occupy different market segments compared to Tesla. Rivian’s target consumers, willing to pay around $78,000 for the R1T truck or R1S SUV, are not likely to be swayed by the price fluctuations of smaller sedans. However, if Tesla were to slash prices on its newly launched Cybertruck, which directly competes with Rivian’s vehicles, it could have a more concerning impact on Rivian’s momentum.
Rivian has been making significant moves to strengthen its position in the market. The company recently introduced a leasing program to drive demand, signed a deal with AT&T to supply electric delivery vans, and accelerated its production and deliveries. Rivian’s gross profit per unit has also improved, and it is on track to achieve gross profit positivity in 2024.
While price wars may eventually affect Rivian, the company’s focus on the pickup truck and SUV niches allows it to delay participating in the price competition for a little longer.