Tesla’s Price Cuts Are Roiling the Car Market

“‘There’s no way,’” Mr. Tran recalls thinking when he saw Tesla’s new prices. The Model Y offered more battery range at a competitive price to the Mach-E, he said.

Tesla’s price cuts have drawn mixed reactions from investors and Wall Street analysts. Some suggested the move was made in response to waning demand. Others viewed it as Tesla squeezing competitors by sacrificing some of its strong operating-profit margins—which are larger than most car companies—while also lowering prices enough to qualify many models for a $7,500 federal tax credit.

What is clear, analysts say, is that the lower Tesla prices are undercutting some competitors’ EVs just as those auto makers try to convince investors and car buyers that they are a viable Tesla alternative by rolling out new plug-in models. It also wreaked havoc on used-car lots, dealers say, lowering the value of some Teslas by several thousand dollars overnight.

The Model Y starting price now is around $53,000, down from about $66,000. That is still higher than a base-model Mach-E, but below some of Ford’s higher-end versions of the EV. The Model Y base price is roughly $10,000 less than the starting point for

General Motors Co.

GM -1.06%

’s Cadillac Lyriq, a similarly sized SUV the auto maker is now rolling out.

Meanwhile, the return of a federal tax credit for some Tesla buyers gives the company additional pricing power. Under the federal climate package passed last year, some buyers of Tesla’s bestsellers—the Model Y and Model 3—are eligible for the $7,500 subsidy if the cars are priced at $55,000 or below. In recent years, Tesla buyers weren’t eligible at all because of a manufacturers’ cap on overall EV sales, but the cap was eliminated as of Jan. 1 under the new law.

Mr. Musk hasn’t discussed Tesla’s rationale for cutting prices. He has said rising interest rates can hurt consumer demand by making cars less affordable.

“Fed rate increases make cars more expensive for consumers, increasing the difficulty level for automotive companies,” Mr. Musk tweeted Thursday.

For now, traditional auto makers, which don’t have the EV scale of Tesla, have thin profit margins or lose money on their plug-in models, Bank of America analyst John Murphy said. Tesla’s price reductions likely will pressure car companies to further reduce their EV costs and ultimately could lead to a price war, he said.

“These price cuts are likely to make business even more difficult, just as they are attempting to ramp production of EV offerings,” he said.

A GM spokesman said the company is monitoring Tesla’s strategy, but it hasn’t had an effect. “It does underscore the value of having a broad EV portfolio at multiple price points, which is exactly what we’re developing,” he said.

A Ford spokesman said the company posted record Mach-E sales last year and has strong demand for its EV lineup. The company continues to monitor the market to remain competitive, he said.

GM Chief Executive

Mary Barra

and Ford Chief Executive

Jim Farley

each have declared a goal to eventually unseat Tesla as the top EV seller in the U.S. but for now remain far behind. Tesla sales accounted for about 65% of total U.S. EV sales in 2022, beating Ford’s 7.6% and GM’s 3.5%, according to sales data and estimates from research firm Motor Intelligence.

The number of car shoppers researching Tesla surged following the early January price cut, research site Edmunds said. The Model Y was the second-most-researched vehicle on Edmunds’ website for the week ended Jan. 15, up from 70th the week prior. The Model 3 moved up 36 spots.

Soon after the price cut, applications for financing of Tesla vehicles tripled at Tenet, a New York startup firm that provides financing to EV buyers. The influx of customers has remained elevated, Tenet Chief Executive Alex Liegl said.

Some car dealers say they are worried about losing customers in the wake of Tesla’s pricing moves.

Howard Drake, who owns Cadillac, Buick-GMC and Subaru dealerships in the Los Angeles area—one of the nation’s largest EV markets—expects Tesla’s lower prices to draw customers who were looking for EVs, but also those who would have otherwise bought a traditional gas-powered car.

“In a place like L.A., it re-prices the whole market for midsize luxury SUVs,” he said. “The EV market will feel it the most, but everything will be impacted.”

Meanwhile, dealers who sell Teslas from their used-car inventory say valuations on some models fell by several thousand dollars following this month’s price cut. In the first 17 days of January, prices of 2020 model year or newer used Teslas were down about 25% from their peak in June of last year, about double the rate of the industrywide drop during that same period, according to Edmunds.

Shaun Del Grande, chairman of a large dealership group in the Bay Area, another EV hotbed, said he had dozens of used Teslas in stock.

“The market is softening,” he said. “When new-vehicle prices go down, the price of used cars gets impacted. We’re seeing that in a big way.”

Write to Nora Eckert at nora.eckert@wsj.com and Mike Colias at mike.colias@wsj.com