Long-awaited price war a sign of rapid transformation in electric vehicle sector

Splashy headlines about Tesla slashing prices for its entry-level electric SUVs below the average cost of new U.S. cars and trucks — including gasoline burners — may be a little less dramatic than they appear, considering the average cost of a new vehicle is close to $50,000 US.

But people who watch the industry say the Tesla move is just one indicator of a global transformation in the automotive sector, as legacy car makers learn how to make electric vehicles (EVs) as efficiently as the internal combustion vehicles that still provide most of their income.

They say the breakneck transition that few foresaw only two or three years ago will have effects throughout the economy, not just in things like battery production and the oil and gas sector, but, potentially, in the value of your home.

"People shouldn't underestimate how fast this market is moving," said Rachel Doran, director of policy and strategy at Clean Energy Canada, a think-tank based at Simon Fraser University.

Doran and others I spoke to said that some automakers may be dragging their feet to profit — while they still can — from selling fossil fuel cars and trucks that have been cheaper to build using old technology. But once manufacturing costs equalize, the justification for producing internal combustion cars and trucks begins to disappear.

"No carmaker has made such a dramatic reduction to a high-volume vehicle in the modern age of the automobile," wrote Bloomberg transportation specialist Tom Randall this week, referring to the latest announcement from Tesla boss Elon Musk that he was dropping the price of Tesla's Model Y, one of the top-selling SUVs of any type. 

"While Musk has denied that Tesla is starting a price war, his peers see it differently."

In fact, Tesla's move to slash prices is not necessarily a sign of strength but may be an effort to grab market share before legacy auto companies eat the billionaire automaker's lunch, said Dimitry Anastakis, a professor and historian of the car business at the University of Toronto's Rotman School of Business.

"There's going to be dozens of new vehicles that are going to compete directly with Tesla," said Anastakis. He said that by using its early-mover advantage, Tesla will force competitors to squeeze out more efficiency. "Musk is really trying to lower costs."

"Tesla is ruthlessly efficient in terms of its production processes," said the automotive historian. "And they're really pushing their suppliers to be even more price conscious."

Neither the car-making majors nor their many smaller suppliers like that kind of price pressure. But both Toyota's notorious pressure on suppliers and Compaq's personal computer push in the '90s showed it is possible to drive industry-wide prices down through brutal cost-cutting while reaping an advantage in higher sales at the new price.

But while Tesla has an advantage in its supply of EVs to satisfy new demand, Anastakis said price alone may not be enough to compete with global industry players like Volkswagen, Ford and Toyota once they gear up EV production. In fact, he sees Tesla as being a possible future takeover target.

He said the North American market's love of trucks could hurt Musk's company as it struggles to produce its Cybertruck. And this week, GM announced it was stopping production of its entry-level EV the Bolt to concentrate on larger vehicles.

Also, said Anastakis, despite its efficiency and leadership in the EV space, Tesla has never learned the complicated process of model development that always offers the next new thing, such a large part of the legacy automotive industry. Tesla vehicles, while a radical departure from pre-Tesla cars, are still very much like the original Teslas from 10 years ago, he said.