Tesla will need further price cuts to trigger China demand: Morgan Stanley

Tesla (NASDAQ: TSLA) will need to cut prices further to trigger demand once again in China, a note from Morgan Stanley said.

Tesla’s most recent price cuts did not get the job done, the firm believes, but it did help more companies trigger reductions of their own, which is best for consumers.

However, Tesla has utilized price cuts in several markets, including China and the United States, to trigger demand and make its offerings even more competitive against comparable models. Tesla has adjusted the prices of its vehicles on several occasions this year in both directions, with the biggest cuts coming at the beginning of the year.

There were also cuts late last year that helped Tesla near its targets for deliveries in 2022. However, when additional cuts came after the New Year, consumers were not happy and felt slighted.

Nevertheless, Morgan Stanley’s China team said it believes this round of price cuts weren’t as successful due to the ongoing price war.

Consumers are expecting the price war to wage on, which would catalyze further cuts throughout the industry, the firm said:

“We gauge a full-blown price war would urge consumers to stay sidelined and await more promotions/discounts to come. Vehicles price elasticity of demand is decaying as consumers’ pricing expectation has also been falling YTD. This might pinch the sales resurgence and order-intake that should supposedly pickup in March.”

Volkswagen, BMW, Toyota, Ford, Nissan, and others have all cut prices in response to Tesla’s discounts, which have helped the company wage a war on its competitors. Tesla still offers what most would call the best options in terms of EVs, especially in terms of charging infrastructure.

Pricing is the only way some brands can offer some sort of advantage over Tesla, and these companies are forced to adjust accordingly to stay aligned with demand.

Tesla saw 74,402 wholesale units sold in China last month, an over 26 percent improvement from January. However, Tesla made improvements to the Model 3 manufacturing line at its Shanghai Gigafactory in January, and along with the Chinese New Year, figures for the first month of the year were soft.

Morgan Stanely reiterated its ‘Overweight’ rating and a $220 price target on Tesla stock.

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