Tesla Lost $5.5B In Used Vehicle Values From 2023 Pricing Drops

Overview

In 2023 Tesla made significant adjustments to the pricing of the Model S and Model X (highlighted below). Any change in new vehicle transaction price will have a “pass through” effect to the same model in the used market. There is also likely to be a cross-elasticity impact to the values of adjacent models in the showroom and even the competitive set. In this exercise, we are looking exclusively at the impact of new vehicle MSRP changes made in 2023 on the Tesla Model S and Model X. We are not considering how these price adjustments impact other Tesla vehicle values or competitive EVs from other brands. Nor are we considering depreciation from evolving market conditions, vehicle age or any other factors.

Methodology

Units in Operation

To understand the total change in value to the Tesla vehicles in the US market, first we must determine current units in operation. We aggregated all vehicles sold since the Model S and Model X launched in the US market (2012 and 2015 respectively) and assumed a typical 5% annual scrappage rate of all vehicles to understand how many units in each model year are likely still on the roads in 2023.

Valuation Impact

To understand the valuation impact, we start with the current 2023 model year change in MSRP of the Model S and Model X. We then apply a pass through rate for each subsequent model year. This dollar impact for each model year is then multiplied by the units in operation of each model year. When we multiply the per unit valuation loss by the number of units in operation we arrive at the following valuation loss per model year below. The combination of peak sales volume for the S/X for 2022MY and the fact the pass through effect is the highest in dollar terms for any used model year results in estimated lost equity valuation of approximately $1.5B for this model year alone.

Tesla Car Parc Estimated Valuation Impact for the US Market

Lastly, we take the sum of all model year valuation impacts to arrive at the total change in valuation of Model S and Model X vehicles currently in operation in the US market. This staggering loss of value presents risk to lending institutions and lease/loan portfolio ABS investors and also disrupts the equity position of consumers. 

Remarkit’s Perspective

It’s impossible to perfectly navigate the retail automotive landscape, but it’s critical to understand how tactical decisions impact the holistic health of a brand. Historically, most automakers have placed priority on managing new vehicle inventory and production rates over used vehicle portfolio values.

While market share and sales performance are high profile KPIs, the rollout of incentives or pricing changes can have dramatic impacts on the business enterprise for automakers with high lease penetration and wholly owned captive finance organizations. In this regard, Tesla is more insulated from used vehicle valuation declines than say, Mercedes-Benz or Honda.

Curiously, these pricing changes seem to get more attention in consumer and automotive industry media than more subversive ways to impact new vehicle acquisition cost such as cash discounting or finance/lease subvention. While MSRP reductions are the most visible form of pricing changes, these other incentive strategies also impact the new vehicle transaction price and therefore the used values as well.

But ultimately, the complexity of automotive manufacturing forces difficult decision making. The capital intensive nature of vehicle development, with long development cycles and high fixed labor and materials cost, combined with supply chain management planning that can take months, if not years, to adjust means that many automakers really only have one tool to address immediate market imbalances: incentives. But not all incentives are created equal. Limiting visibility will limit used vehicle impact.

The definitive solution to protect new vehicle transaction prices and used market values is to strategically manage production volume and build mix throughout the life cycle of a vehicle. Easier said than done, but when executed well contributes to long term brand health, elevated transaction prices and overall marketplace success.