Wednesday, September 6, 2023

Upside Down on Your Tesla?

When a manufacturer cuts prices by 10% or more, you overpaid for your car.

I mentioned early on in this blog, about being "upside-down" or "underwater" on a loan.  You bought a house in 2007 and paid $500,000 for it.  In 2008, it is worth only $400,000 and you still owe $450,000 on the loan.  Big trouble.

But of course, a house loan is over 30 years, and maybe in five years, prices will recover - if you can hold out that long.  With a car or boat or RV, however, the loan balance is often chasing the depreciation, and the depreciation usually wins.  This is why 10-year RV or boat loans (or 7-year car loans) are often always a bad idea. You are stuck with the vehicle and cannot sell it, unless you bring thousands of dollars in cash (which you don't have) to the closing table.  Either that, or default on the loan, destroy your credit rating, and owe even more money to the bank.

This is why you see old Boats and Motorhomes rotting in people's side yards.  They lost interest years ago, but still owe money to the bank.  Sort of like Mullet-Man and his barn full of broken toys - that he still owes money on.

Tesla stock is up 100% this year, which makes little sense as the P/E ratio is an astounding 63.  While that might seem "normal" in silicon valley, it is considered absurd in Detroit.  Ford, for example, has a P/E ratio of 13.8 - which is astounding, if you think about it. But stock prices are often based on emotions, not logic, and an army of bots and simpers are hyping Tesla stock, much as Gamestop and AMC stocks have been hyped (both companies losing money and have no plans to make money).  Just because some nerds on Reddit overpaid for one share of stock doesn't mean it is "going places."

The dumpster is a place.

So why did Tesla drop prices?  Well, last year, Elon Musk demanded that price subsidies for electric cars be abolished - now that his company was no longer eligible for them.  Neat idea - eliminate the subsidies that propped up your company, just as the competition gets into the business.  Can anyone really be that baldly self-serving? You bet. Instead of abolishing these subsidies, the Biden administration expanded them, and as a result, they now once again apply to Tesla vehicles, provided the prices drop.

And so, today you can get a Model S for a base price of $74,990, $3,500 less than last week's lowest price, or a Model X for $79,990, $8,500 less than last week.  The price drop for the Model-S is not so concerning (although the newer model has a better range).  But with the ill-fated model-X and its leaky doors, the drop of $8,500 is over 10% of the purchase price.  If you put down a 10% down payment (or less) on your Model X, you are now upside-down on the loan.

UPDATE:  It gets worse.  Since new Tesla Model X owners now qualify for a $7500 tax subsidy, that means they are paying $16,000 less than Model X buyers who bought in August.  That's a huge amount of depreciation in a matter of days.  What's more, it says volumes about the real value of a Tesla, particularly in an era where competition is heating up.  As I noted early on, the genius of Tesla was to market the Model S as a high-end luxury car, instead of a bare-bones commuter box (which previous EV companies tried to do).  It changed the whole paradigm of EV marketing - back then.  With electric cars entering the mainstream, prices had to come down, eventually, across the board.
But the price drop doesn't end with new-car sales.  Cars depreciate almost linearly over time, until they reach a point, 10-20 years down the road, where repair costs exceed resale value and they get scrapped.  I have run into naive people who have told me - with a straight face - that their five-year-old car is "worth more than a new one!"  But in reality-world, no one is going to pay as much for a used car, when they can get a new one, under warranty, for the same money - or less.

So these price cuts trickle down through the Tesla ecosystem - used Teslas are now worth a proportionate amount less, overnight, than they were worth last week.  This will surely piss off a lot of Tesla owners.  A lot more owners are underwater on their loans, now. The real trouble could come from lessees - when they go to turn in the cars, Tesla may start playing the "back-end charges" game, as the cars may be worth less than the residual.

But why are they lowering prices?  There was once a waiting list for Teslas, and when they called you, you went and got your car and you didn't have much choice as to the model or options.  But since those halcyon days, the world has changed.  The Chinese offer a plethora of locally-branded models, chipping into one of Tesla's prime markets.  Ford and GM are selling electric vehicles, with better fit-and-finish (and when Detroit outdoes you on assembly quality, that is saying something!).  Even oddball brands like Rivian are in production.  I actually saw a Lucid parked in Jim Thorpe, Pennsylvania.  Then there is the "dirty halo" of owning a Tesla, when the company is run by a neo-Nazi.

Tesla had to lower prices to attract buyers, particularly for the problem-plagued Model X. With subsidies back on the table, they may be able to clear some inventory - yes, inventory.  The electric car market is becoming competitive.  We are starting to see the beginnings of a price war.

And historically, this has been the pattern in the car business.  Shortly after the turn of the (previous) century, there were dozens upon dozens of car makers in the US.  If you made buggies or wagons, you starred making cars.  Many tried, only a few succeeded.  And the bigger you were, the easier it was to crush competition.  "Go Big or Go Home!" wasn't a slogan minted in Silicon Valley, but in Detroit, Michigan.

The Great Depression weeded out a host of these lesser car-makers.  Even GM teetered on the brink of bankruptcy (and it would not be the last time, either!).  After World War II, the "big three" started a price war that devastated smaller companies like Studebaker, Kaiser-Frazer, Packard, Hudson, and Nash.  American Motors rose from the ashes of the latter two, but even that would be absorbed within a couple of decades.  Why would you buy a stripped "Henry J" Kaiser when a Chevy 210 cost the same amount?

Tesla has to go big or go home - and the political views of its CEO are not going to help sales to eco-friendly buyers.  And the neo-Nazis are not buying electric cars.  We are at a gay campground and there are quite a few Teslas parked here - gays embraced them early on.  A year or two ago, it was like, "Cool!  You bought a Tesla!" but today, the owners are like, "Only 36 more payments to go!" before their lease ends and they can unload their Hitler-mobile.

Lowering prices isn't a sign of strength - it is an admission of defeat.

We went through this in the 1980s when Lee Iaccoca offered "rebates" on Chrysler cars.  By offering "rebates" they were not lowering the sticker price and thus preserved their pricing position.  But it started the whole trend of rebates and discounts that continues to this day (with a brief interruption for the pandemic, of course).  No one expects to pay full price for a car anymore, unless it is a limited edition model in short supply (e.g., the new Corvette) or they are particularly foolish.

If you bought a Model X last week, it may be tempting to just let the bank repossess it and the go out and buy a new one - for 10% less.  Of course, the bank would still come after you, and your credit rating would be shot.  But it illustrates the pickle Tesla put buyers in - more than a few now owe more on their cars than they are worth in resale value.  And that's never a good place to be.

"If you can find a better car, buy it!" - probably a slogan Tesla won't want to use!