Credit: Dale Cruse | Flickr
Tesla dropped its electric vehicle prices across all markets back in January. Some markets saw price drops as high as 20%. This price reduction strategy was implemented for a few good reasons. First, rival automakers are ramping up their electric vehicle production with competitive pricing in conjunction with Tesla’s higher production output. Second, rising interest rates by the Federal Reserve threaten to sink the economy into a recession making it difficult for consumers to borrow for big purchases such as electric cars. In addition, Tesla stock has taken a significant hit in the past year (down 30%). Thus, Tesla’s jolting price cuts are motivated by these economic factors coupled with increasing supply and dwindling demand.
Tesla U.S. Price Chart
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Recent Tesla purchasers are not thrilled about the price cuts; they could have saved $3,000 to $13,000 (based on the U.S. market) in today’s market versus their purchases in the recent past. Customers whose orders have not yet been fulfilled may cancel them if the new price cuts are not automatically applied. The Tesla used car market will accordingly lose its charge. Car buyers would opt for a lower-priced new car than a higher-priced used car, leaving current Tesla owners in shock. Consequently, past purchasers would be unable to recoup equity as much as they anticipated if they wish to sell their Tesla vehicles.
Buying a Tesla is unlike the typical dealership setup that is widely used in the United States. Some U.S. states (e.g., Texas, Louisiana, West Virginia, and Oklahoma) mandate a car dealership as a means of sale, but other U.S. residents purchase directly from the Tesla website via order placement. This allows the company to draft a contract with an arbitration clause that most consumers are unaware of. Forced arbitration is uncommon among other automakers because of the conventional procurement of vehicle ownership. Utilizing the arbitration clause, Tesla may prevent class action suits for consumer grievances to avoid costly litigation and a PR nightmare. Owners may lose the incentive to pursue arbitration as the cost and time may not be worth the potential compensation. Unfortunately for the aggrieved U.S. consumers, there seems to be no consumer protection laws to compensate them for these massive price drops.
Arbitration and its Usage in Corporate Settings
Tesla claims this arbitration agreement benefits its customers, but careful examination may prove otherwise. The contract allows buyers to forgo arbitration if they send a letter asking to opt-out. Though there are instructions to opt-out in the contract’s fine print, most buyers are unaware of that option. Therefore, the ability to appeal, pursue a class action, hear of other consumer issues, and choose an arbitrator is likely out of consumers’ hands. This may push judges to send theoretically filed class actions into arbitration, but a judge may maintain the class action if the arbitration clause is considered harmful to consumers.
Arbitration is a litigation alternative meant to resolve disputes between parties to a contract. Parties agree that a third party (arbitrator) will make a binding decision for their dispute. The binding decision allows for predictability without the chance of appeal that is common with litigation. Arbitration is generally faster, more affordable, and more flexible than litigation as it is a streamlined approach. Additionally, arbitration is a confidential process that allows public exposure avoidance. Thus, Tesla would not only save its time, money, resources, etc., but also prevent negative publicity with the provided confidentiality.
Many other big businesses are using binding arbitration such as Amazon, Microsoft, and Uber. Arbitrators don’t provide judicial statistics and class actions that a traditional civil action would generate. This allows these large corporations to conceal their malfeasance and take advantage of consumers’ who may be crippled by the inability to engage in the arbitration process. In spite of that, the opposition would contend that arbitration is generally more efficient and beneficial to consumers.
Where has the price drop taken Tesla?
So far, there have been no looming consumer protection litigation pursued. However, the demographics of Tesla owners consist mostly of Millennials and Gen Z’ers in tech. More potential tech layoffs threaten these owners' Tesla vehicle ownership. This means that more Tesla vehicles may be up on the market some time this year and further saturate the big production numbers of the leading EV brand. Ergo propelling potential price point pillaging precariously.
What does this mean for Tesla?
It may drive a lot of new owners to lose loyalty for the brand. Staying with a brand that lost you so much money while competitors expand with competitive pricing may be unlikely. Moreover, former Tesla fans were angered by Musk’s Twitter acquisition and subsequent management. Tesla’s shine is beginning to corrode with the political and economic momentum, but their price drops may attract new buyers to sustain the company. The new prices will incentivize people to buy into the premium brand and show off their incredible deal and newfound social status.
*The views expressed in this article do not represent the views of Santa Clara University.