The tougher credit environment might be hurting demand for Tesla vehicles more than other brands.
Many Tesla customers have been stretching their budgets to afford the purchase. This has been going on for years, and it could explain why Elon has been persistently harping on the importance of affordability so much more than other automaker CEOs have been, and why Tesla has had to cut prices this year more than most other brands have. Normally, most customers buy new cars that are in approximately the same price and market segment as their previous car.
Elon stated on the Q2 2018 earnings call, "people are trading up into a Tesla, so they're choosing to spend more money on a Tesla than their current car, just based on the trade-in values." On that same call, Robin Ren said the top 5 trade-in models were:
- Toyota Prius
- BMW 3 Series
- Honda Accord
- Honda Civic
- Nissan Leaf.
In 2019, Bloomberg published the results of a
survey of 5000 Model 3 owners. One of the questions was what car they had traded in for their Model 3. (Surveys are questionably useful in general, but this was a basic factual question and the results for the top 5 exactly align with what Tesla had said a year prior.)
Then in the Q1 2021 report, Tesla again showed that the majority of trade-ins were of non-premium brands:
CarMax has observed a similar pattern. They
stated earlier this year:
For the Tesla Model 3, our most popular EV at CarMax from September 2022 – February 2023, the most common trade-in was a Honda Civic and the second most common was a Toyota Tacoma.
Full Q2 2018 earnings call commentary on trade-ins:
Zachary Shahan - CleanTechnica
Hello. First of all, thanks for the recent retweet, Elon. I was really impressed with the Model 3 after owning a Model S, so I'm really impressed how much you've developed since the early days. My first question was about Conquest sales, actually. Right before the call we published an article that Camry sales were down 22% year-over-year, Prius sales were down 23% year-over-year and we're very curious how much you're pulling from these other cars, other segments. It sounds like you sort of answered that question at the beginning, but can you give anything in terms of what percentage those top five are in terms of trade-in sales? And how broad you're pulling? I know you pull from pickup trucks, from sports cars. Can you speak a little more about the diversity you're pulling from?
Elon Musk
Actually, what we have right now is just the top five. So I'm not sure what the allocation is between top five or where it goes beyond top five. We just sort of out of curiosity asked for the top five breakdown. And it's just interesting that people are trading up into a Tesla, so they're choosing to spend more money on a Tesla than their current car, just based on the trade-in values. A Civic is a very inexpensive car compared to particularly the Model 3 today. So that's promising from a market access standpoint.
Robin Ren
Yeah, this is very interesting. So, we looked at what people who are buying Model 3 cars in the United States, what cars they are trading in. What we found is through this year, from January to July, the top five non-Tesla cars people are trading in to get into a Model 3, they are Toyota Prius, BMW 3 Series, Honda Accord, Honda Civic and Nissan Leaf.
Elon Musk
Really surprising.
Robin Ren
Yeah. They are surprising because they are not the traditional premium sedans. They are actually – many of them are mainstream midsized sedans.
Elon Musk
Right. And we're obviously at this point not yet selling our $35,000 car, so this is promising for the future.
Then in the Q3 2023 call, we were informed that the effective retail price of a Model Y, as measured by the monthly loan payment, has remained approximately constant, and the only difference has been that more of the payment is now going towards paying interest instead of paying down the principal. Considering that the actual cost is what matters to the customer, not the Tesla list price, this would indicate that intrinsic demand has not declined.
Tesla has repeatedly told us over the years that their customers are exquisitely sensitive to price (i.e. there is high elasticity of demand), and the past market reactions to price changes have indicated this is so.
Q3 2023 call:
Elon Musk
... So, I just can't emphasize again how important cost is -- it's not an optional thing for most people. It is a necessary thing. We have to make our cars more affordable that people can buy it. And I keep harping on this interest thing, but I mean, it just raises the cost of the car.
I mean, we're looking in internal analysis, which we think is more or less on track that when you look at the cost -- or the price reductions we've made in, say, the Model Y, and you compare that to how much people's monthly payment has risen due to interest rates, the price of the Model Y is almost unchanged.
Vaibhav Taneja -- Chief Financial Officer
If you factor in the change in interest rates.
Elon Musk
Yes. Which is what I'm trying to say. The thing that matters is the monthly -- it's how much money do they have to put down and do they literally have that in their bank account or their check balance and then what is the monthly payment? And it doesn't matter how -- if that monthly payment is principal interest or whatever, it's just a number, and that number has to not cause their bank account to go negative. So, going from near-zero interest rates to kind of the current very high interest rates, the actual monthly payment is basically the same.
It's just a bunch more of it is going to interest. And there are some incremental challenges beyond that, which is the difficulty of getting credit at all has increased. And so, the number of people who simply cannot get credit, period, even if they've got a job and everything is solid, the banks are a little gun shy on handing out credit given that a bunch of them kicked the bucket earlier this year.
This all indicates that Tesla can unlock massive demand simply by progressing on cost reduction and moving into lower price tiers, especially with Gen 3.
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