Teslas are cheaper than ever and its a creating a headache for the entire auto industry

A Tesla Model Y. Patrick Pleul/Getty Images

• You can now get a Model Y for cheaper than the average car.
• Tesla is making big moves into the mass market this year.
• Price reductions could show up in Q1 profit margins at earnings release Wednesday.

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Tesla's price war is spilling over out of the electric vehicle market as Elon Musk's car company continues to slash prices.

Musk has dropped the prices on Tesla models five times since the start of the year, kicking off a price war with mainstream car brands like Ford and GM. 

So far, Tesla's pricing strategy has been seen through the lens of the EV market and Musk's efforts to protect Tesla's spot as the number one seller of electric vehicles in the US, but now Tesla's vehicles are priced more comparably with the entire vehicle market.

For example, after Tesla's latest price reductions last week in the US, the Model Y now starts at $49,990. Add on the $7,500 EV tax credit, and you can now purchase a Model Y for around $42,500. That's about $5,200 cheaper than the average price paid for any vehicle in the US in March, according to car-shopping website Edmunds.

"For so long people have seen price and infrastructure as the limiting factors for buying an EV, and Tesla has just blown that out of the water," Martin French, managing director at consultancy Berylls, said in an interview. "They've just said, 'we can offer you a vehicle at about $40,000, and by the way, you can use our Supercharger network.'"

In addition to price reductions, Tesla has been dangling special offers like free charging for new customers.

It's the latest move for Tesla into the mass market this year. Musk has said the company is aiming to build 2 million vehicles this year, doubling 2022 production.

Tesla's sales were up in Q1

Tesla went into 2023 with bloated inventory – the opposite problem most of its competitors were facing. Musk spun this problem into an advantage by lowering the prices at the same time others were still charging well above sticker price on dealer lots.

As a strategy for boosting demand, Tesla's price cuts appeared to be working in the first quarter, reporting a 36% increase in deliveries during that period. 

But the move has some analysts and investors worried that Tesla could cede its industry-leading profit margins for bigger sales volumes. Those margins will be under the microscope when the company reports first-quarter earnings on Wednesday afternoon.

Analysts polled by Bloomberg expect gross margins to fall slightly, to about 21% from nearly 24%, along with lower per-share earnings and revenue.  

If the price reductions have a significant impact on profit, analysts say they would like to see Musk present a plan for regaining that ground. French pointed to some manufacturing efficiencies Tesla presented at its investor day earlier this year as potential lever for the company to pull.

"I expect if there is a hit to margins, Tesla will be ready with a clear roadmap back to their world-beating margins," he said.