There May Be a Price War Coming for Electric Vehicles. Here’s Why Rivian Can Win It.

Consumers hoping to receive a $7,500 federal electric vehicle (EV) tax credit on a Tesla (NASDAQ: TSLA) Model 3 next year could end up with a lump of coal instead. But the ripple effect of this change and what it could mean for competitors such as Rivian Automotive (NASDAQ: RIVN) could be much more impactful than investors realize.

What’s going on

Specifically, Tesla’s most affordable vehicle will no longer qualify for the $7,500 federal EV tax credit after the calendar flips to 2024, when stricter rules on battery sourcing will take effect. The loss of the tax credit will apply to most Model 3 trims. However, the performance trim level will still be eligible, according to Tesla.

There are a couple of interesting factors for investors to note. First, it’s still possible the automaker could pass on some savings. All Model 3 trim levels will still be eligible for the $7,500 tax credit when leased, per Inflation Reduction Act rules, but it would be up to the financing company to decide whether those savings are passed on to the consumer via favorable lease terms or not.

With that said, however, the loss of the tax break on Tesla’s cheapest vehicle will almost certainly put further pressure on Model 3 sales. And one thing investors know for sure by now is that Tesla is willing to slash prices to support demand. It’s easy to envision a scenario where the loss of these tax credits softens demand enough that Tesla reduces its prices again, setting off another round in the EV industry’s price wars.

The motive for Tesla to do that is clear. With the tax credit, the Model 3’s effective price was just under $35,000, and that price point has been the threshold for shoppers on the fence about EVs due to their high sticker prices. If the company wants to keep demand healthy for its mass-market vehicle, it will be imperative for it to keep the effective price below that threshold.

Would it dampen Rivian momentum?

For most investors in EV companies, indications that more salvos may be coming in the ongoing price war are not good news.

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But that outcome would not be especially problematic for Rivian, which has been building momentum. The good news is that Rivian is one of the few EV makers that has been able to avoid joining the price war so far, and for the same reasons should remain unimpacted if Tesla again slashes prices.

The main reason why Rivian has been able to avoid participating in the price war is that its EVs don’t directly compete in the segments where Tesla has been slashing prices. Consumers who are willing to pay a starting price of roughly $78,000 for a Rivian R1T (truck) or R1S (SUV) won’t be impacted by the price fluctuations of a smaller sedan.

Now, if this same price cut development were to happen with Tesla’s newly launched Cybertruck, which will more directly compete with Rivian’s vehicles, it could have a far different and more concerning impact on Rivian’s momentum.

Why Rivian

Rivian has momentum going into 2024. It just launched a leasing program to stoke demand, has inked a deal to supply AT&T with electric delivery vans (vehicles it previously was selling exclusively to Amazon), and accelerated its production and deliveries. It has also improved its gross profit per unit, and is on track to be gross profit positive in 2024.

Price wars will eventually bite Rivian, but because the company only competes in the pickup truck and SUV niches, it should be able to avoid them a little bit longer. That’s great news for shareholders this holiday season.

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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.

There May Be a Price War Coming for Electric Vehicles. Here’s Why Rivian Can Win It. was originally published by The Motley Fool