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January 2, 2019

Tesla will cut prices to combat tax credit phase out

Tesla is cutting its car prices in the United States by $2,000 to combat a cut in a federal tax credit for its buyers.

Tesla triggered the tax credit phase-out in July when it became the first car maker in the United States to sell more than 200,000 plug-in vehicles. The government designed the credit to be phased out for each automaker once it reaches that milestone.

Before that benchmark, Tesla buyers were entitled to a tax credit of $7,500 for purchasing a plug-in electric car.

But as of January 1, Tesla buyers will only get half that credit, or $3,750, for the next six months. The credit falls to $1,875 in July, and then disappears in 2020.

"We are taking steps to partially absorb the reduction of the federal [electric vehicle] tax credit," Tesla said in a statement.

The price cut might be good news for Tesla buyers, but it was bad news for investors. The price cut could lead to a decline of about $180 million in revenue every quarter, based on Tesla's fourth-quarter sales. Tesla's (TSLA) stock fell 8% on the news.

The tax credit phase-out comes just as Tesla was preparing to sell a $35,000 version of its Model 3 sedan, the first time it will be taking aim at the price-conscious mass market.

CEO Elon Musk said in an interview on "60 Minutes" that he expects the lower-priced version of the Model 3 to be available in five to six months.

Tesla also reported strong production and sales for the just completed fourth quarter. Total sales were up 8% and Model 3 sales were up even more, about 13%, to 63,150 vehicles.

That works out to an average of about 4,900 Model 3s per week in the quarter, putting it in range of its goal of 5,000 Model 3's a week.

But sales came in about 1,750 below Wall Street estimates for the fourth quarter, according to data from FactSet. The slight miss added to investors' concerns.

Analysts had been expecting that the last-minute rush of buyers seeking to get the full tax credit would be a bigger boost to fourth-quarter sales said Daniel Ives of Wedbush Securities. But he said the bigger concern was the price cut, which he said came as a complete surprise.

The price cut would be "a potential positive for demand but not what the bulls wanted to hear on the impact to profitability and ultimately the bottom line," he wrote in a note to clients.

Tesla said sold a total of 245,240 cars in 2018, nearly as many cars as it sold every year before last year, combined.

Tesla said most of its cars went to US customers in the fourth quarter, because it was rushing to fill sales and keep the full tax credit in effect.

It anticipates selling more vehicles to international customers in 2019. It expects to start selling the Model 3 in Europe and China in February and will expand Model 3 sales to other markets, including countries where drivers sit on the right side, later in 2019.

Tesla faces increased competition from other luxury automakers who will be rolling out their own electric vehicles in the United States later this year.

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