Tesla’s latest Model 3 price cut reinforces doubts about demand for its vehicles

Tesla Inc. cut the base price of its Model 3 sedan in the U.S. weeks after a federal tax credit shrank in half, renewing concern over whether the electric-car maker can sustain sales with less support from incentives.

The Model 3 now starts at $38,990, according to Tesla’s website. Arndt Ellinghorst, an analyst at Evercore ISI, wrote in a report Tuesday that the halving of the U.S. tax credit to $1,875 at the beginning of July is causing the company to reduce prices to support demand.

“The key question remains — will Tesla be able to sustain itself given steadily declining ASPs and worsening mix?” Ellinghorst wrote, referring to the average selling prices of the company’s vehicles dropping as the Model 3 becomes a greater share of deliveries, replacing the more expensive S and X models.

Tesla shares fell as much as 2.2% to $247.93 shortly after the start of regular trading Tuesday. The stock was down 24% this year through Monday’s close.

While the starting price of the Model 3 has fallen, Tesla’s moves to simplify its lineup include dropping a standard-range version of its larger Model S sedan. The cheapest version available is now $79,990, according to the company’s website.

Tesla also cut prices on all vehicles shipped to China, with the Model 3 dropping to about $52,000 from about $55,000, according to a Tesla representative. Prices of the Model S and Model X were cut about 4% to about $113,000 and $115,000, respectively.

The changes won’t affect prices of Model 3s that will be produced near Shanghai, according to the representative. Tesla is expecting to begin output at a factory there later this year.

Tesla is adjusting prices “in order to continue to improve affordability for customers,” the Chinese unit said in a statement. “We are standardizing our global vehicle lineup and streamlining the number of trim packages offered for Model S, Model X and Model 3.”