Falling Electric Car Prices Are Saving — Or Destroying — the EV Market

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Ford is the latest automaker to drop prices on its electric cars, slicing $4,000 off the 2014 Focus EV. The move will undoubtedly succeed in getting more drivers to take a second look at the car. But how long can Ford—and other automakers slashing EV prices—keep on losing money with each electric car sold?

“The new starting MSRP keeps us competitive in the marketplace and is an important part of our commitment to provide customers with a range of electrified vehicles to choose from,” read a statement from Ford regarding the $4,000 Focus EV price drop.

Quite frankly, before the decrease in MSRP, the vehicle wasn’t competitive. Ford sold only around 900 Focus EVs during the first half of 2013. After the price drop, the Focus EV has an MSRP of $35,995. Consumers who’d consider the Focus EV are surely also looking at vehicles such as the Nissan Leaf, which lowered its sticker price by $6,400 in 2013, bringing it under the $30K retail mark, and can arguably be driven for free once state and federal incentives are factored in—and a little creative math is employed, taking into account savings on gasoline. Other automakers have also been aggressive in pricing their electric vehicles, with lease deals for the Fiat 500e and the Chevy Spark EV starting under $200 per month.

“Price-dropping offers on EVs, including this latest one on the 2014 Ford Focus Electric, are good news for consumers,” Edmunds pointed out.

(MORE: Let’s Hope You’re Not Trying to Sell an Electric Car Anytime Soon)

“If you’re a buyer looking to try out an electric car there are some excellent deals to be had,” Karl Brauer, senior analyst at Kelley Blue Book, told USA Today.

OK, so falling prices and cheap lease deals obviously benefit consumers. But what do the relentless price decreases do for automakers? Isn’t this a race to the bottom?

For the time being, Ford, Nissan, Honda, and the other competitors are focused on getting drivers behind the wheels of EVs, rather than concerning themselves with making profits. “Manufacturers are realizing that selling an electric car at a loss is better than not selling one at all,” said Brauer, noting that automakers don’t have plans to sell all that many EVs so it’s fairly easy to absorb these losses.

The price drops also show that there is a market for battery-powered vehicle, so long as the price is right. In the first half of 2013, Nissan sold nearly 10,000 Leafs—which is about the same as it sold for all of 2012. Drivers in California have been having a hard time finding Fit EVs available after Honda dropped its lease price to $259 per month, down from $389, with no money down.

(MORE: Ford Is Slashing the Price of the 2014 Focus Electric, But It’s Still Pretty Pricey)

Automakers can’t go on losing money with each EV sale indefinitely, though. The hope is that, within a few years, production prices on electric cars (batteries especially) will decrease, allowing automakers to lower MSRPs without taking a bath on each sale. Driving range is expected to increase, the time required to recharge cars will fall, and the infrastructure of charging stations should improve, all of which will make EV ownership more attractive to drivers. It’d help the EV cause if gas prices rose as well, making the cost of recharging a vehicle cheaper and cheaper compared to filling up at the pump.

For the near future, however, very few drivers are likely to bite on EVs even as prices drop by $4,000 here and $6,000 there. “Even after taking the federal tax rebate of $7,500 into consideration, electric vehicles remain a costly proposition for most consumers,” Kelley Blue Book senior analyst Alec Gutierrez said via e-mail.

What’s more, the price-slashing pattern that’s been set will only make it tougher for automakers to turn a profit down the line. “With prices coming down, consumers already on the fence may continue to wait and see if even greater discounts will come later in the year or next year,” said Gutierrez. “This will make it quite difficult to command higher prices in the future, which will make profitability more difficult to achieve. Until battery costs come down, manufacturers will continue to find it difficult to make a profit on EVs, especially knowing that consumers are really only jumping into the segment when the price is right.”

For those interested in EVs, leasing seems the smartest way to go, not only because lease deals are so inexpensive nowadays, but because consumers who lease don’t risk getting stuck long-term with outdated technology. More than 70% of EVs on the road are leased, according to Gutierrez, compared to the industry average of 20%.

(MORE: Tesla Beat the Odds — and the Haters — But Now Comes the Hard Part)

Prices still have a long way to fall before mainstream buyers are interested. “With the possible exception of Tesla, which has found success in the sporty luxury car niche, manufacturers have found that consumers are simply unwilling to pay a significant price premium for a vehicle that’s main selling point is saving money at the pump,” said Gutierrez.