Winter is coming to the global automotive sector. Many companies will not survive. 

Executives at Tesla (TSLA) on Friday announced dramatic price cuts to its electric vehicles. Shares immediately collapsed, then rallied to near unchanged. Other vehicle stocks are still falling.

Tesla is coming after a bigger slice of the auto market. Investors in legacy companies should worry.

That’s not the way all of this is being spun. 

Tesla skeptics argue that the price cuts are evidence of a demand problem, and there may be some truth to that view. The Austin, Tex.-based company announced in December that its state-of-the-art factory in Shanghai, China would furlough several shifts into January. The facility produces one shiny new Tesla every 40 seconds. The implication was softening demand in Asia and Europe.  

Weeks later Tesla reported that fourth quarter vehicle deliveries came-in at 405,000. While this number was up 40% from a year ago, it failed to meet internal growth projections of 50% year over year.  

Keep in mind, sales in 2022 declined at every legacy car company with the exception of General Motors (GM), according a report at Zacks Research. 

And that is where the proverbial rubber hits the road. 

Legacy automakers are currently maintaining profitability by selling fewer vehicles. Although this may seem perverse, inventory scarcity is creating better margins, and higher profitability. When dealerships have no inventory, customers can’t haggle for lower prices. Often, they are forced to pay severe premiums to the list price, pushing the average cost in the United States of a new vehicle to a record $49,500.

Price gouging has been possible because legacy automakers are legitimately supply constrained due to the ongoing shortage of older semiconductors. They are also not threatened by a viable, low cost competitor. That changed on Friday.

Aggressive Tesla price cuts, combined with federal tax credits, mean the entry level Model 3 sedan, and its SUV cousin, the Model Y, now sell for only $36,500 and $45,500, respectively. These vehicles offer cutting-edge performance, they are ultra-safe, have been EPA tested for the equivalent of 131 miles per gallon, and new orders are expected to arrive within six weeks.

Tesla is coming after legacy automakers when there are especially vulnerable. Traditional carmakers need to keep selling expensive internal combustion engine vehicles to offset the losses they are making selling EVs. Not only is Tesla’s EV operation profitable, its production costs are the lowest in the industry.

Cheaper Teslas help the company dramatically expand its potential addressable market, at the direct expense of legacy manufacturers.

EVs priced at $65,000 sell into the luxury market segment, roughly 5% of the total marketplace for cars and trucks. However, a $35,000 Tesla is affordable to 25% of the global auto market of 67 million units annually.

Elon Musk, chief executive officer, said in August that by 2030 Tesla production will rise to 20 million units, a 13-fold increase over 2022 levels. Reaching that lofty goal necessarily means lower price points for new Teslas, and a lot of pain for competitors.    

When the price cuts on Friday were announced, Tesla shares tanked immediately. Investors worried about profitability. However, by the end of the session Tesla stock was down by only 1%. This week, the stock has soared by 7.5%. 

Legacy automaker stocks have not fared nearly as well. General Motors (GM) fell 4.8%, Ford (F) lost 5.3%, Stellantis (STLA) declined 3.6%, and Toyota (TM) slipped 1.5%. The group weakness continued on Tuesday.  

The consensus view has always been that the legacy automakers would eventually come for Tesla market share with competitive EVs. The premise is Tesla is simply another car company. Where this thesis fails is the possibility that Tesla might come for the whole shooting match with lower priced vehicles.

Teslas are the most advanced, and safest vehicles on the road. The company is also the most efficient manufacturer. These are huge competitive advantage.

Investors in legacy auto stocks should worry. This is not likely to end well.     

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This article can also be found on Forbes.com.