What happened

The EV price war is heating up -- and electric car stocks are going down.

This morning, luxury EV manufacturer Lucid Group (LCID 0.41%) announced that for a "limited time" it will give buyers of "select configurations" of its Lucid Air electric sedan a $7,500 EV credit -- so basically a $7,500 price cut on its most expensive Lucid Air Touring and Air Grand Touring models.  

Investors aren't thrilled with the news. Shares of rival EV makers Lordstown Motors (RIDE 1.11%) and Canoo (GOEV -5.00%) are down 2.3% and 3.8%, respectively, as of 1:05 p.m. ET. Lucid stock itself is tumbling 8.7%.

So what

It's no great mystery why Lucid is slashing prices. Last month, Tesla (TSLA -1.92%) cut prices on its best-selling Model 3 and Model Y electric cars by as much as 20%. A couple of weeks later, Ford Motor Company (F 0.66%) followed suit with price cuts up to 8%. Over in China, EV star XPeng (XPEV -3.35%) is cutting prices, too -- and now Lucid is feeling the heat.

What distinguishes Lucid from its American rivals is that, with even its cheapest offering -- the Lucid Air Pure, priced at $87,400 -- the company currently has no models priced low enough to qualify for the $7,500 income tax credit that the IRS is awarding to buyers of lower-priced EVs. So to entice buyers, Lucid is having to reach into its own pocket and cut prices.

But here's the thing: When Tesla or Ford lowers prices to advertise an electric car for less than $55,000, the IRS effectively cuts that price by an additional $7,500, with taxpayers paying for the difference. (That's the discount that Lucid is trying to match with its "EV credit.") But because Lucid can't get its prices low enough to meet the IRS's threshold for a government credit, every cent of its price reduction comes out of Lucid's profit margin, with zero subsidization from taxpayers.

Now what

Long story short, Lucid's profit margins are going to take a huge hit from this move -- and the company wasn't earning any profits to begin with. So really, the main effect of this price cut is that Lucid's losses will loom large.

As for why Lordstown and Canoo stocks are going down today, too, I'd say this is most likely just a knock-on effect of Lucid's announcement. The fact that Lucid feels compelled to eat more losses in order to move cars off the lot means the price war in electric cars that Tesla started last month is starting to inflict casualties across the EV board.

How will all this end? The strong will survive -- but weak stocks will dive. And we're seeing this scenario play out right before our eyes today.