Tesla sales tumbled 21% in a ket market. It’s bad news for the EV boom

Tesla’s long, slow slide in California has officially turned into a cliff. The EV giant’s second-quarter sales in its most important U.S. market dropped 21% year over year, according to the California New Car Dealers Association — 41,138 vehicles registered in California from April to June, compared with 52,119 a year earlier. That’s Tesla’s steepest fall in more than two years — and its seventh straight quarterly decline in the Golden State. For a company that largely built its brand (and its margins) on West Coast dominance, the numbers are more than just a bad look. They’re a flashing warning sign.

California accounts for about a third of all EV sales in the U.S.. When Tesla falters in the state, the entire electric market stumbles. And that’s exactly what happened this spring: California’s zero-emission vehicle share fell to 18.2%, down from 22% a year ago. The biggest reason? Fewer Teslas on the road.

That collapse couldn’t come at a worse time for Tesla. The company reports second-quarter earnings later Wednesday, and expectations are already low: global deliveries are dropping, regulatory credit sales are drying up, and margins are still under pressure despite price cuts and incentives. And while CEO Elon Musk is busy talking about robotaxis and AI moonshots, Tesla’s core business is quietly cracking at the foundation.

The drop in California is especially striking given Tesla’s history in the Golden State. In 2023, the Model 3 and Model Y made up more than 60% of all EV sales in the state (and over 70% in 2022), giving Tesla an Apple-like grip on the market. Now? Plug-in hybrids are the new darling, up 54% year to date (and grabbing nearly 20% of the state’s market), while Tesla’s most popular models are stagnating despite a recent refresh. Legacy automakers such as Toyota and Honda are flooding California with plug-in hybrids that qualify for incentives but appeal to EV skeptics — and it’s working. Hybrid sales in California are up more than 50% this year, just as Tesla’s numbers are falling.

Rivals — from Hyundai to Mercedes to Ford — are catching up fast, and legacy automakers are flooding the state with attractive, incentive-loaded alternatives. Traditional OEMs such as BMW, Ford, Mercedes-Benz, and Hyundai are making inroads, rolling out mainstream EVs that appeal to pragmatic buyers and chip away at Tesla’s dominance. Even upstart Rivian, while itself down 29% in California during the quarter, highlights how Tesla’s lead is no longer bulletproof.

The incentive landscape isn’t helping. Federal EV credits are set to expire this September, thanks to President Donald Trump’s “Big, Beautiful Bill” that phases out EV credits and rescinds IRA clean-energy initiatives. At the same time, California regulators are also rethinking whether the state’s EV policies have leaned too far in Tesla’s favor — and may put changes in the pipeline of their rebate programs to promote more diversity in brand adoption and affordability. For Tesla, that means less pricing power and fewer policy tailwinds at a moment when it needs both.

Meanwhile, Musk’s political detour isn’t exactly bolstering demand. His push to launch a political party, habit of endorsing far-right candidates, and criticism of “woke” issues have alienated parts of California’s customer base — many of whom were early adopters of the brand. While the noise is hard to quantify, industry analysts say the distractions aren’t helping Tesla’s standing among consumers who once viewed it as a climate-first company.

There’s no clear heir to Tesla yet. If anything, California’s EV slowdown suggests the entire segment is entering a more uncertain phase, where affordability, incentives, and practicality are outpacing brand loyalty. That shift is already playing out in Europe and China, where Tesla’s market share has slipped and brands such as BYD are stealing the show.

Investors are watching closely. Tesla shares are down over 12% this year, and the company’s stock is riding on future promises — robotaxis, humanoid robots, and Musk’s AI playbook. What the California numbers make clear is that in the meantime, the core business is struggling — and not just in the state that built it. When analysts tune into Wednesday’s earnings call, they might simply ask: If Tesla can’t hold its crown in California, where can it?