Tesla's price war is starting to backfire

• Tesla slashing prices spurred industry panic over an all-out price war.

• The first batch of cuts sparked demand and forced other automakers to consider the same move.

• But Tesla’s latest cuts aren’t having the same effect, Morgan Stanley warned.

Tesla's price war has rocked the industry over the past few months, but Morgan Stanley experts say it was short-lived, especially in the electric-vehicle battleground that is China.

Elon Musk has been slashing the prices of his vehicles in China for months. But the cuts were largely a strategic move that, at first, helped Tesla shore up demand amid increasing competition.

Unfortunately for Tesla, further price reductions haven't seen the same positive reaction as the earlier adjustments.

"Tesla's price cuts started a broader round of industry price reductions," Morgan Stanley auto analyst Adam Jonas said in a note to clients on March 10. "Unlike earlier cuts that triggered a strong demand-response, this round has not seen follow-through as consumers wait for further cuts."

Not all Tesla customers were pleased: Protesters demanded refunds for the price difference from when they bought their cars just weeks or months earlier for a higher cost.

The Chinese auto market accounts for 30 to 40% of Tesla's profitability, Morgan Stanley estimates. Its biggest competition there, BYD (whose stock has declined since the price war began), has also introduced discounts. But waning reactions to those also "mark another climax of the price battle."

"April is now the crunch to put a pause in the price war," the analysts said. "The market will focus on whether the relentless price war in the China car market can come to taking a breather at least in April, with more new vehicle launches and less inventory risk of legacy models."