Everybody is doing the best they can to hype the new electric vehicles coming soon or already here. The global auto industry (the U.S. is not first in line) has been making good on the gamble they collectively made only three to five years ago. Demand at the end of 2022 seems to be outstripping most manufacturers’ capabilities to supply the market. Did that gamble trace its origins to government policy? To scientific consensus? Or, to anticipation of future petroleum supply constraints?
It was probably a combination of all those factors. But the die has been cast. They can’t turn back. Sunk costs cannot be recovered. And capital investments in battery production, new plants, new design and engineering staffs, are all sunk costs. The biggest risk-takers were first to market – we know Tesla. The more conservative automakers, especially Honda and Toyota, may ultimately have the last laugh – at this point we don’t yet know. Tesla created the market – worldwide! Tesla proved to the world and its governments that an electric vehicle future was possible. But governments took extra encouragement from scientific consensus on greenhouse gases and tried forcing the rest of the industry up to Tesla levels. Those efforts, in the U.S., EU, China, and elsewhere, are beginning to bear fruit. EVs are now in the same technological position as the early internal combustion (ICE) powered motor cars were at the turn of the 20th century. Yes, it’s possible to produce an EV that people will buy, even eagerly, so long as they can afford one! But we’re still waiting for an electric Model T. GM has done best, so far, in the U.S. market with the Chevy Bolt – its price was lowered this fall (an exceedingly risky, maybe desperate, move) by nearly $6000. Other countries have been more aggressive on mass-market pricing of EVs.
Yet, the market for EVs is still dominated by luxury brands. Tesla, to its credit, implemented a crash program to expand beyond its premium-priced original models some five years ago. The Tesla Model 3 and Model Y are now sitting on top of a burgeoning world market in the international sweet spot of pricing for cars — the upper-middle-price range ($40K-$55K U.S.). Tesla has achieved a dominant position in that segment of the market in numerous countries. And that segment historically is the key to growth, especially with brands already established in the higher tier. They offer social status for the upwardly mobile, who show off their luxury automobile as a marker of their near-elite standing. It’s a time-honored marketing ploy for the auto industry.
But EVs still lack significant market penetration in the mass-market segment. While the Chevy Bolt is trying to get there, Korean Hyundai and Kia brands will soon challenge GM, but not just yet. And the Inflation Reduction Act (IRA) in the U.S. doesn’t help them. Korean battery production is still anchored outside the U.S. free trade zone, hence not eligible for the $7500 federal tax credit. Demand has been so high for EVs over the last few months that there are long waiting lists to get one of the new lower-priced models from Ford, Hyundai/Kia, and even the Toyota and Subaru models yet to come next year. GM expects Bolt sales to continue apace, with new Chevrolet models arriving in that hot medium-price range next year (Equinox and Blazer). The sticking point with the IRA credit may not be domestic production (Hyundai/Kia may soon be here, VW already is here) but battery raw materials. Look for an amendment to the law coming from the new Congress. It may be a political test of influence: Koreans vs. UAW. Breaking open that supply and production bottleneck is the greatest factor now in bringing those prices down. Infrastructure needs build out as well, but it’s important to remember that most Americans, middle-class and up, are homeowners. They can easily install Level 2 chargers in their driveways and garages. The IRA provides incentives for them too. But the low end of the automobile market is aimed more at younger folks, who are less likely to be homeowners. Public infrastructure, and multi-family or townhouse developers, also need incentives. Ultimately, dense urban areas need public charging abundance as much as open highways do. Right now, public infrastructure is unevenly distributed around the country. Many European countries (Norway is a shining example) do much better.
If Teslas are upper-middle-class status symbols, there is another demographic in this country for whom a big pickup truck, or even a retro muscle car (Mustang or Dodge Challenger), are the higher value status symbols. Then there are the many working-class drivers who must settle for a small used car – having no ability to search for any automotive status symbol. This is at least as big a market as ever (inequality, as you know). American automakers are not actively courting these groups; the implicit assumption is that the bottom of the market (used imports) will likely be the last to electrify. India and China see it differently. Going forward, the IRA will offer $4000 tax credits for used vehicles that would qualify for the full $7500 credit when new. But that will have to wait until the used marketplace becomes populated with EVs.
One of the biggest Tesla innovations in automobile marketing has been the elimination of dealers. All Teslas are bought directly from the manufacturer – no middleman! Auto dealers, both new and used, are one of the most obvious classes of rentiers in American society. And Tesla’s success is getting other manufacturers to look again at their dealer networks. Do they really need those franchises? GM is offering to buy out any of its dealers who won’t accept the manufacturer’s quota of electric models being introduced over the next two years. Other automakers may follow suit. Consumers would benefit from greater manufacturer control over dealers.
Like Mary Barra, I’m bullish on EVs. I predict that over the next two or three years we will see enough of a trickle-down effect on prices that a sizable percentage of new car sales (in U.S., maybe 50%, even more in China and Europe) will be electric. New technology in solid state batteries will come online. Bottlenecks will be alleviated in the supply chain and there will be some reversion to greater free trade in components (i.e., Koreans will win out over UAW). Electric pickups like the F-150 Lightning and Silverado EV will soon dominate the truck market. You can even buy simulated exhaust sounds of a highly tuned ICE, digitally mastered! The problem of intellectual property locking down engine tuners will continue, but amateur garage mechanics will not be any worse off with the software controlling EVs. And over the next four or five years, you will start to see the migrant workers in that block of garden apartments surrounding your neighborhood buying used electric Toyotas and Kias, charging them in their upgraded parking lots or the local strip mall. I’m not even mentioning long haul truckers, public transportation, and the new renewable grid itself! Electrifying America will work. And sooner than we thought just a few years ago.
— William Sundwick