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16 June 2022

US wants quicky EV tax bill, UK prefers punishment

What everyone has covered this week in EV news is the letter sent to Congressional leaders in the US, by the big three US car-makers, plus Toyota, trying to extend the electric vehicle tax credit beyond 200,000 car limit for each manufacturer.

What few have pointed out is that the sudden acceleration in sales of Electric Vehicles experienced in the US, is slower than most other markets, primarily because of the convoluted and substandard nature of its EV subsidy program. Taking those subsidies away could lead to EV sales crashing.

This barrier of only allowing 200,000 vehicle purchases really goes against the grain, since Tesla has long since passed this number, and now so has General Motors. But the huge success of Ford’s F150 Lightning and its Mach 3 EV, mean it is about to go past this number, and pretty soon no-one will be able to get back $7,500 of their purchase price from the government, except overseas suppliers with smaller sales footprints.

The key to unraveling forecasting in this market is to compare a market both pre and post subsidies, and better still, if there is a pause in subsidies, find out what rate they fall back to temporarily, before a subsidy is re-imposed. This happened in China in the first and second quarters of 2020, when subsidies were halted for three months and then re-instated. Sales initially fell slightly and then re-accelerated. The rule is that roughly 5% more cars than last year are stimulated by such an incentive – as consistent subsidies go 5%, 10%, 15% 20% of all car sales are EVs during the first four years of a stable subsidy.

By limiting the subsidies to 200,000 cars in total for each manufacturer, in the US this more or less means that each of GM, Ford, Stellantis and Tesla will only allow 800,000 EVs to be sold with subsidy, unless VW, Toyota and others join in on the act, in which case it will seem to be an unfair advantage to overseas suppliers after a while, like now.

The new EV moves in the Build Back Better Bill passed by Congress last November and then stranded on the rocks of a split Senate, would have introduced fresh subsidies for EVs, at a much higher level, boosted if entirely made in the US, and especially with unionized labor. This would have seen the subsidies rise up to $12,500 from today’s $7,500, but some key car-makers – Toyota, Volkswagen and Tesla were unhappy with the union qualifications.

The Act which DID get through congress promising money for EVs was the Infrastructure Investment and Jobs Act often referred to as the Bipartisan Infrastructure Bill, which voted through cash ($4 billion) to build EV charging infrastructure.

So this leaves US EV sales, relative to China and Europe, in  the doldrums. And this issues reduced to simple political fight, on a single issue – keep the incentive, vote it more funds and get rid of the 200,000 vehicle limitation – that should certainly accelerate sales.

Let’s understand what these subsidies are for elsewhere – the cost of buying a new EV is typically about $10,000 to $12,500 more than a similar internal combustion engine car. This will fall over time as costs of making the cars falls, to about $7,500 in the near term, and eventually disappear in the 2 to 3 year timeframe. EVs are clearly cheaper to run, so if there was a $12,500 subsidy, an EV ends up cheaper all round than an ICE vehicle and people want them.

All of that is the conventional logic – but… the US being behind the development curve in EVs and especially lithium ion batteries, is going to experience tightness in EV batteries over the next 3 to 4 years, and that tightness will translate to more expensive batteries, not cheaper batteries. And given that it was the falling price of lithium ion batteries which was supposed to bring down the price of EVs, then subsidies may be vital to the health of the US car market for a good while yet. And failure to grant them will likely put the US market even further behind Europe and China.

While senators like Joe Manchin make comments pointing out that most EVs have a waiting list and given that the price of gasoline is $4, those waiting lists are likely to extend into the distance, so why do we also have to pay these people $7,500 to buy EVs? On  the surface that’s a reasonable question, but it fails to take in that you can only buy an EV if you are fairly well off. If you are poor you need the subsidy, and without it EV sales may well dry up for a few years as they are limited to the upper middle classes.

This would leave companies like General Motors and Ford in a terrible position – making EVs for foreign markets and ICE vehicles for home markets, and that is despite the money they have all spent rejigging their supply lines with US battery factories, which are slowly coming online. Those deals are committed, and Biden is still planning to build the charging mechanism – it is impossible to turn the clock back on those decisions.

Which is perhaps why the letter came from the combined CEOs of General Motors, Ford, Stellantis and Toyota Motor North America.

The letter points out that these companies have combined to pledge investments of $170 billion through 2030 on EVs. These companies need a predictable upgrade rate which they can control, so that they can increase their eco-systems for EVs, and dismantle those for ICE vehicles in a reasonable time frame.

“Recent economic pressures and supply chain constraints are increasing the cost of manufacturing electrified vehicles which, in turn, puts pressure on the price to consumers,” the letter said.

But if Congress waits until after the mid-term elections to vote on this, there is a good chance that it will be sabotaged in the senate once again, as the democrats lose more seats there.

So expect to see lobbying from the car industry to intensify for a bill of this sort to be put before Congress, with a lot of sympathy from the automobile lobbyists – and that it will pass and soon.

The letter does not make any reference to this subsidy extension only being for cars made in the US or by union workers, and adding that, which Biden might like, would both weaken any such move and make it more complicated to rally support.

Meanwhile as one Western political force contemplates the carrot, another in the form of the UK, shows clearly that it prefers the stick – and the grants for buying EVs were quietly done away with in the UK this week. They had already fallen from £5,000 a year in 2021, which was the least of any European nation, and now they are at £1,500 and are going to be done away with. The UK government considers it has achieved its goal of “kickstarting” the market ahead of the nation’s 2030 ban on the sale of petrol and diesel cars. This will push the poorer members of UK society into paying the massively inflated petrol prices at the pump brought about by the Russia-Ukraine war, and the ban on Russian oil in the UK and Europe. The right idea would have been to increase the number of subsidies so that everyone can get off oil sooner. The UK is now the only major European market where there is no subsidy for electric vehicles.

In the UK, as in Europe there is a mandate placed on car-makers which says they will be punished if they do not sell enough EVs vehicles, with numbers going up each year so this puts the onus on the stick and punishing car makers.