US EV Subsidies – a reflection

As the administration is trying to figure out how to keep the subsidies going, especially with strong opposition, let’s reflect on what the purpose was.

If you look at it from any business’s perspective – they’re not going to put in R&D to build a product that they can only sell at a loss. Especially if the technology isn’t ready yet and time will make that cheaper without their involvement (see: EV1)

For the purpose of example only – let’s say that it’s 2010. The manufacturer determines that, with the way technology is advancing, they will likely be able to sell an electric vehicle in volume by 2030, mainly due to the price at that point being able to be close to ICE cars. They know that it’ll take them 5-10 years to develop, so they’ll plan to gradually start in 2020. (This isn’t far off from what the projections were, but I’d need to do more research to be sure)

Don’t forget that for any new platform or product by any company, the R&D costs are typically absorbed mostly into the first year or two, and typically completely paid off within 3-5 years. But this has an exponential effect. The higher the price (in order to recoup R&D), the less you’ll sell, which means you have to raise the price to pay off R&D…

So if they start R&D on their EV in 2010 and start selling an EV in 2020, the price will be ~$10000 more than an ICE car due to R&D cost recuperation and component cost. This means it would be too hard to sell them. That’s why they’re going to wait until 2020 to start R&D, and plan to selling by 2030.

But the government has other priorities – namely a massively growing deficit and the environment. So to help the latter, and get R&D moving quicker, they announce the subsidy program. The purpose here is not (directly) to sell EVs. The purpose is to encourage the company to do their R&D sooner so that they can sell EVs sooner. This rebate program is really an R&D subsidy program. That’s what the Bolt was, BTW. Not a “compliance car” but an accelerated R&D platform.

Due to the wind-down, there are two benefits here. They basically get a fixed $1.5 billion to speed up R&D (200,000 x $7500) but also there’s an incentive to sell as many vehicles as possible in the year after that as the subsidy winds down. But it’s peanuts for everyone other than Tesla. GM had about another ~$150 million in subsides after they hit 200,000. Tesla gamed the system by delaying deliveries until the start of the quarter, so they had a full 6 months of full discount vs other manufacturers who had less. Tesla was flirting with losses the entire time, so this was smart on their end. It was peanuts to GM.

For reference, GM spends about $7.5 billion a year on R&D. They also make about $8 billion a year in profit. So the $1.5 billion matters. Eking out a few tens of millions isn’t as big a deal – especially if they’re still selling at a loss. I don’t know if GM has ever given us numbers on this, but there’s no way that they weren’t selling the Bolt at a loss. Not at first, but ironically after the subsidies expired they started selling in the low 20s when the cost is in the high 20s. But part of the reason is what I mentioned above – once R&D has been paid off, they can sustain a bit of a loss to gain market share.

So after the R&D subsidy, the purpose of the program has been fulfilled. Ideally the manufacturer now has electric vehicles that are being sold and closer to being profitable, so there’s no need to keep the subsidy going for them. Otherwise it’s just a handout to big businesses.

Keep in mind that everything comes with a price tag (estimated $7.5 billion from 2018-2022). If they government kept the subsidy going for everyone, it’s going to cost a lot more, and as such they wouldn’t be able to offer as much up front, which would slow down the progress.

We also want ALL manufacturers to get the same benefit – which is why there’s a cap of 200,000 per manufacturer. Otherwise again it becomes a handout to the biggest companies who can afford to get a product to market sooner.

As we saw, with the $7500 subsidy and subsequent pricing from GM, clearly that was an appropriate amount. The public still isn’t ready to buy EVs yet, and that’s another problem entirely… Also keep in mind which market segment is buying new vehicles as the average sale price tops $40k – upper middle class and above. So a subsidy to that segment also has to be considered vs its overall impact. Also keep in mind that there are sales outside of the US, and the environmental benefit to an EV is different depending on the type of power generation. Long story short – it’s very complicated.

One thought on “US EV Subsidies – a reflection

  • September 21, 2021 at 7:46 pm
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    Sean,

    Retrospectively, the tax incentives missed the mark on several fronts:

    1. The formula favored higher income earners, those with $7500 or more in tax liability.
    2. There was no cap on MSRP, so subsidies to ultra wealthy who bought $100K EVs.
    3. While 200K units was a SWAG, the tech is advancing so rapidly that those who got in early were tied to old tech, while those who got in later could secure components with newer tech and better pricing, easing their entry while yielding the same financial benefits as early adopters.
    4. The incentives did little to make cars more affordable for buyers, it enabled inflated MSRP on the promise of a reasonably competitive price after rebates were realized up to a year after purchase. Meanwhile, finance costs, insurance costs, sales taxes all ate away at the delayed $7500 credit.

    As new incentives are being debated, some, but not all of these are being addressed. But, what if the incentives were directly between manufacturer and IRS? A $7500 tax credit to the car maker for each car sold would allow them to set MSRP lower from the start. Buyers wouldn’t be shocked by the sticker, and would get a break on sales and registration fees, finance and insurance charges, and not have to wait a year for these financial benefits. Of course, some regulation would be necessary to hold manufacturers to lower MSRPs, but that kind of regulation is used regularly in insurance and utility pricing. To qualify for the credit, the car maker would need to show financial analysis of costs and R&D payback periods, and set an MSRP that would yield a breakeven after a set period. Wouldn’t be too difficult.

    Sticker price is the thing that scares many away from EVs. Promises of tax breaks a year later, or even lower TCO due to fuel and maintenance costs are beyond comprehension for many buyers.

    Reply

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