Wind of Change

  John Eichberger |  November 2018

Without a doubt, there is significant momentum behind the electrification of transportation. Just open any newspaper (or more accurately click on any news website) and the headlines scream at you that electricity is coming, kind of like the Red Coats were in 1775. But the U.S. market for electrified vehicles currently is heavily dependent on public policy to support market growth, and if we have learned anything in the past several years it’s that the winds of change are strong in American politics and what once was can soon be no more.

This thought prompts some whistling in my head and, in honor of the Berlin Wall opening its gates in November 1989 (almost 30 years ago), I give you the Scorpions:

The world is closing in
Did you ever think
That we could be so close, like brothers
The future's in the air
I can feel it everywhere
Blowing with the wind of change

So as the wind blows, let’s take a look at some of the headlines that I like to point to concerning the growth of the electric vehicle market: 

  • Ford Goes ‘All In’ on Electric Cars – Bloomberg Technology, January 15, 2018
  • General Motors is Going All Electric – Wired, October 2, 2017
  • Global Carmakers to Invest at Least $90 Billion in Electric Cars – Reuters, January 18, 2018 
And then most recently, General Motors’ own press release – 
  • General Motors Calls for National Zero-Emissions Vehicles (NZEV) Program, October 26, 2018 

As Mashable wrote last year, “If it seems like every carmaker is going electric, that’s because they are.”  This is a pretty compelling headline, and the data seems to indicate that consumers are responding.

According to WardsAuto, through October 2018 sales of battery electric vehicles (BEV) and plug in hybrid electric vehicles (PHEV) combined for 244,480 units sold and represented 1.7% of all light duty vehicles (LDV) for the year. By comparison, sales were 58.4% above 2017 sales through October – this is a huge increase and dwarves the 2016-2017 sales increase of 26%.

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Is the sky the limit for electrified powertrains?

It is important to recognize that government policy has had a significant role in the development of the electric vehicle market, but policies can change with a redirection of political winds. And although automakers must be cognizant and responsive to global market demands, policies and pressures, domestically the rate of growth will still be influenced by the direction of policy.  The following are some of the government-related issues that should be taken into consideration when thinking about how the U.S. market for electric vehicle might continue to develop:

California’s Zero Emission Vehicle Program – The vast majority of electric vehicles sold in the United States are sold into California in response to its Zero Emission Vehicle (ZEV) program. (At one point, I heard the number was about 50%.) The program requires automakers to produce ZEVs as a percentage of their total vehicles sold in California each year. In 2018, the target was 4.5% and by 2025 it will rise to 22%.  Each vehicle sold generates credits based upon its total electric driving range.  Nine other states have adopted the ZEV program – Connecticut, Maine, Maryland, Massachusetts, New York, New Jersey, Oregon, Rhode Island and Vermont. Combined, the ten states represent 30 percent of new car sales in the U.S.

However, the program is facing a major challenge. In the SAFE Vehicles proposal to amend the Corporate Average Fuel Economy (CAFE) program, the Administration is seeking to eliminate the ZEV program claiming that it exceeds California’s authority under the Clean Air Act. It is uncertain at this time what will happen with this challenge to the ZEV program, but if it is successful one must wonder what motivation will remain for automakers to continue producing and selling ZEVs into California.

In January 2018, Moody’s Investor Services claimed that automakers lose between $7,000 - $10,000 on each electric vehicle they sell. If this is true, and if the ZEV requirements are vacated, will electric vehicles continue to show up on the showroom floor?

Tax Credit Limitations – To help offset the higher price of electric vehicles, the federal government provides consumers with a tax credit when they purchase a qualified vehicle. The credit can be as much as $7,500, depending on the battery capacity of the vehicle and applies only to vehicles that receive a charge from an outlet (i.e., a plug-in vehicle. Traditional hybrids do not qualify.) This has been a major benefit to the electric vehicle market.

To underscore the value of tax credits, look at the state of Georgia. At one time, Georgia offered a $5,000 tax credit in addition to the federal tax credit for consumers who purchased an electric vehicle. Under this program, Georgia became one of the leading states in terms of electric vehicle sales. When the state repealed this tax credit, electric vehicle sales dropped 90% the following year.

But the federal tax credit does not last forever. Within the program, the tax credit is restricted to the first 200,000 qualified electric vehicles sold by each manufacturer.  This applies to the parent company, not the brand. For example, the limitation applies to all electric vehicles within the broad General Motors family. Once the 200,000 limit is reached, the tax credit begins to phase out over the following year and, once it is gone it cannot come back.

According to Inside EVs, by October 2018 six automakers were in jeopardy of potentially losing their credit eligibility. The publication reported that two companies have entered the phase-out period or will do so very soon (Tesla with estimated sales of 244,333 and General Motors at 196,986). Four others have room but are likely paying close attention to the cap:  Nissan (125,747), Ford (110,583), Toyota (90,699) and BMW (77,366).

What impact might the elimination of this tax credit for the most popular electric vehicles have on their continued market growth?

Tax Credit Legislation – During negotiations on a federal budget towards the end of 2017, there was a very strong chance that Congress would completely repeal the tax credit for electric vehicle sales. In fact, entering the final stage of negotiations, the House-passed version eliminated the credit while the Senate version did not. At the end of the day, the tax credit survived but the debate exposes a potential issue going forward.

In October 2018, two Senate bills were introduced relative to the tax credit.  On October 6, Senator John Barrasso (R-WY) introduced S. 3559 which would eliminate the tax credit and establish a highway user fee for alternative fuel vehicles. Then on October 11, Senator Dean Heller (R-NV) introduced S. 3582 which would eliminate the 200,000 unit trigger for phasing out the credit and begin phasing it out effective in 2022.  Neither bill has gained any momentum and no action has been taken, but they signal that the congressional debate about government incentives for electric vehicles is far from over.

And with elections comes another blast of potential windy change.

2018 Mid-Term Election – The results of the election in November can have an impact on the future of electric vehicle policy. First, the Democratic party assumes the majority in the House of Representatives in January and will take over control of the agenda and all of the committees. As a very broad generalization, members of the Democratic party have historically been more supportive of policies that are deemed to support reductions in carbon emissions and many of the policies supporting electric vehicles are based upon a desire to reduce carbon. This could result in a House of Representatives that is generally more supportive of policies supporting electric vehicles.

The Senate remains in control of the Republican party and it is likely that Senate-based policies pursued during the current Congress will continue to be priorities in the next Congress. Senator Barrasso, who is Chairman of the Environment and Public Works Committee, could very well re-introduce a version of S. 3559. However, Senator Heller was not re-elected. His legislation, S. 3582, has no current co-sponsors so it is uncertain if another Senator would assume leadership of the issues contained within that legislation.

What will happen on electric vehicle policy (along with all other policies) remains to be seen as the Congress enters into a period that most anticipate will be rife with political battles between the chambers and the White House.

Wind of Change

Markets that are heavily dependent on government policies (such as the U.S. and even electric vehicle-leading Norway) are susceptible to the changing winds of politics and are therefore not in control of their own destiny. No single country (including the U.S.) can independently drive or stop the transition to electric vehicles, but they can influence the pace of adoption within their borders. This in turn, for major markets especially, can have an influence on the pace of global adoption as automakers seek to balance their strategies to satisfy global market dynamics.

It is the desire of the electric vehicle industry to reach a point in which electrified vehicles deliver such compelling value (performance and economic) that they can continue to thrive in the absence of supportive policies, and I honestly believe they will someday:

Take me to the magic of the moment
On a glory night
Where the children of tomorrow share their dreams (share their dreams)
With you and me
Take me to the magic of the moment
On a glory night (the glory night)
Where the children of tomorrow dream away (dream away)
In the wind of change (the wind of change)

At this point, I think all would agree that the planets have not yet aligned to deliver on that vision and that government programs may be necessary for some time yet to enable the vision to become a reality. Of course, winds change and it could be a bumpy road for a while as the market seeks to react to volatility in the policy world. Policies today could be gone tomorrow:

Walking down the street
Distant memories
Are buried in the past forever
I follow the Moskva
Down to Gorky Park
Listening to the wind of change

All that said – a 57% increase in BEV and PHEV sales over last year is nothing to sneeze at – will the market continue to grow at such an accelerated rate?  Guess we need to see in what way the winds decide to blow.