How electric cars pose difficult business dilemmas

Western governments wanting to reduce greenhouse gas emissions are encouraging greater use of electric vehicles to help achieve their goal. But it has also become clear that providing support involves solving dilemmas.

Among the most pressing issues are: how to balance domestic political concerns and geopolitical tensions; And how to encourage citizens to buy electric cars without undermining key national manufacturing industries.

In the United States, the Biden administration determined three years ago that electric vehicles should make up half of the vehicles sold in the United States by 2030. In Europe, the European Union aims to have at least 30 million zero-emission vehicles on its roads. , also by 2030. 2030.

Such goals are likely to stimulate innovation and generate jobs, but achieving the main goal – replacing electric vehicles with gasoline-powered vehicles – has been slower than expected, and nowhere close to mainstream.

Even those Western users who are not constantly reluctant to abandon the internal combustion engine face the dual problems of limited availability and unaffordability of home-made electric cars. On the other hand, Chinese company BYD has made inroads in Europe with affordable versions of electric cars.

The question for US and European governments is: What steps can or should they take to protect their automakers, which are so important to their broader economies?

Subsidies

One tactic is to use subsidies to make electric cars more affordable for buyers, especially at a time of high inflation.

Germany has chosen to offer a tax incentive of €6,750 (reduced from €9,000 in 2022) for pure battery electric cars and €6,750 for hybrid cars.

The IRA in 2022 brought a tax break on electric cars of up to $7,500 – but this is subject to increasing restrictions on the source of battery components and critical metals.

This support has helped boost sales. In the United States, nearly 1.2 million electric vehicles were sold in 2023, representing 7.6 percent of total sales in 2023, up from 5.9 percent in 2022. In the European Union, battery electric vehicle sales exceeded Pure ones were likewise 2 million cars, up from 1.6 million. .

However, the rules around subsidies can become so complex that buyers may be reluctant.

In April 2023, the US Treasury Department announced that some foreign-brand electric vehicles assembled in the US – Audi, BMW, Hyundai, Nissan, Rivian, Volkswagen, and Volvo – would no longer be eligible for even partial tax credits. Access to the full incentive requires that at least 40 percent of the battery's critical metals be extracted or processed within the United States or in countries with which it has a free trade agreement, such as Mexico or Canada, and/or come from recycled materials. In North America.

In December 2023, the US Treasury additionally announced that starting in 2024, any US-manufactured electric vehicles that include Chinese-made battery components will no longer be eligible for the full IRA subsidies.

Definitions

Some governments have used import tariffs to protect domestic electric vehicle manufacturers. The United States imposes a 27.5% import duty, while the United Kingdom and the European Union impose 10% duties on foreign-made cars.

The European Union's more open trade policy has enabled European automakers to produce electric cars in China, export them to Europe and offer them at competitive prices. For example, although MG Motor is headquartered in the UK and owned by Chinese company SAIC, the MG5 and MG ZS are manufactured in China and exported.

However, in September, the European Commission, the EU's executive arm, announced an investigation to combat subsidies in Chinese electric cars that may “distort” the EU market, and said it would consider increasing import tariffs to prevent an influx of cheaper Chinese models. . Which may harm local manufacturers. For example, China's BYD overtook Tesla as the world's best-selling all-electric vehicle manufacturer at the end of 2023. BYD reported sales of 526,000 battery-only vehicles in the fourth quarter, while Tesla delivered 484,000 vehicles.

But while higher import tariffs could help protect against Chinese EV exports, they would also slow EV adoption in the EU. It will be very difficult for European manufacturers to produce the tens of millions of electric cars needed to meet the EU's 2030 target from domestic factories alone. Its challenges include China's three-quarters share of global battery cell production capacity and its dominant position in supply chains for critical raw materials, such as cobalt and lithium.

Even within the European Union, France and Germany disagree on tariffs on electric cars. France supports imposing protectionist restrictions on imports from China, while Germany fears possible retaliation by China that would hurt its exports.

In the United States, efforts to protect domestic manufacturers also face increasingly complex challenges.

There is pressure on costs, for example. To settle the United Auto Workers strike in November of last year, GM, Ford and Stellantis (formed by the merger of Fiat Chrysler and PSA in 2021) agreed to offer UAW workers a 25 percent pay raise over the next four years. . The resulting large wage increases and the extension of union protections to factories that make electric car batteries are likely to push prices higher.

Furthermore, GM and Ford have focused on making larger, more expensive electric SUVs and pickup trucks, but their sales have been relatively slow. In October, GM announced a one-year delay in expanding production of all-electric trucks at its Orion Assembly Plant in Michigan.

Tax breaks are complex but shrinking, while tariffs need careful calibration. For these reasons, both tactics create challenges for EU and US policymakers trying to bring accessible and affordable electric vehicles into the mainstream.