In 2021, Tesla share price soared as the fast-growing electric vehicle (EV) company outpaced the valuation of traditional car manufacturers. Investors saw EVs as the future and saw Tesla as the likely winner in the race to dominate the battery-car space.
More recently there have been second thoughts over Tesla, as Chinese competition has intensified, forcing down prices and margins on the western electric car leader. Investors have come to understand the Chinese dominance of the EV space, and how they are selling much cheaper vehicles with little pressure to make big profits.
As a result, Tesla shares are now around half their past peak level. Traditional car makers are still struggling, with Ford shares under half their peak, VW’s valuation is around one third of its past high, and Toyota, Mercedes and General Motors around a fifth lower. They are finding it difficult to sell enough battery cars and to command prices that make it worthwhile.
Electric vehicles
There are about 40 million EVs in the world, compared with against an estimated total of 1,475 million vehicles. More than half of these EV’s are in China. At a 3% market share, electric vehicles have a long way to go to become the dominant method of travel. These numbers include plug-in hybrids as well as full battery electric cars.
In 2023, 12% of world new car sales were battery cars and 6% plug-in hybrids. Battery cars need to be the dominant type of new vehicle purchase if serious inroads are to be made in replacing the petrol and diesel fleet. Governments want people to buy all-electric cars, not hybrids.
The three main arguments many people make against buying a battery car remain:
- They are too expensive.
- They take too long to charge or to find a charger.
- Their range is too limited.
Progress is now being made on all these issues. The early days of large state subsidies or tax breaks are passing, as hard-pressed governments start to worry about the big loss of tax revenue they would experience if too many people do go electric. Meanwhile, the Chinese can make and sell cheaper EVs, and are putting price pressure on the more expensive western makes.
The advanced countries have said they will roll out many more charger points, cutting delays in getting access to one and making it easier to undertake longer journeys. It is still taking time to do this. Range is also said to be improving on many models with better batteries.
The electric vehicle tax problem
The UK debate illustrates the tax issues electric vehicles pose to many countries. UK fuel duty on diesel and petrol raises £25bn. This vanishes if the UK goes all-electric. The UK imposes a higher Vehicle Excise Duty (VED) on more expensive vehicles of more than £40,000. Value-Added Tax (VAT) is also charged on new cars, raising EV prices. The Treasury is proposing to charge VED on battery cars from next year. as it already does on hybrids. This will also entail putting the higher charge on all-electric cars priced at more than £40,000.
Various schemes have been put forward to switch from high taxes on purchasing fuel to road pricing, charging a sum-per-mile for using the roads. This could also be used to cover the costs of cutting VAT and VED on new electric vehicles.
The argument goes that it would be fairer to tax road use as better off people tend to drive further, and extra road use imposes extra wear and tear costs on nationalised roads. It would also they say be greener, as a higher tax on travelling should reduce miles travelled. These schemes poll very badly, so no major party hoping to win a UK general election has backed them yet.
People worry a government will introduce a road use charge but keep the other taxes on motoring as well. They do not expect to be better off if they currently do less miles than the average. As and when the number of EVs rises so there will need to be a solution to the reducing tax problem. Many European countries depend on high petrol and diesel taxes, the US less so.
EVs dominate in the tariff wars
The European Union (EU), the US and now Canada are alarmed by the prospect of China selling large numbers of much cheaper EVs into their markets. They see the prospect of half-price Chinese vehicles sweeping aside their emerging domestic industry producing battery cars, and stretching their abilities to roll out enough charging points and to supply enough electric power to homes to handle such an invasion.
The US has imposed a 100% tariff now matched by Canada, whilst the EU has imposed variable high tariffs by manufacturer. The EU position has been more nuanced as their own car manufacturers have substantial car plant interests in China and are concerned that high tariffs will cause problems for them with their Chinese hosts. The EU tariffs range up to 37.6% with an additional 10% general tariff on cars staying in place as well.
It is interesting that governments wedded to the transition to electric cars as part of their net zero strategy are now concerned that the transition might go faster if they allow imports of much cheaper product from China. Their idea has been to speed transition based on domestic production, as they want the green jobs that a new successful electric car industry could bring.
They have discovered that China has been planning a stranglehold on the electric vehicle market for years. China has gained access to the crucial raw materials to make batteries and has put in substantial battery making capacity. As the battery can cost a quarter or more of the total cost of the vehicle and is crucial to its construction, China has built itself a big advantage.
The UK has not imposed extra tariffs on Chinese vehicles and seems more relaxed about the impact this might have on the domestic car assembly industry. The UK has so far failed to attract sufficient investment in battery manufacture to create a larger industry.
The tariffs imposed are based on a competition analysis which seeks to show that Chinese production and sales prices of EVs reflect Chinese subsidies. The EU does this company-by-company whilst the US and Canada use a generic average. The high tariffs are leading to Chinese retaliation against North American and EU products sold into their market.
Western price cuts and cancelled EV investments
Tesla has made announcements about price cuts this year seeking to stimulate more purchases. Ford has cancelled a planned larger electric SUV, writing off $1.9bn. Its profit figures reveal large losses per car on the sale of EVs. VW has scrapped plans for a €2bn additional EV plant in Germany. Mercedes has slowed its work on new electric cars.
Most western manufacturers have found it difficult to sell the volumes they wish and have accepted compromises on price and margin. They have had to allow more plug-in hybrids relative to battery vehicles, as some buyers are happy to buy into the idea of an electric car but want the certainty of being able to drive the vehicle on fossil fuel if recharging proves difficult.
The transition to all electric hangs uneasily over the sector, as investors factor in the likelihood that it will prove more expensive and more drawn out than originally hoped.
The industry will continue to experience rising costs and delays in this very ambitious transition.
The arrival of price-competitive Chinese cars has led to more difficulties for Western electric cars makers. The high tariffs now being imposed in most places will alleviate the immediate price and margin pressures from China but leave the western industry with continuing issues over how much their customers will be prepared to pay and how quickly people will want to move from hybrids to all-electric.
The industry and governments will face the question of how EV owners will be asked to make up the loss of fossil-fuel tax revenue when there are enough such vehicles in use, and still need to talk customers through the pace of roll out of charging points and the ability of electricity suppliers to deliver enough power to recharge millions of cars.
The industry will continue to experience rising costs and delays in this very ambitious transition. There will be more announcements to come of over-ambitious Ev investment and write offs of traditional vehicle production facilities as older non-electric models are withdrawn.
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