With plug-in hybrids, or PHEVs, on the EV tax credit bill then these are going to be
new cars with some significant price drops. Accompanied by the rhetoric from the government
that they are trying to transition to cleaner transportation, demand for plug-in hybrids
and battery electric vehicles will surge. We are talking up to $12,500 discount here.
Even when the cash for clunkers program started with a maximum of $4,500 off a new car, the
program exhausted the budget in the first month, so congress then tripled the budget,
from $1 billion to $3 billion. But this new program could cost more like around $100 billion,
over 30 times as much. This will have some serious economic consequences.
Consumers will take advantage of these credits, demand for eligible vehicles will surge. But
what will people do with their old cars? Well they will sell them, or trade them in. What
does that do? Obviously adds significant supply to the used car market. What happens when
there is too much supply? Prices have to come down to meet the market clearing price. But
now you have to compete with the new cars with up to a $12,500 discount.
Ok so in the used market now, obviously any used PHEV is now going to have lost similar
value instantly. Why would you want to buy a 2 year used PHEV for $30,000, when you can
get a new one for about $25,000. So any current car owners holding PHEV instantly lost money,
same for any dealerships, their PHEV stock just took a huge hit.
You see this is the thing, governments may like to make you think they can simply create
money and magic it up somehow. But the money always comes from somewhere, namely the tax
payer, in one form or another. The other problem is, that when they spend money they mess with
the free market, the natural flow of the economy. Governments create laws and regulations that
have all kinds of perverse and “unintended” consequences. The government then creates
all kinds of new laws and regulations to fix these consequences rinse repeat.
But this could be significantly worse for ICE cars. Now the narrative from the government
is that you need a clean car, electric or plugin hybrid, so demand for ICE cars will
plummet, and because of the incentive, supply of used ICE cars will increase at the same
time. Due to so many people selling their ICE car for a subsidized EV.
For example, as far as I can tell the Ford Escape plug in hybrid is made in the US, and
therefore is eligible for the full tax credit of $12,500. This car starts at $33,075. In
other words we are talking about $20,500 after the tax credit to buy this car. Of course
a lot of consumers will finance it anyway, and the savings on gasoline would outweigh
the interest on the loan. This becomes a ridiculously cheap car.
A used 2020 Escape Hybrid with over 10,000 miles on the clock still costs $30,000. You
could save $10,000 and get a new one. And that's exactly what will happen. A used one
would might have to compete at more like a $15,000 price tag to reach the market clearing
price. That is half the value of the used car wiped off, that's a lot of money.
If the tax credit was solely for actual BEVs, then it wouldn't have the same negative consequences.
For example a Model 3 standard might be around $30,000 after incentives, but that's not going
to wipe $10,000 off every used Tesla, as there isn't enough supply. Ok perhaps if you are
holding a Chevrolet Bolt it might lose a bit more, as it doesn't have quite the same demand.
And if you bought a Ford Mustang Mach E, well you already got $7,500 credit anyway, and
that's all the Mach E is eligible for.
Anyway, as for the Ford Escape, it is at least a hybrid, or even plug-in hybrid. It's going
to be even worse for ICE cars, as the market is being flooded with extra ICE cars from
people selling them and trading them in to buy a brand new EV. It will not be a rational
decision to buy an ICE car, unless you simply love a particular ICE car, and now its dropped
in price so much that you can afford it. Either way, any demand will be as a result of price
drops, and there wont be the demand to support the previous value of the vehicle.
But free money! The government are giving away free money, everyone want's their share.
Especially when its around $10,000. Consumers know they are paying for this one way or another,
so they better at least get their fair share. $12,500 is over 3 times what the maximum payout
was on cash for clunkers. They'll be queuing up around the block. Except the thing is,
they might have just lost around $10,000 on their ICE car too. When they go trade-in their
old car, which previously had a trade in value of perhaps $20,000, well now they'll only
get $10,000 for it.
Car dealers know their industry, they know when consumers change their buying habits,
their job is to find the supply of the right vehicles that meet demand, or else they go
out of business. It's dangerous buying such high value stock that depreciates so rapidly.
I mean what can a used car dealer do? They have this ICE stock that has now dropped half
its value. They have a queue of people wanting to sell their used ICE cars to them too. Do
you think they will want to buy them? I am not quite sure what the sensible business
decision here is, or how to even stay in business. I am not sure I see a future for used ICE
car dealers.
Consumers are going to start seeing their ICE vehicles as a time bomb, until no one
at all is going to want them, and they are going to lose a ton of value. It will be a
big game of musical chairs, everyone scrambling to sell their car before the music stops.
But even if PHEVs are on the bill, well then, there still might not be enough demand, at
least not initially. People can order their EV, and go on to a waiting list. But they
still need something to drive in the meantime. As long as they can get another year or two
out of their existing car then maybe they will hold on to their ICE car, and the value
has probably already been wiped off it, so it might make sense to hold on to it until
then, as they already paid for it.
Ok, lets run through this further actually using a rational economic person. You can
now get a new car at an insane price. You don't want to miss out on this deal, in reality
you never know how long it will last. They will be climbing over one another to make
sure they get their discount. Not to mention they just paid for this by losing thousands
of dollars on their ICE car at the same time, they want whats theirs.
So you order your Tesla online, or go to your local legacy dealer and buy or order a PHEV,
or maybe BEV. But you weren't the first person to get this idea, some people saw this coming,
and already ordered, the waiting list is now one year.
However, as the waiting list, even for PHEVs might be so high, then perhaps some of that
demand will pass over to the the used PHEV market, as we expected PHEV prices to crash,
to adjust for the discounted price of a new PHEV, then perhaps some people wont be able
to resist the price of a used PHEV too, as its now also significantly discounted. But
there is no other reason to buy PHEVs as the consumers motivation isn't that they are cleaner,
but they are cheaper, thus demand has not increased from people becoming more environmental,
but solely through lower pricing.
Ok, so one year passes and you can finally go into to purchase your PHEV, of course the
car dealer knows what demand was like, and they have possibly added on to the suggested
retail price, as they know they can get away with it. Everyone takes their cut. Also they
might justify this profiteering over the fact they lost a lot of capital on their ICE inventory.
But still sales have never been better for them with all these PHEV orders. They can
sell every PHEV they can get, and with twice or even more their usual mark up. And these
cars still need to be serviced for oil changes, so the dealers will order as many as they
can get. It's a new car dealers dream, well as long as the manufacturer they sell actually
makes plug ins too.
Anyway, the rational economic consumer finally gets their PHEV, and now has to dispose of
their ICE car. But who wants to buy it? Yea, its not going to be easy to sell.
And what about some consumers who have an ice car on finance, that they paid over $40k
for, and now its worth, well possibly only $15k after just 2 years. Yet they still owe
$30k on it? They dont want to owe $30k on a $15k asset. Depending on their financial
position, among other various situations like credit score, they may just renege on it,
and it will be repossessed. Which means the legacy auto companies have to wear that cost.
Less ethical consumers might write their cars off, for the insurance money. Thus inadvertently
affecting insurance companies and in turn premiums to consumers. Except for Tesla insurance
of course.
Remember this tax credit is not an over the night incentive, its going to last years.
Even possibly into the second half of the decade. Which means eventually there should
be enough EVs to go around for everyone who can afford them. In fact some people may go
through 2 or 3 EVs over this period. By one now, own it for 3 years, sell it, then buy
another one, as they are so cheap.
So the used PHEV market will build up. There wont be natural demand for it though, unless
consumers are actually convinced they are better for the environment, and thinking that
they are buying clean energy cars. Which perhaps the legacy autos will likely cajole consumers
with their manipulative advertising.
Ok so legacy can sell all the PHEVs they can make, but what about all their ICE? It's irrational
to buy something that loses $10 to 20,000 the moment you drive it off the dealership.
Yea, so legacy just lost their ICE business. Good luck surviving without that.
But like I said this will go on for years, and what is coming in a few years? The end
of auto as we know it. The $25,000 compact Tesla. Or would that be the $15,000 Tesla?
And unlike legacy autos, the Tesla showrooms aren't going to raise the price on you. Also
unlike PHEV, its fully electric you never need any fuel, along with all the other benefits
of an actual BEV, like only having to charge once a week, compared once or twice a day
- yea hardly convenient. Oh and all the added benefits from a Tesla
too. Along with FSD.
Tesla just have to get their LFP production up. But these Model 2s may be able to run
on only a battery the size of around 35 kWh, which is probably not far off only twice what
some of these hybrids have.
Ok so if Tesla can produce 5 million Model 2s a year, then we are only talking about
just over 150 GWh of battery requirement. Do the numbers, that is not a lot of batteries
required. Tesla will have that much supply next year, and the majority of those batteries
are 2170s. Which means they have nickel and cobalt in the cathode, scarce minerals in
very high demand. The Model 2 batteries will have iron phosphate
cathodes, for more abundant and cheaper. The dry battery electrode manufacturing process
will have been perfected by this stage along with all the other revolutionary new battery
manufacturing techniques Tesla has achieved.
Of course you would hope supply chain issues are sorted by this stage too, meaning that
there is very little to constrain the production line of the Model 2. This is the car that
ends the legacy industry. So surely Tesla would build a factory for Model 2 in the US,
possibly as an extension in Texas. It wouldn't even cannibalize their other products. As
they will also like have a tax incentive, and demand for those will be crazy enough
anyway.
In fact the purpose of the Model 2 really would be to just end the rest of the PHEV
market. And it should have negligible effect on the rest of Tesla's demand for their other
products. So what if Tesla could be at 10 million total
units a year just in the US, perhaps by 2025. Would that mean they have 50% market share?
Well maybe not, legacy autos would have most likely be gone by now. With the exception
of possibly Toyota. Some of the other EV companies might have started finally making some alternatives
too. I mean the alternatives wont be close to Tesla,
from a value proposition perspective of a rational consumer. But some people want something
different. I conducted some of my own market research, and had about 100 Mach E owners
tell me why they bought it, aside from a couple of die hard Mustang fans, the 2 reasons were
that everyone had a Tesla, so they wanted something different, and the other reason
was they simply liked the look of the car better.
On the other hand once Teslas drive themselves then your probably too busy looking at the
screen to watch Netflix rather than the look of the actual car itself.
Ok that was a lot to go through there, and it doesn't cover it all. But as far as I can
tell, ICE cars are going to suffer enormous amounts of depreciation, and the consequences
will proliferate to consumers and businesses. Now if it was solely a BEV tax credit, then
that might be different.
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