As you might have heard, it would appear that
the EV tax credit or incentive is now back on the table.
You are probably familiar with the details, so instead I thought we could delve in the
the actual economics of how this affects the auto industry and in particular Tesla.
CURRENT The current EV tax credit it a little special,
of which I mean in a bad way.
Currently US tax payers are subsidizing consumers to buy foreign electric vehicle imports.
Nissan, Volkswagen, etc, these are EVs that are made overseas, then imported and given
a $7,500 tax credit.
Whilst all EVs that are made domestically in the US, do not receive any tax credit whatsoever.
Except perhaps the Ford Lightining.
That's right, the US is kindly helping demand for their overseas competition.
Why is this you may ask, how could a government be that kind to the competition.
Well General Motors and Tesla have already exhausted all their tax credits, as it was
limited to the first 200,000 EVs purchased for each manufacturer.
They are both the only two companies making EVs in the US.
Even Ford's Mach E was made in Mexico.
Admittedly now they are producing the F-150 Lightning in Michigan.
So it doesn't take a genius to work out, this is a flawed incentive, and whatever benefits
there are, clearly aren't worth it.
I mean to be honest there is no EV incentive that is of any benefit to anyone, at least
not with tax credits or rebates.
It just pushes the economy around from one area to another, and doesn't actually create
or motivate anyone to increase the supply, or reduce costs.
The clash for clunkers incentive was a complete disaster too, and ended up costing tax payers
a fortune, that wasn't even close to realized back into the economy.
This will be no different.
ECONOMICS Let's go through how this would work, starting
at the consumer level.
This means that every consumer in the US, can buy a new EV and has a $7,500 discount.
Once they hear about this, then I imagine a large majority of consumers want their fair
share.
If everyone else is getting a discount, and a cheap EV, then I want one too.
Obviously this will increase demand.
Hmmm, obviously?
Won't it?
Remember all EVs already have a $7,500 tax incentive to buy a brand new EV in the US
right now, excluding Tesla and GM.
Therefore wouldn't that mean that only Tesla and GM's demand would increase, as there is
no change as to any of the other manufacturers.
MODEL 3 Currently a Tesla Model 3 Standard Range,
is the lowest cost Tesla EV available in the US, and starts at $47,000.
If the full EV credit was applied, the Model 3 would now sell for below $40,000.
Now the Model 3 has been that price previously, even without an credits, but Tesla's popularity
has increased significantly since then, on top of that, the value of a Tesla has increased
majorly due to oil price rises.
Therefore demand for the Model 3 would shoot up dramatically.
If you traded in a $10,000 ICE vehicle, then it would only cost $29,500 to upgrade to a
brand new Tesla Model 3.
Doesn't sound like a whole lot does it?
Yea, well it's still $30k, so it's nothing, and not everyone can find that much money,
even if it is for a Tesla.
On the other hand, if you are driving a $10,000 ICE car, then it's probably reasonably old,
not running very efficiently, often needs parts replaced, and costs a bit on fuel.
Well instead you could finance it, and even with at 4.2% interest, it would only cost
$500 a month to make the finance payments.
People love to tell me that Tesla is a luxury car, and I am dreaming if I think millions
of people can afford them, or delusional that I think Tesla would ever come close to selling
even 2 million Model Ys a year.
But I am sorry, if you can't find $500 a month extra, or more like whatever is extra after
you would have paid for gas, servicing, parts, etc, and probably more expensive insurance,
then that is on you, not Tesla.
Just about anyone, at least in the US, can find a way to save an extra $100 a month.
But even if they couldn't, they would just need to find an hour a week to drive the Tesla
in Uber.
If you want a Tesla that bad, then do your own spreadsheet and work out how you can afford
it.
Oh and one other thing, after your Tesla is paid off, those loan repayments, well they
stop, forever, and you are left with you own Tesla.
Whereas your ICE car, well that would still need gas and maintenance.
ADVERTISE Wow, that math was really easy, even if there
wasn't an incentive, it's still affordable for the masses when you put it like that.
Yes, it is.
Tesla's are the lowest cost of ownership vehicle you can buy.
But as we have talked about before, the buy process of vehicles needs a new paradigm when
they are electric.
Rememnber you are bascially getting all your fuel and servicing included in the stick price,
you are pre-paying for all your running costs, getting them out of the way, so once you buy
the car, you will have a lower cost of living.
Better for your health too.
So why doesn't everyone know this yet, why aren't Tesla explaining to consumers how they
have such low cost cars?
I guess enough people to realize, or don't even car, they just want a Tesla.
But when Tesla does get to producing millions and millions, then perhaps a new pricing paradigm
will emerge.
Like buying a house, imagine if you could only get a mortgage that needed to be repaid
in 5 years.
Then very few people could afford a house.
But instead we have this entire financial system where we print money each year, to
inflate the economy, and increase the vale of property, so banks can lend money to homeowners.
As banks are comfortable lending on an appreciating asset, as in the long run, it will always
go up, as long as the governments keep printing.
Which they will, because the banks pay them very well.
EVs, well Teslas, should be classed as an asset, not a liability.
Especially when they have the ability to earn income.
POPULAR Anyway, long story short, Teslas will become
very popular.
But Tesla couldn't make close to enough RWD Model 3s in Fremont, to serve the demand for
a sub-40,000 dollar Tesla.
Tesla will need to raise their prices.
Or else it will get ridiculous, like a 2 or 3 year waiting list.
That's no good for anyone.
Tesla will raise the price, perhaps by about $3,750, perhaps half the EV credit.
I believe the cap for sedans is $55,000.
What does that mean?
Well obviously the RWD has suddenly got some insane margin by this stage, as it does already.
But Fremont can't make them any faster, and Tesla has moved on to 4680 cells in Texas.
However, due to such high margins, Tesla might bring over Made in China Model 3 RWD versions,
if the profits are that good and the demand is that strong.
Of course the demand for all of Tesla's cars will increase.
A Long Range Model Y, back under $60,000.
A 4680 Texas version almost in the low 50,000s after the incentives.
Sounds like a bargain.
Tesla are going to increase their supply and ramp as fast as they can, but when the price
drops almost 15%, then demand going up a lot more.
PRICING I think Tesla will just have to reprice all
their vehicles.
Tesla don't want too high a prices, they are not trying to be some exclusive luxury brand,
only for the rich.
They are meant to be for the mass market.
But they are just too popular and have to manage their demand with pricing.
So the Long Range Model Y will probably be in excess of $70,000, provided it doesn't
go over the cap.
These are off brand prices for Tesla, but they can't help it.
At least when Tesla's production does finally start to reach the millions, then they can
hopefully lower the price, however, the brand now has a higher perceived value, so lowering
the prices is really going to increase demand.
GM As for GM, their Hummer is too expensive to
qualify, the Cadillac Lyriq will, but GM aren't going to be making any large quantity of EVs
anytime soon.
Perhaps 2024, 2025, if their cell factories are doing ok.
UAW But this incentive has to start relatively
soon, because legacy are going to be making cars when their battery factories are ready.
Legacy need to increase their prices by about $7,500, and reduce their battery costs by
about the same amount.
When you combine the two, then you are potentially left with a small net profit on an EV.
But without the incentive, likely still a loss.
However, it sounds like this incentive will last for 10 years.
To provide enough time for legacy to finally make a profit.
However, this will come at an absolutely insane cost.
As Tesla is also likely to eat up those benefits.
And Tesla can ramp their cars so much faster than anyone else.
Tesla could be selling 4 million a year in the US by 2025, meaning that alone is costing
tax payers $30 billion a year.
I don't think Tesla or Elon want that.
Also I don't think the government or legacy want that either.
I think they are entirely under estimating Tesla's ability to ramp, and thus have no
realization of how much this could cost.
HYBRIDS We should also probably address the elephant
in the room.
This incentive is for any vehicle with a larger battery size than just 7 kWh.
That is very small, and does include hybrids.
Some people might think that this is how legacy will win, by making cheap hybrids for the
rebate.
But I think legacy are going all in on fully electric.
Legacy may take advantage of the potential profitability for hybrids.
But I don’t think they are about re-orientate their entire business plan around it.
Also remember, they still have to compete with a discounted Tesla.
COST Even just by the end of this decade, it would
have accumulated around 1/2 a trillion dollars in EV incentives.
Does that sound right to you?
No one has bothered even budgeting how much this could cost.
And that's if EV growth is only 30% a year.
REFINING & MING What really needs to be incentivized, if this
was done right, to actually increase production of EVs, rather than just demand.
Is incentivize the mining, processing, refining of battery ingredients, and cell manufacturing
factories.
SUMMARY Legacy need help, there is no doubt about
that.
They are attempting to enter a new industry that is foreign to them, and are hoping they
can just throw cash at it and use their political powers to hope everything will be alright.
This tax incentive, will simply blow up in everyones faces.
It is far too expensive, yet at the same time, legacy autos can't make a profit without it.
The funny thing is that about 3/4 of the rebates, or more, will go to Tesla.
So although the actual rebate directly to help legacy may not add up to too much, the
fact that Tesla has to take it's share, just makes rebates too expensive to the tax payer.