The US is entering a risky new phase of the EV transition

This year will be the first chance to see the impact of a compromise built into the Inflation Reduction Act. Making it harder for Chinese companies to benefit from the EV tax credits was guaranteed to slow sales in the near term, because of how much of the battery supply chain is controlled by China. Legislators believe that’s a sacrifice worth making to boost the nascent U.S. battery industry in the long term.

Are enough consumers willing to shell out more for some EV models to make it worth automakers’ while to keep scaling up their production lines? That’s the virtuous cycle that the Biden administration hopes will eventually lower prices for all models.

EV sales rose in the U.S. in 2023, reaching nearly 10% of total car sales. But top producers like Ford and GM scaled back their production targets as rising interest rates ate into expected demand. The latest forecast from BloombergNEF sees 16.7 million EVs sold globally in 2024, up 20% from the previous year but down 4% from its earlier forecast, mostly due to below-expectation sales in the U.S. and flagging U.S. consumer interest in the leading U.S. brand, Tesla, as it struggles to bring a lower-cost model to market. The company’s global sales in the fourth quarter of 2023, reported this week, came in just ahead of analysts’ expectations, just shy of 500,000. But lower-cost versions of Tesla’s popular Model 3 are among the EVs now disqualified for the tax credit.

The narrower tax credit rules narrow the path to profitability for the EV divisions of all the major automakers, as they put pressure on those companies to sign deals with potentially higher-cost non-Chinese battery suppliers while simultaneously cutting their cars’ prices to compensate for the lost tax credit.

The tax-credit rules are expected to become even more stringent next year, which adds another wrinkle for consumers’ calculus: Wait a while to buy, and prices will likely come down, but wait too long and your preferred model may get axed from the tax credit list. As a result, a growing number of U.S. drivers are turning to alternative buying arrangements.

Leased EVs can still qualify for the tax credit with no restrictions; although the credit technically goes to the company leasing the vehicle, most dealers pass those savings to lessees. “Microleasing,” with terms shorter than six months, is also on the rise, which may be the fastest and lowest-risk way to get behind the wheel of EV today. As of Jan. 1, all used EVs priced under $25,000 can also qualify for a $4,000 tax credit.

Ultimately, tax credits aren’t a decisive factor in automakers’ long-term EV plans, said Ellen Hughes-Cromwick, senior climate fellow at the think tank Third Way and former chief economist at Ford: It’s clear that, sooner or later, the era of gasoline cars is reaching its finish line.

“Tax credits will support growth, but they aren’t a crutch — U.S. companies have been prudent and built out EV capacity independently,” she said. “There is a race to secure adequate sources of capital to accelerate EV production to scale. As we achieve that scale, competitive forces will cause companies to reduce prices (and still make money for shareholders). In my view, that’s going to hugely benefit consumers and put more EVs on the road.”

For U.S. and European automakers looking to sell EVs outside the U.S., the biggest threat is competition from Chinese rivals. BYD, for example, has proven it doesn’t need tax credits to dominate the global EV market. The company delivered 526,409 EVs in the fourth quarter, beating Tesla for the first time and making it the world’s biggest EV manufacturer, with a particular edge in the lower-price point end of the market. BYD doesn’t sell in the U.S., where its car would face a crippling import tariff. But it’s pushing into Europe; last week the company confirmed that it plans to open its first European factory, in Hungary. And its rock-bottom production costs and vertically-integrated battery supply chain mean that its income is about equal to Tesla’s despite having one-tenth the market capitalization.