EVs on Life Support (Part 3): Unplugging
What happens when EVs are unplugged from the incentive life support? The German experience is that EV demand nearly collapses, sending the auto industry into chaos with some surprising consequences
The first and second parts of this substack focused on two great examples of electric vehicle (EV) adoption success stories: Norway, the country with the largest EV penetration in the world and China, the country with the largest EV fleet in the world. Both countries have subsidised and are subsidising EVs heavily in the hopes of creating a self-sustaining industry as incentives taper off. However, the recent German experience following the suspension of EV incentives tells a different story of what happens when incentives are rolled back. So, what happens when EVs’ support is unplugged?
Why Use Subsidies
Before delving into the issue of unplugging EVs from life support, it is worthwhile answering a different but related question: why subsidise in the first place? There are two relevant perspectives, consumers, and governments.
On the one hand, a significant perceived barrier to EV adoption is consumer inertia (some examples here, here, and here), the user reluctance to adopt technologies different than the conventional ones. Subsidies and incentives are intended to help break the inertia barrier and make EVs part of users’ perceived set of choices for personal mobility.
From the governments’ perspective, subsidies and incentives are some of the few levers available to influence consumer and business choices towards the desired goal of transitioning away from fossil fuels for personal mobility. The idea is that “Economic incentives can either make a new technology cheaper or make the incumbent one more expensive. Either way, they help level the playing field early on in a technology’s development […] Eventually, as the new technology scales, costs should drop until the point when you don’t need incentives anymore and can instead turn to other tools like mandates” (Source). Clearly, the larger the incentives, the more likely that they will achieve the desired outcome.
The consumer and government perspectives explain the widespread and invariable presence of incentives in the EV adoption toolbox. However, EV adoption is complicated by several factors that make incentives useful tools but only up to a certain point.
Why Subsidies May Not Be Sufficient
From a consumer perspective, the choice between electric vehicles and internal combustion engine vehicles (ICEV) is far from one only concerning the initial purchase price. This is because it is not clear that EVs are inherently ‘better’ than ICEVs. In fact, there are both trade-offs and uncertainties in EV technology that can sway consumers. EVs’ zero tailpipe emissions, fantastic acceleration and mechanical simplicity come with trade-offs relating to driving range, vehicle weight, charging time duration and uncertainties relating to total cost of ownership, residual or resale value, battery life, degradation, decommissioning, and performance depending on weather conditions.
EVs also don’t directly solve a consumer problem. In the transition from horses to internal combustion engine vehicles (ICEVs) in the early twentieth century, ICEVs solved a pollution problem, believe it or not, while clearly causing others:
“An urban workhorse dumped between 20 and 50 pounds of manure a day on the street along with a gallon of piss. Add 500 horses per square mile and then do the math, “says Greene. "Some cities had good systems to truck out the manure while others dumped it in rivers." Tonnes of manure pounded and pulverized into dust attracted rodents and flies. By one wild government estimate, 95 per cent of all disease-carrying flies bred in horse dung. (Source)
EVs are ostensibly part of an answer to climate change inducing anthropogenic emissions. Without going into details into the causal link (or lack thereof) between man-made emissions and climate change, consumers may rightfully ask, “if burning fossil fuels for personal mobility is such a big problem, shouldn’t private jets be the first problem addressed before my vehicle to tackle climate change ?” Emissions reductions from using EVs can be achieved if the electricity is sourced from renewable sources, a luxury few countries have realised so far, hence detracting from the EVs’ potential to reduce anthropogenic emissions. The issue remains that consumers may be affected by climate change through increased weather events severity, droughts, floods etc. However, drawing the causal link between transitioning to EVs and reducing floods requires some imagination.
The key idea behind incentives is to level the playing field to improve technology scalability and cost structures to a point where the technology is cost competitive with incumbents. The issue is that many EV manufacturing innovations are directly translatable to ICEVs. Thus, EV manufacturing can achieve a limited cost advantage compared to ICEVs and therefore partially negating incentives’ effectiveness.
At a government level, remember that a key idea behind incentives is to level the playing field to improve technology scalability and cost structures to a point where the technology is cost competitive with incumbents. The issue is that many EV manufacturing innovations are directly translatable to ICEVs. Injection moulding (or mega-casting) is perhaps one of the latest innovations in auto manufacturing. Although the process was primarily developed by Tesla to manufacture its electric vehicles, it is perfectly suited to manufacture ICEVs thus reducing their manufacturing costs. Thus, EV manufacturing can achieve a limited cost advantage compared to ICEVs, partially negating incentives’ effectiveness.
One manufacturing area where EVs can differentiate is the powerpack. The lower the powerpack manufacturing costs, the lower the cost difference between EVs and ICEVs. If EV incentives don’t support the creation of a vehicle manufacturing cost advantage, they do indirectly support powerpack manufacturing, research and innovation, the majority of which takes place in China. The likely hope is that a breakthrough in powerpack energy storage (such as the Lithium-Air battery) will improve battery energy density sufficiently to make EVs cost competitive with ICEVs on the long term. While this innovation may be just around the corner, in the meantime incentives continue to cost governments billions.
I found the quote below in a recent article that seems to perfectly encapsulate today’s EV market particularly in the European Union and the U.K.
Oddly, the rapid success of EVs was partly responsible for their downfall. Developers and proponents of passenger and commercial EVs believed that the use of electricity as a fuel was associated with modernity and progress itself. While they were also able to cultivate an appealing vision of a horseless age, many electric vehicles proponents thus ignored some of the real advantages of gasoline and the stated preferences of customers. These advocates were so focused on an ‘‘ecstatic belief’’ in the future of EVs that they became blinded by the practical challenges that emerged. Many were also convinced, from previous improvements in battery size and range, that a ‘‘miracle battery’’ would eventually be developed. In short, EV proponents believed in technological optimism and placed faith in human ingenuity to overcome lingering technical problems. (Source)
If this sounds familiar, you may be surprised to know that this quote refers to the rise of gasoline powered vehicles in the United States in the early 20th century! The future does look like the past…
Unplugging EVs from Life Support
A recent flurry of news pieces emerged after August 2024 European vehicle sales data surfaced, especially focusing on Germany. August 2024 data indicated that 125,000 EVs were registered during the month, a 36% year-on-year decline. Two of the biggest markets for EVS, Germany and France saw a massive decline in BEV sales by 68.8% and 33.1% respectively.
The EV sales decrease comes in a context of a softening European auto market, with new vehicle registrations (irrespective of power source) declining by 18.3% year-on-year. France experienced the largest decline of 36.6%, followed by Italy 18.8%, Spain 17.4%, and Germany with 7.4.%.
The suspension of incentives, particularly in Germany, has been the underlying factor that has prompted the sharp decline in EV sales (see graph below). Germany suspected all EV subsidies at the end of 2023 following a ruling by the its constitutional court on budget spending. The direct results of this decision were visible almost immediately and continue to show. The country’s largest auto manufacturers VW, Mercedes-Benz and BMW have both issued profit warnings and taken actions in light of the EV demand decrease. VW has considered plant closures in Germany due to decreasing EV demand, with the Osnabrück plant now being the most likely candidate. Mercedes-Benz has delayed its 2025 EV sales deadline (was previously 50% of sales) to 2030.
The German luxury brand [Mercedes-Benz] now says it won't meet its 2025 deadline to have EVs, including hybrids, make up 50% of all sales. Lackluster demand for electric-powered cars has delayed that goal until at least 2030, the company said. (Source)
BMW has adjusted its financial guidance in light of reduced sales and posted a 13% decrease in revenue in Q3 2024. Other auto manufacturers have also adjusted their EV production plans in light of the demand slump, including Stellantis, Renault and Ford.
Some may wonder why the decrease in EV sales isn’t more pronounced given that the price differential between EVs and ICEVs has now increased. Part of the answer lies in the EV market structure. Most EVs (as much as 80% of European purchases) are actually purchased by fleet operators or corporate buyers. In Germany, more than 3 out of 5 EVs purchased are purchased by fleet/corporate operators. Corporate buyers’ demand is somewhat less price-elastic because they are also facing pressures to report on reduce carbon emissions as well as potential quotas for EVs in their portfolios.
This is perhaps one of the reasons why the German government has agreed to provide tax reliefs for corporate EV buyers where “companies would be able to deduct up to 40% of the value of newly purchased electric and qualifying zero-emission vehicles from their tax bill in the year of their purchase, falling progressively to 6%. The government estimates that the measure will have an average annual cost of about 465 million euros ($514 million) between 2024 and 2028.” (Source). Without the carrot (incentives) and the stick (mandatory reporting and targets subject to fines), it is likely that the demand from corporate buyers would also dry up.
For a brief period of 8 months, Germany experimented with unplugging EVs from life-support and was met with the tough reality that EVs are economically dead without incentives. Incentives have so far failed to support EV manufacturing to improve its cost competitiveness and failed to build sufficient demand momentum, especially in private consumers, as the European Automobile Manufacturers Association own study shows. Incentives just covered the main user concern (that of purchase price) but failed to provide sufficient assurance about others (driving range, battery lifetime, electricity prices, battery decommissioning etc.). In a very real way, what happened more than 100 years ago in the U.S. is happening now once more.
What This Means for the Future of EVs
The central thesis of this article has built is that the EV markets in most countries are maintained on life support through government incentives and subsidies and that suspending EV incentives can completely destroy EV markets. The German experiment of suspending all incentives, whether intentional or not, partially supports this thesis. In the 8 months following the incentives suspension, EV demand has gradually and then steeply decreased. This decrease will likely subside with the introduction of the new incentives, again pointing towards an EV markets failure to self-sustain.
Although governments may want to gradually roll back this support, the market structure, incentives, and technology will likely not permit this as long as other alternatives, such as conventional vehicles or hybrid vehicles (e.g., Plug-in hybrids PHEVs) are still part of the market choice set.
The EV transition is not consumer led, rather fleet operator and corporate led. In most European countries, including Germany, corporate buyers form the majority of the EV market. Unlike private consumers that receive just the carrot (lower subsidised prices), corporate buyers are also subject to the stick (emissions reporting and reduction requirements – e.g., the EU emissions trading scheme (ETS), and potential fines). As long as EVs remain the most accessible way for businesses to reduce their operational emissions (commonly known as Scope 1) and as long as emissions reporting and reduction requirements remain in place, demand for EVs will continue to be propped up, even if just partially.
Corporate and fleet operator vehicle decisions are often more influenced by cost factors than vehicle characteristics. Unlike private buyers that may be interested in battery degradation and weather performance, battery replacement costs and so on, many corporate and fleet operators acquire vehicles for shorter terms (a 3-year, 50,000 km leasing model for instance). Hence many EV characteristics and disadvantages become irrelevant for the corporate EV purchase decision. One of the possible consequences of this corporate-driven demand structure is that the incentives to innovate and resolve many of the EV consumer concerns may be lacking.
Private consumers that are interested in buying affordable EVs may be able to do so from the second-hand market. The residual value of EVs tends to drop much quicker than that of ICEVs. This increases the EVs affordability and may spur EV adoption amongst private consumers.
The surprising winner in the battle between EVs and ICEVs may be hybrid vehicles such as PHEVs. Hybrid vehicles seem to provide the best of both worlds in terms of range, charging speed, reliance on charging infrastructure, and battery-related issues at a somewhat higher, but not prohibitively higher, price than EVs.
The surprising winner in the battle between EVs and ICEVs may be hybrid vehicles such as PHEVs. Hybrid vehicles seem to provide the best of both worlds in terms of range, charging speed, reliance on charging infrastructure, and battery-related issues at a somewhat higher, but not prohibitively higher, price than EVs. Hybrid vehicles typically have electric-only ranges that satisfy the typical daily needs of most private consumers while also allowing for longer, uninterrupted driving without the need to rely on charging infrastructure. The one downside hybrids appear to have, for some strange reason, is a propensity for fire that is superior even to that of ICEVS.
If governments wouldn’t be so dead set that the future of mobility must be electric at all costs, they would perhaps realise the value of hybrid technologies not just as a transition technology but as a genuine tool to reduce fossil fuel consumption and emissions without the need to reinvent how mobility is powered.