It’s no secret that the U.S. is pushing for electric vehicle adoption, with policymakers at both the state and federal levels laying out incentives to boost purchases.
But the thing is that EVs are expensive — the average one runs for about $60,000, while a typical internal combustion engine (ICE) vehicle with similar features is about $20,000 less. That means right now, customers have a choice between a $40,000 gas-powered vehicle or a $60,000 EV, which in this strained economy is a no-brainer.
So will prices ever come down? In September, General Motors (NYSE: GM) shocked the electric vehicle space when it introduced its Chevrolet Equinox EV, an all-electric SUV that will sell for around $30,000 beginning in 2024.
That got analysts asking the question: Will GM’s low price force other EV makers to follow suit? The short answer is … no.
“[GM and other EV makers will] have the lower end simply to establish that they are a player at that end of the range,” Dr. Richard Kilgore, an associate professor in the Online Management and Business Administration program at Maryville University in St. Louis, told Modern Shipper.
“But especially when the capacity is constrained early on, the actual production will be skewed more toward the higher-margin vehicles — and especially vehicles with higher software packages for autonomous driving, larger batteries that have more reliability, things like that.”
Through work as an industrial consultant, Kilgore has 20 years of experience learning the ins and outs of the automotive industry. In his view, GM’s announcement is more of a marketing ploy than anything. He believes the automaker and its rivals will offer lower-priced options to compete with powerhouses like Tesla, but more expensive models will remain the focus.
“They want to position themselves in the marketplace as a brand you want to consider if you’re looking for a sub-$40,000 vehicle,” Kilgore said. “Tesla is positioning themselves to be more of the Apple iPhone electric vehicle. GM is positioning themselves to be the Samsung Android of electric vehicles.”
But just like Samsung offers a $300 model and a $1,200 option, GM and other companies will do the same. And Kilgore predicts that vehicles on the cheaper end of the spectrum will be in short supply.
“When it comes to having the available capacity to meet demand at that price range, that’s not going to happen,” he said. “Given their existing capacity and planned capacity, there’s gonna be a very small number of those vehicles available.”
So if prices across the board won’t go down and low-cost EVs will be tough to come by, then how will the U.S. meet its goal of having EVs make up half of all vehicle purchases by 2030? Things should start to ease up when the provisions outlined in the Inflation Reduction Act, which took effect in August, have been in place for a few years.
One provision laid out by the IRA is a $7,500 tax credit for consumers who buy a new EV and a $4,000 credit for those who purchase a used EV. The catch? To be eligible for the credits, a vehicle must be assembled in the Free Trade Area, which includes the U.S., Canada, Mexico, Australia and a few other countries. Notably, that list doesn’t include any Asian or European nations.
This emphasis on local sourcing and production, Kilgore believes, will ultimately drive prices down for consumers because firms won’t need to cover the costs of production and shipment from overseas.
“The vehicle has to be produced in those countries and has to have a certain percentage of battery material composition to meet that $7,500,” he said. “So I’m sure at that price point, [automakers are] trying to also induce those people who have $7,500 credit eligibility to even further reduce the price of the vehicle.”
The IRA’s tax credit provision is in part a way to shield the U.S. EV market from foreign competitors undercutting its price points. For example, an Indian company called Tata launched an EV that would cost about $10,000, but that vehicle isn’t eligible for the credits.
However, the fact that a cost-effective model like Tata’s exists is a wake-up call for manufacturers within the Free Trade Area.
“That would be only available within India. The U.S. would prevent that vehicle from being exported to the United States,” Kilgore said. “But that kind of competition out there tells people, ‘Hey, if these Indian manufacturers can build one for $10,000, why can’t GM, Ford and everybody else over here? … If they can do it in India, they can do it in Indiana.’”
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Luckily for U.S. manufacturers, the laws of economics should prevail. As production ramps up, automakers will be able to spread their fixed costs across more vehicles, allowing them to charge less for each.
But in the short term, they have work to do in order to corner the nascent EV market. Kilgore sees two groups that would make ideal candidates for a vehicle that costs around $30,000, like GM’s will.
The first is families with children, who are typically a large market for SUVs. But in the case of GM’s Chevrolet Equinox EV, Kilgore thinks the vehicle class should be put in air quotes.
“I can turn an existing Tesla into an ‘SUV’ simply by making the back end a little bit taller,” he said. “And I think that’s what a lot of these car makers are trying to sell to the public, is that this would be a replacement for the current SUV you have. But in reality, I don’t think that’s the case.”
Rather, Kilgore predicts that families will use an EV like GM’s as their second vehicle, buying it as a complement rather than a replacement.
“What they’re going to do is fulfill what I think is going to be the initial purchase decision for a household, which is that they’ll keep the ICE vehicle for the long commute trips,” he said. “But for the person at home going to and from soccer, or going to and from the grocery store in the neighborhood, that’s where this sub-$30,000 EV will really be an in-demand option.”
The other group Kilgore identified was single people in their 20s and 30s who have limited commute times. These typically low-income buyers would be more likely to make a low-cost EV their primary vehicle for getting to and from work and are a great marketing target, Kilgore said.
“Those two segments will be the primary segments that will be attracted to that lower-price vehicle, and I see very, very high demand in the future for that,” he said. “But the problem is capacity.”
Because low-cost EVs are still a new idea, automakers continue to skew their capacity planning toward higher-margin vehicles. Yet even after they solve that problem, they will be faced with another: a malleable customer base that has yet to figure out what it wants.
“Unlike traditional ICE buying, there’s going to be very little brand loyalty,” Kilgore said. “No one sees Ford or GM or Volkswagen as being any different when it comes to EVs, whereas they do see big differences in these companies when they compare ICEs.”
There may be a day when brand loyalty does arrive. But until it does, automakers are left scrambling to reach a market they still don’t fully understand.
“There’s uncertainty on both sides of the demand and supply,” he said. “The manufacturers don’t know their consumer, and the consumer doesn’t know the product. There’s range issues, quick charging, hybrid versus nonhybrid, speed of the vehicle, reliability — the manufacturer has to guess at what mix of those will be the optimum mix for the consumer. At the same time, that consumer hasn’t really decided what they’re going to be looking for. They’ve never purchased a vehicle like this.”
He compared the issue to the one facing the young portable laptop industry when it first got started. Both manufacturers and consumers were witnessing an entire industry being born, and each had to learn about the product before the market adjusted.
Similarly, Kilgore believes EV makers should be prepared for failure early on.
“There’ll be some companies that will have some horror stories about their launches and recalls, and they’ll lose their reputation as quickly as they gained it by putting out a price that may be too low for the reliability that the customer wants,” he said.
Add to that ongoing issues like battery fires and crashes, and Kilgore predicts that customers may wait to purchase an EV until prices come down and automakers work out the kinks in their designs. But by 2028, his hope is that the industry has been fleshed out enough to keep prices under control and help the U.S. reach its lofty goals.
Click for more Modern Shipper articles by Jack Daleo.
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