Mickey Kim and Roger Lee: EV struggles confirm obituaries for IC were premature

Demand for electric vehicles exploded post-COVID. Particularly on the coasts and in big cities, EVs became de rigueur among the “green energy” cognoscenti/early adopters (though EVs have actually been around since the 1830s, well before internal combustion came on the scene). The meteoric growth in supply and demand wasn’t due solely to EVs’ product appeal, but also to the Biden administration’s commitment to a “greener” future of 60% EV market share by 2030 and 67% by 2032.

Domestic and foreign manufacturers of traditional, internal-combustion vehicles responded by announcing plans to transition to producing 100% EVs. Conventional wisdom was, this was surely a death knell for internal combustion (and businesses like gas stations that support it).

Fast forwarding to 2023, EV demand has stalled. According to Kelley Blue Book, the average price paid for an EV in September was $50,683, down more than 22% from one year ago (but still a healthy premium compared to internal combustion vehicles). Even with the price cut, demand is lagging, and inventory is piling up. EV and IC inventory both started the year at around 52 days’ supply (number of days needed to sell all vehicles in inventory based on the previous month’s daily selling rate). While IC supply has remained constant, EV inventory is currently 97 days’ supply, almost double the inventory of IC.

In response to rising interest rates and a drop in U.S. market share, Tesla CEO Elon Musk’s strategy has been to keep customers’ monthly payments “flat” by aggressively cutting vehicle prices to offset higher interest expenses. For example, without factoring in federal tax credits, the starting price for the 2023 Model Y Long Range has been lowered to $48,490, down 25% from the comparable 2022 model ($64,990). These deep cuts have not only forced all manufacturers of EVs to follow suit, they have crushed resale values and left many buyers “upside down” (owing more than the vehicle is worth) on their auto loans.

The EV glut was foreshadowed by the massive investments poured into electrification. The combination of government policy and ultra-low interest rates spurred a boom in investment in U.S. EV capacity, with the federal government poised to contribute $83 billion through the Infrastructure Investment and Jobs Act and the Inflation Reduction Act.

Toyota President Akio Toyoda was derided when he expressed concerns about EVs’ significant price premium to ICs and the spotty charging infrastructure and refused to commit to a timetable for a transition to 100% EV. Toyoda was unbowed, asserting the “silent majority” of his industry peers shared his doubts about pursuing a 100% EV future. Toyoda was prescient in worrying about the depth of the market for EVs costing $50,000-plus and the large proportion of potential buyers with severe “range anxiety.”

Indeed, Ford announced its Model-e division’s operating loss for the third quarter more than doubled from 2022, to $1.3 billion, and has lost $3.1 billion so far in 2023. Ford is losing $37,000 on every EV it sells, and that’s before the 25% wage increase it agreed to in order to end the UAW strike.

In EVs’ halcyon days, there were months-long waiting lists for Ford’s Mustang Mach E SUV and F-150 Lightning pickup truck. Now there’s a 3-1/2-month supply of Mach E’s withering on dealer lots, and Ford recently eliminated a work shift at the factory producing the F-150 Lightning.

The sudden negative change in EV economics (demand down and pricing/cost pressure up) caused Ford to delay $12 billion in planned EV investments. Similarly, GM cited the need “to better manage capital investment while aligning with evolving EV demand” when it announced it would delay the opening of a factory producing large EV pickup trucks in Michigan.

Fortunately, it’s not all potholes on the road to electrification, as the market for hybrids (pairs an internal combustion engine with an electric motor) is experiencing a resurgence. Toyota introduced the first mass-produced hybrid vehicle, the Prius, more than a quarter-century ago. While hybrids cost less than fully electric EVs and avoid “range anxiety,” they were mostly forgotten in the stampede to full electrification.

Ford plans to quadruple its sale of hybrids over the next five years, even as it decelerates its EV ambitions. Toyota has been criticized for its continued commitment to hybrids (given they still rely on fossil fuels), but they account for about one-third of U.S. sales. The fact that Toyota could double the number of plug-in hybrids it sells today makes Toyoda’s assertion “because the right answer is still unclear, we shouldn’t limit ourselves to just one option” ring true.

Not being political, but the recent EV travails are an example of what can happen when well-meaning government policy becomes the primary driver of business decisions, not economics. EV production ramped up too quickly, and the market wouldn’t absorb the additional supply. EV prices still need to fall dramatically to “mass market” levels, and the maturation of the charging infrastructure is years in the future.

We don’t know if we’ll ever get to the “promised land” of 100% EV, but for IC, it’s like Mark Twain said: “The report of my death was an exaggeration.”•

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Kim and Lee are chief operating/compliance officer and director of research, respectively, for Columbus-based investment adviser Kirr Marbach & Co. They can be reached at 812-376-9444 or mickey@kirrmar.com and roger@kirrmar.com.