Incentives end looms for top-selling EVs

June 25, 2018 01:00 AM

AUTOMOTIVE NEWS ILLUSTRATION

It's a race that punishes the first to cross the finish line. After each automaker sells 200,000 plug-ins, its customers gradually lose access to a $7,500 tax credit.

Tesla Inc. and General Motors lead the U.S. auto industry in sales of plug-in vehicles.

In a traditional vehicle segment, that would be cause for celebration. But in an emerging market for plug-ins, it has meant investing billions of dollars in vehicles that aren't yet profitable while also being first in line to lose sizable tax credits for their customers from Uncle Sam.

Tesla, perhaps as early as July, is expected to be the first automaker to hit a 200,000-unit sales mark that triggers a phaseout of the federal tax credit currently worth up to $7,500 toward the lease or purchase of a new plug-in hybrid or electric vehicle.

GM is expected to follow Tesla by early 2019. Nissan Motor Co. and Ford Motor Co. are the next closest to 200,000 and are still forecast to be years away from hitting the trigger. Barring an extension to the credits from Congress, the plug-in market is about to enter a period in which some brands are suddenly hindered by a considerable price disadvantage, and buyers could be surprised to receive less of a credit than they had been counting on.

The end of the credits was expected to occur years ago for large automakers such as GM. But adoption of the vehicles has not occurred as quickly as most expected when the program was created a decade ago.

Slowly plugging in

Plug-in hybrids and electric vehicles aren't expected to reach 10% of U.S. auto sales until 2025.
2017	202,151	1.2%
2018	284,795	1.7%
2019	398,898	2.4%
2020	599,950	3.6%
2021	770,649	4.7%
2022	1,125,115	6.9%
2023	1,425,687	8.6%
2024	1,613,246	9.7%
2025	1,728,996	10.3%
Source: IHS Markit

Plug-ins represented 1.2 percent of U.S. sales in 2017, according to IHS Markit, which doesn't forecast them to surpass 5 percent of the domestic market until 2022. IHS predicts that by 2025 an influx of new models — the number of choices is expected to go from 49 last year to 258 in 2025 — will increase sales of plug-ins, including fuel cells. But even at 10.3 percent in 2025 they would still represent just a sliver of the overall market.

The alternative-fuel tax credit program started under the George W. Bush administration and was expanded under President Barack Obama. It was a point of contention for the Trump administration and Republican-led Congress last year, as they debated sweeping tax reform legislation that almost terminated the program.

Supporters, including many automakers, have touted the cash as a needed subsidy to help accelerate the development of next-generation electrified vehicles to reduce the country's dependency on fossil fuel and foreign oil.

Opponents of the credits have criticized the program for disrupting the free market and using tax dollars to back unwanted technology. Some say the government should not be subsidizing wealthy customers who would purchase $75,000-plus Teslas anyway.

And now, the program is about to effectively penalize companies that spent billions on research and development, built up supply chains and stimulated public interest, which rivals can now take advantage of as the plug-in market gets more competitive.

"The groundbreakers, the people who forged ahead and got these products out there first, could be at a significant disadvantage now," said Rebecca Lindland, executive analyst at Kelly Blue Book. "I don't think it's fair to reward a company that hasn't been as innovative with an incentive that begins when someone else's ends.

"We need to not penalize the companies that were innovative and early to market."

Tesla quiet, GM lobbying

Tesla and GM have accounted for 44 percent of the 853,500 plug-ins sold in the U.S. since the tax credits took effect Jan. 1, 2010, according to estimates by the Automotive News Data Center.

The two companies are likely to feel the end of the credits differently. Industry experts expect GM to take a bigger hit than Tesla. The federal incentive affects purchasing decisions for lower-priced vehicles such as the sub-$40,000 Chevrolet Volt more than a $75,000-plus Tesla Model S or X, according to research by the Institute of Transportation Studies at the University of California-Davis.

"As we believe in an all-EV future, we think there's still work to do to make sure customers understand the benefit as we continue to develop the marketplace."
Mary Barra, GM CEO

"We expect that GM will have much more impact or drop in sales," said Gil Tal, director of the Plug-in Hybrid and Electric Vehicle Research Center at UC-Davis. "The larger the share of the incentive, the higher the impact."

A 2016 study co-written by Tal found that 29 percent of plug-in sales in 2010 through 2014 can be attributed to the federal tax credit. Within that, 40 percent of Volt buyers would not have purchased one without the credit of up to $7,500, according to the study, but only 14 percent of Tesla buyers would have bought something else instead.

That's likely why Tesla and its outspoken CEO, Elon Musk, have been uncharacteristically quiet on the looming end of the credits, while GM and its executives have lobbied for an extension or expansion of the program, which is believed to be highly unlikely under the current administration.

Batey: "Great for the consumer"

"At the end of the day, we think having the benefits is great for the customer, because obviously it makes the EV adoption easier and more attractive," GM North America President Alan Batey told Automotive News this month.

GM, which currently offers two plug-ins in the U.S., plans to launch at least 20 all-electric and fuel cell vehicles globally by 2023. The company has said its next-generation EV platform — expected in 2021 — would be profitable.

A lot of GM's competitors don't have any EVs to offer, and Batey said there "should be a broader opportunity for those that have EVs to offer the consumer."

Despite its flaws, the federal tax credit is and has been "the most important incentive for the purchase" of plug-ins, said Michael Nicholas, senior researcher at the International Council on Clean Transportation. The industry has been "able to get to more favorable economies of scale sooner" than it would have otherwise, he said.

'Mixed bag'

Nicholas, co-author of several studies on the topic, and others described the tax credit program as a "mixed bag."

"Will it make some consumers look at a brand that still has the tax credit eligible? Absolutely," said Rachel Shue, automotive consultant with IHS Markit. "But are some consumers going to return to the place where they bought their first EV because of new and exciting products? Absolutely as well."

Industry experts argue the federal tax credits should have been based on a period of time, not the number of units sold — creating a level playing field and more urgency among automakers.

"One of the really strange things about this program is it doesn't have a finite ending point," said Jeremy Acevedo, Edmunds' manager of industry analysis.

Some say the incentives also should be based on the price of the vehicle and only be available to first-time buyers, which would encourage consumers to actually purchase the vehicle instead of leasing. When plug-ins are leased, the finance company gets the credit and doesn't always pass along the full amount to the buyer.

KBB's Lindland, who participated in a 2015 National Academy of Sciences study on barriers to EV deployment, said the regulatory incentives essentially have helped more affluent, eco-conscious drivers who would have bought the cars regardless and are now running out "just when the mainstream market needs to be incentivized."

For a case study on what occurs when such credits end, look no further than sales of the Nissan Leaf after the state of Georgia — one of its prime markets — removed an incentive of $5,000 for plug-ins.

When the tax credit was replaced with an increased registration fee — to make up for the gasoline taxes that EV drivers don't pay — Leaf salesin the state reportedly dropped almost 90 percent.

Phaseout

The phaseout of the federal tax credits begins two quarters after the quarter during which a manufacturer crosses the 200,000 threshold. That means buyers can still get the full credit for up to six more months, depending on the timing.

If Tesla, for example, reaches the limit anytime from July 1 through Sept. 30, the full credit would remain available to buyers who take delivery of its vehicles by the end of the year. The credit would then be cut in half, to $3,750, for the following two quarters (January through June) and then halved again, to $1,875, for two more quarters (July through December) before going away for all Tesla buyers starting Jan. 1, 2020.

Tesla has said it expects to hit the 200,000 mark sometime this year, and reports on some Tesla online message boards suggest that the company has slowed U.S. deliveries to ensure it doesn't trigger the phaseout before July 1.

During Tesla's annual shareholders meeting this month, Musk said the company wouldn't start building the least-expensive version of the Model 3 until the first quarter of 2019.

That means consumers who have been waiting for the $35,000 base trim that Musk announced two years ago would finally get their car just as the credit drops by $3,750.

The credit applies to businesses as well as individuals, suggesting that Waymo, Google's self-driving technology affiliate, could reap credits totaling $465 million for a May agreement to buy up to 62,000 Chrysler Pacifica plug-in minivans. If so, that also would reduce the number of individual FCA US customers eligible to receive a credit by nearly one-third.

Plug-in advocates are quietly pressing lawmakers to raise the limits, although no legislation is imminent, said Genevieve Cullen, president of the Electric Drive Transportation Association.

In March, 36 utilities wrote House and Senate leaders seeking elimination of the 200,000-unit cap. Utilities are increasingly gearing up to provide charging infrastructure for EVs and say incentives still are necessary to help achieve economies of scale and provide certainty to automakers and consumers.

"We've continually reinforced the need to extend," GM CEO Mary Barra said earlier this month.

"As we believe in an all-EV future, we think there's still work to do to make sure customers understand the benefit as we continue to develop the marketplace."