Column: From electric vehicles to chocolate: Lessons in demand elasticity

As you may have noticed, if you bought any foil-wrapped bunnies recently, the price of chocolate has gone up, up and up.

Cocoa bean prices were high when the year started, then they doubled. Climate change has a role in the repeated years of poor crops, but what I found really interesting was that even as those higher prices worked through the supply chain to end products, consumers kept buying them.

I suspect that's because there just isn't a really good substitute for chocolate. Caramel or jelly beans don't hit the same way, and the indulgence of chocolate is ingrained in the culture.

It's a terrific example of what economists call inelastic demand: The demand changes little, even when prices change a lot.

That has not been the case with electric vehicles.

American consumers have proven very responsive to price cuts. Demand for EVs, especially in the shift from early adopters to early-mass market, is very price-elastic.

Consider the Mustang Mach-E.

When Ford cut the price of 2023 Mustang Mach-E electric crossovers by as much as $8,100 in February, the pace of sales nearly quintupled, according to analysis by Cloud Theory, the data analytics firm.

The key takeaway is that when you hear someone say, "No one wants EVs anymore," you should add — to the conversation or just in your own head — "at the current prices."

A lot of Americans do want EVs, but they want to pay less for them. Consumers always want to pay less, right? But of course, the upfront cost of an EV is an important purchase consideration, along with projected fuel and maintenance savings. But those factors are less obvious than the price facing them (before extraordinary incentives).

EVs are quicker, quieter and, on most days of the year, a lot easier to live with. But EV ownership brings with it lifestyle changes and other challenges that consumers want to be compensated for. Or at least, they don't want to pay more up front and face additional challenges.

But here's the thing: Those EVs that cost too much for the average consumer to buy are also expensive for automakers.

EVs cost a lot more to make than combustion vehicles do, because of their expensive batteries. Vehicles that qualify for a full federal tax credit of $7,500 can make up much of the difference, but Inflation Reduction Act rules are complicated and will continue to get tougher.

How bad you see it depends in part on how you do your counting. Hyundai and Stellantis both say they make money on their EVs — and Stellantis is now offering a very affordable EV in Europe. I presume that executives are referring to the marginal profit — revenue minus the cost of direct parts and labor, excluding upfront development spending — much like how Toyota used to talk about the original Prius. But as a free-standing investment, making money on EVs is not easy. Ford reported a negative profit margin of 80 percent for its Model E business in 2023, or a loss of more than $40,000 per vehicle. Adding $5,000 in discounts to those losses can't be appealing.

But losing money in the learning and scaling process shouldn't be terribly surprising: Look back at Tesla's early days, when it reported massive net losses, but also huge, Porsche-like operating margins.

So what's an automaker to do? Make cheaper cars and make them for a lot less.

And that's what they're trying to do.

Like everything else in this electrification transition — new mining and mineral processing, battery chemistry breakthroughs and construction of battery and vehicle assembly plants — EV product development will take years, not weeks or months, to address.

But they are in a race to the death to achieve it: Tesla, Stellantis, Ford, Kia, Hyundai and just about everyone else is working furiously toward a $25,000 EV that can be made profitably. Nissan just announced its plan to cut EV costs by 30 percent.

Tesla has reportedly told suppliers that it plans to launch its low-cost platform next year, though analysts don't expect it to ramp up until 2027.

Hyundai Motor America CEO Randy Parker told Carly Schaffner and me on an Automotive News Live Chat that the brand is working on a sub-$25,000 EV — possibly a sedan — but he didn't want to preempt a "future auto show moment."

Turning back to Ford, the automaker has put off development of a three-row EV and electric pickup, which people familiar with the plans said would allow it to focus resources on smaller, more affordable EVs. Ford is aiming to launch an EV on a small-vehicle platform as early as late 2026, likely out of Louisville, Ky., one of the people said.

This is totally in line with the pivot that CEO Jim Farley signaled in February.

Dealers worry that all the talk is vaporware. And if you're sitting on a 100-day supply of EVs currently, you might reasonably be concerned about your brand's ability to read the market.

But the race is on. If two or three big companies can crack the code in the next few years — with battery breakthroughs, innovative manufacturing and clever designs — it will be a game changer for the industry. Regulators won't have to push consumers into EVs, they'll just want them.

I heard Gene Munster, the managing director of Deepwater Asset Management, on Bloomberg Radio this week saying that incumbent automakers can't ever catch up to Tesla — especially because they are reprioritizing hybrids and internal combustion engine trucks. Munster said he holds Tesla in his personal portfolio, not his firm's.

I'm not so sure about his analysis. But much like their competition with the best Chinese EV makers, American, European, Japanese and Korean brands have their work cut out for them — as do the governments that support and count on them.