Tesla is still a strong contender in the US EV market

Tesla's recent price cuts and the chaotic implementation of President Biden's new tax credits for electric vehicles obscure a bigger picture: the shift to EVs in America is getting serious.

With more and more people making the switch to electric vehicles, it's clear that this is the future of transportation. Tesla is leading the way in this transition, and with the introduction of new, more affordable models, it's only going to continue to grow in popularity.

‍
If you're considering buying an electric vehicle (EV), you may be confused by the new subsidy regime. Investors trying to understand which manufacturers will benefit from the credits might feel similarly perplexed. Could the credits give Tesla a much-needed boost, or will they disrupt the recent gains of Hyundai and its affiliate Kia?
It's still not entirely clear how the new regime will affect things, even though it's already started. However, Washington seems to be taking a generous approach, which should keep sales of electric vehicles strong in the US, even if the economy slows down.

‍
When the new tax credits were first announced as part of last summer’s Inflation Reduction Act, it seemed like they might not have much effect. The headline consumer subsidies came with such tight strings attached that 70% of the 72 plug-in models on sale at the time were immediately ineligible. Foreign manufacturers such as Hyundai, which currently imports all of its U.S.-sold EVs, were aggrieved, as only North American built EVs qualify.

‍
However, some loopholes have been discovered. The biggest one seems to be leasing, due to a separate tax credit for commercial fleet buyers that has no attached conditions. Guidance released by the Internal Revenue Service late last month suggested that this benefit could be passed on to consumers through leases.
Leasing vehicles was a popular way for manufacturers to discount them before the pandemic. However, as discounting dried up, the popularity of leasing shrank to less than two in 10 new-vehicle sales. EVs could bring the financing model back, though, not just for cars imported from South Korea or Germany. More expensive EVs made in North America might benefit as well, given the price caps imposed by the consumer tax credit.

‍
The big gap between these two numbers has set off a controversy about what makes an SUV different from a car. “Crossovers” that sit somewhere between the two, such as Tesla’s Model Y and GM’s Cadillac Lyriq, are the most popular EV type. The Internal Revenue Service categorizes these two models in most cases as cars (Model Ys sold with a third row being the exception), meaning they only qualify if priced below $55,000. That helps explain Tesla’s price cuts on Thursday, which brought the base version of the Model Y within range. GM is disputing the official categorization of the Lyriq, which currently starts at $62,990 for the 2023 model year.

‍
The Treasury Department is showing flexibility in other areas, such as in its understanding of a “free-trade agreement.” The consumer tax credits only apply if 40%, rising gradually to 80% in 2027, of an EV’s “critical minerals”—think lithium or cobalt—are mined or processed in the U.S. or countries with which it has a free-trade agreement. This complex rule was originally due to come into effect on Jan. 1, but last month the Treasury delayed it until March to give more time to hammer out the details. The U.S. has comprehensive FTAs with 20 countries, including major battery-metal exporters Chile and Australia, but in a recent white paper the Treasury Department said it expected to identify additional deals “for purposes of the critical minerals requirement.”

‍
The point is that Washington appears to be willing to relax the requirements for its consumer EV tax credits when manufacturers can't find a way to comply. This makes sense from the standpoint of wanting to accelerate the technology's adoption. The conditions were designed to encourage the industry to invest in a U.S.-based supply chain, rather than one based in China, which is currently the center for battery production. However, this is already happening to some extent, with a large number of battery investments coming to the U.S. last year, even before the Inflation Reduction Act, which included direct subsidies for battery manufacturing, as well as the EV tax credits.

‍
U.S. sales of electric vehicles rose by 50% last year, with December being particularly strong, according to a preliminary tally from data provider EV-volumes. Generous subsidies could maintain that growth momentum even as rising interest rates cool demand for most cars. Tesla’s shares were down 5% in premarket trading Friday as investors worried about the impact of the price cuts on its margins. However, the U.S. market leader can afford the hit, and bringing its core products firmly into the subsidized mainstream seems like a sensible response to a new market reality.

‍
As electric vehicles become more affordable in the United States, the real losers may be those auto manufacturers that don't yet have good plug-in alternatives to their traditional lineups. The technology transition will cut both ways.