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Jul 16, 2023

Want More Affordable EVs? End the Protectionism.

About the author: Christopher Tang is a distinguished professor at the UCLA

About the author: Christopher Tang is a distinguished professor at the UCLA Anderson School of Management.

With nearly $2 trillion in federal funding behind its industrial policy, the Biden administration should be finding it relatively easy to achieve its goals of strengthening manufacturing and accelerating the transition to green energy. Unfortunately, when it comes to electric vehicles—a key priority for the administration and many consumers—protectionism and parochialism are getting in the way.

In August 2021, President Biden announced a goal of making EVs 50% of vehicle sales by 2030. Several new laws support that policy, including the Bipartisan Infrastructure Law, the Chips and Science Act, and the Inflation Reduction Act. They provide some economic incentives promote EV adoption. However, there are several obstacles to overcome, and the current implementation plans may hinder progress.

Consider the extension of the Obama-era EV tax credit of up to $7,500 through the Inflation Reduction Act. Not every EV qualifies. To be eligible for the credit, EVs must adhere to certain country-of-origin rules that depend on the percentage of components and critical minerals sourced from the U.S.

The EV tax credit scheme has successfully stimulated EV sales in the U.S., with three million EVs on the road as of April. Tesla remains the top EV manufacturer in the U.S., accounting for 65% of total EV sales in 2022, according to Motor Intelligence. Other popular brands of EVs sold in the U.S. as of early 2023 include GM, Ford , Volkswagen, Hyundai, and BMW .

While this progress is promising, a study by JD Power reveals that a growing group of U.S. consumers has no enthusiasm for EVs. The study identified two key reasons for this trend: high prices and a lack of EV infrastructure.

First, higher purchasing prices and higher auto-loan interest rates are deterring many consumers from purchasing EVs. Americans have had to pay dearly for cars recently, and now a worrying number are having trouble making payments. Nearly one-in-ten auto loans to people with low credit scores were 30 days or more delinquent, as of the end of 2022, according to The Wall Street Journal. That adds to Americans’ overall debt troubles. The share of debt balances that became at least 90 days delinquent rose from 0.71% to 1.08% percent in the year leading up to March 2023, the Journal reported. With a potential recession looming, many American consumers are avoiding expensive EVs.

However, cheap EVs may no longer be available. GM's Chevrolet Bolt is currently the most affordable EV with a base price of $25,600, not including tax credits, but GM plans to stop production of its best-selling EV by the end of 2023. Instead, the manufacturing capacity will be used to produce higher-priced electric SUVs and pickup trucks.

Ford, meanwhile, cut prices on its Mustang Mach-E earlier this year, but it still starts at about about $46,000. Its F-150 Lightning costs more.

Nissan's Leaf has an affordable base price of about $28,000, but it no longer qualifies for the EV tax credit due to battery sourcing requirements announced in April. Additionally, other affordable brands such as Kia and Hyundai do not qualify for the $7,500 tax credit because they don't meet the government's requirements for where components must be manufactured. Hyundai has said it's increasing its investments in the U.S. and is asking the White House for a waiver, but for now its cars aren't eligible for credits at purchase.

Making more affordable EVs available is key. But these policy changes, combined with higher interest rates, put the growth of the EV sector into question. Protectionism in the EV market impedes competition and weakens innovation. The result is higher purchasing prices.

With GM and Ford betting on electric SUVs and trucks and other pricier vehicles, providing a partial tax credit for popular and affordable Hyundai and Kia EVs assembled in the U.S. could entice price-conscious consumers to purchase more EVs.

The second factor holding back EVs has to do with charging. Even for those consumers who can afford to purchase more-expensive EVs without receiving any tax credit, there are legitimate concerns over the availability of EV charging stations and long charging times. By the end of 2022, there were over 54,000 charging station locations with over 143,000 charging ports in the U.S. Most of the charging stations are located along both coasts, but the current charging infrastructure remains inadequate especially in rural and remote areas. This limits the range and convenience of EVs.

The rate of charging-station installation must be tripled over the next eight years if Biden's EV adoption goal is to become reality. Consumers have reason to be skeptical. Even when these charging stations are available, they don't always work. One report found that 20% of charging attempts in 2022 failed because the software or hardware didn't work, and due to "occasional vandalism."

There's more the Biden administration can do to make EVs a car buyer's first choice, even without solving the infrastructure issues. One idea is to expand the list of vehicles that qualify for the tax credit. Currently, the EV tax credit focuses primarily on all-electric vehicles. The Biden administration could also offer tax credits for more plug-in hybrid models besides the Chrysler Pacifica and Lincoln Aviator. Because plug-in hybrids combine gasoline and electric powertrains, they help alleviate concerns about the availability of EV charging stations and long charging times.

Strengthening public-private partnerships could also speed up charging-station installations. In February, the Biden administration announced plans to use public funds to supplement private investment from GM and Ford by installing more than 100,000 public chargers available for all EVs in rural and hard to reach locations.

It's going to be a challenge to make EVs 50% of all new vehicle sales within a decade. But it would be a lot easier to give Americans affordable EVs if the U.S. dropped its protectionism and focused on helping the sector grow.

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