Charging ahead

Bottom Line

As if this year's presidential election wasn't already contentious enough, the future trajectory of the auto industry may be determined by which party wins control of Washington. At issue is the market share of electric vehicles (EV) versus those with a internal combustion engine.

Partisan politics Over the past decade, EV production has evolved from a nascent industry to a potentially green cornerstone of sustainable transportation beyond traditional autos. Democrats are pushing hard for mass EV adoption, with legislation such as the bipartisan Infrastructure Law, which pledged billions of dollars to improve the country's charging infrastructure and the Inflation Reduction Act, which introduced tax credits for new and used EV buyers. These policies underscore the Biden administration's goal of EV reaching a 50% market share of auto sales by 2030.

Some Republicans believe that free markets should determine the success or failure of the sector, without the government putting its thumb on the proverbial scale by spending taxpayer dollars on an industry they say is not ready for nationwide adoption. At last month's Republican National Convention, former President Trump vowed to end the EV mandate on day one.

Current market landscape The combustion engine still dominates the U.S. As of year-end 2023, only three million EV were on the roads compared to 275 million gasoline- and diesel-powered vehicles. There were also 8 million hybrids, with both battery and gas propulsion. In 2023, customers bought 1.1 million EV (7% of the auto market), 13.1 million combustion-engine vehicles (84%) and 1.4 million hybrids (9% market share). To reach Biden's target, entirely EV sales must maintain an aggressive compound annual growth rate (CAGR) of 33.2% and combution-engine sales must decline by a CAGR of 7%. Lumping EV and hybrids together takes that rate down to a more achievable 18%.

Challenges facing the industry

Price and affordability The average EV price in 2023 was $55,000, compared to $44,000 for combustion-engine vehicles. Despite tax credits introduced by the Inflation Reduction Act, EV remain less affordable for most Americans. The average U.S. annual salary was around $59,000 in 2023, which makes the average price as a percentage of that salary 93% for EV and 76% for traditional vehicles. That large gap could price the average car buyer out of the EV market. Using a 76% salary price point for combustion-engine vehicles, the comparative salary for EV would be $73,000. According to the most recent IRS income data in 2021, the top 50% of Americans earn $46,000 or more and the top 25% earn $94,000 or more. So, it may be financially unrealistic to target a 50% EV market share by 2030. Consequently, reducing battery costs, which account for 40% of the EV price tag, will be crucial in achieving that goal.

Battery productionEV batteries require minerals like graphite, copper, nickel, manganese, cobalt and lithium. China possesses a firm grip on the global processing capacity and production of almost all these minerals. Despite significant reserves, the U.S. lags in lithium production, hampered by regulatory challenges. Efficient domestic sourcing of these materials will be crucial to lowering EV costs. Although the Inflation Reduction Act incentivizes sourcing from the U.S. or from Free Trade Agreement partners, current lithium production levels are insufficient to meet the projected demand for lithium-ion batteries in 2030.

Charging infrastructure Some 64% of Americans own their own homes, for which home charging is feasible. But it's problematic for renters without access to a garage. Since 36% of the population lives in "multi-unit dwellings," this further limits the pie of potential EV ownership. Public charging infrastructure also lags, with only 70,000 currently on the road-well below Biden's target of 500,000 stations by 2030.

The slow rollout of the proposed "fast-charging network" under the Infrastructure Law is a significant hurdle for potential EV purchasers. The Biden administration's $7.5 billion program to build out the nation's charging infrastructure has faced delays, with only seven out of a promised 5,000 stations now operational.

Range anxiety The median driving range of EV in 2023 was 270 miles. That is sufficient for the average American's daily needs, but less than the 403-mile median driving range typical for gasoline- and diesel-powered vehicles. Range anxiety remains a top reason for hesitation among potential EV buyers, with concerns about the availability and reliability of public charging stations also mentioned.

Market share reality So consumers look at EV as a solid choice for local errands, but as a somewhat riskier option for longer trips. Consequently, 78% of EV owners also own a combustion-engine vehicle. But in 2022, only 37% of Americans own two or more vehicles. Using the average price for both types, these multi-vehicle owners spend roughly $100,000. Using that 76% of salary price point for combustion-engine vehicles, the comparative multi-vehicle (with one EV) owner's salary is $132,000. The top 25% of Americans earn $94,000 or more and the top 10% earn $169,000 or more. That suggests that the potential market share for EV ranges between 10% and 25%, considerably less than Biden's target.

Safety concerns Many EV weigh 1,000 pounds more than their traditional counterparts. A 2011 study by the National Bureau of Economic Research concluded that weight difference increases the likelihood of a fatal crash by 47%. Lithium-ion battery fires are another safety concern. The National Transportation Safety Board reported that EV pose a significant risk of battery fire and that "stranded energy" in an EV can also cause electric shock to first responders. Some parking garages in major cities will not accept EV because of this heightened risk.

What's the future for EV? Government spending and intervention are likely necessary to speed up their adoption, though their high relative cost should eventually decline. Changing political winds and market forces will ultimately decide winners and losers.

Research assistance provided by Federated Hermes summer intern Jake Kavan.

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