Electric Vehicles: Has Demand Crashed or Merely Stalled?

A CEO facing an earnings call after incurring a $4.7 billion loss on a business segment with high hopes can expect tough questions.

Ford Motor Company CEO Jim Farley took a hard line of questions from analysts in early February 2024. Demand for the company’s EVs failed to meet expectations last year, and losses from the Model E segment and protracted contract negotiations with the United Auto Workers caused the automaker to withdraw its 2023 earnings guidance.¹

One analyst on the call referred to Ford’s push into EVs as a “science project” that ate into profits. Another insisted that customers weren’t happy with the product.²

Farley, however, stood by Ford’s EVs, asserting, “The journey on EVs is inevitable in our eyes, and we have a bright future of EVs.” Still, Ford has postponed its $12 billion EV manufacturing investment.³

Other automobile manufacturers faced similar difficulties with EVs last year. General Motors, for example, scaled back EV production plans and delayed opening an EV truck factory in suburban Detroit. Elon Musk warned that Tesla would experience lower growth in 2024.

EV Sticker Shock, High Financing Costs Are Hurting Demand

Not long ago, EVs showed more promise. In 2019, signs indicated that the adoption and expansion of EVs were speeding up.

In 2021, Volvo said it planned to phase out internal combustion engines and go fully electric by 2030.

"I am totally convinced there will be no customers who really want to stay with a petrol engine," former Volvo CEO Håkan Samuelsson told reporters when asked about future demand for EVs. "We are convinced that an electric car is more attractive for customers."⁴

Indeed, Volvo reported selling some 113,419 EVs in 2023, up 70% over 2022.⁵

Other automakers have made similar commitments to EV production. BMW expects all-electric models to make up more than 50% of sales well ahead of its 2030 goal.⁶ General Motors hopes to stop selling gas-powered vehicles by 2035.⁷ Ford aims to sell only EVs in Europe by 2035.⁸

In the U.S., federal programs under the Inflation Reduction Act (IRA) and Bipartisan Infrastructure Law (BIL) aim to encourage consumers to give EVs another look. The IRA has committed $35 billion to EV component and assembly plants and charging stations so far.⁹

The IRA extends a $7,500 federal tax credit on new EV purchases ($4,000 on used EVs) until 2032. The point-of-sale tax credit effectively acts like a discounted sticker price at the dealership for consumers who would otherwise claim the credit when they file their taxes.

Pent-up demand for cars in 2022 generally caused automakers to ramp up production, including EVs, with expectations that waiting buyers would snap up the new models.

Automakers thought 2023 would be a hot year for EVs. “With EVs, right now it’s like, ‘You build it, and they come,’” Steven Center, operations chief of Kia Corp.’s U.S. business, said during fall 2022.¹⁰

But the market flipped in 2023. Early adopters who wanted EVs paid a premium for their new rides. This left a larger group of consumers doubtful about the average price of EVs, which in 2023 ranged from $53,000 to $60,000, based on various estimates. They opted for hybrids or traditional gas-powered cars instead.¹¹ See Figure 1. That’s if they bought cars at all. Elevated vehicle prices and expensive financing from high interest rates have also dampened the auto industry.

The mood for EVs has turned gloomy in the markets. Share prices of automakers have mostly slid since summer 2023 peaks thanks to the decreased demand for EVs. In some cases, United Auto Workers strikes and new collective bargaining agreements have also played a role.

Companies in the EV supply chain are also feeling the impact. For example, the stock price of Aptiv PLC, a global automotive safety technology supplier, took a hit as demand for EVs slackened.

We think the market has overreacted to the waning demand for EVs. We can’t be sure if EV growth will again reach the lofty projections of the last two years. However, we believe the demand for EVs will grow more moderately.

Why Did the Market Sour on EVs?

Consumers haven’t warmed to EVs in the way automakers expected.

Dealers warned automakers last year that EVs were moving off the lot slowly, as shown in Figure 2. Dealers said consumers were skeptical of sticker prices and nervous about the driving range of EVs and the availability and reliability of charging stations.¹²

Well-publicized incidents of drivers stranded after their EVs failed to charge in freezing weather haven’t helped sales either.¹³

Indeed, the average price of an EV now stands at around $52,314, a premium of about 10% over gas-powered vehicles.¹⁴ The federal tax credit helps close this gap. However, rules in the IRA about sourcing materials from specific foreign countries narrow the list of EVs that qualify for the tax credit.

Macquarie Equity Research projects that the average EV price needs to fall into the $30,000 range to achieve broader adoption in developed countries.¹⁵

Even China, the world’s top EV market, has seen decreased demand. The expiration of government subsidies for EVs and the overall weakness of the Chinese economy have caused consumers to cut back on their spending, resulting in an oversupply of EVs.¹⁶

What’s Ahead for EVs in 2024?

In the 1990s, as the internet became more widely available, people saw endless possibilities for what it could do. Many investors latched onto the hype and boosted the value of internet-related businesses, but then the bubble burst, leading to the dot-com crash in the early 2000s. However, over the years, the internet has transformed commerce as many envisioned, just slower than expected.

We think a similar dynamic could play out for EVs.

For all the bad press EVs got toward the end of 2023, global sales still grew 31% on the year, with fully electric vehicles accounting for 70% of those sales.¹⁷ That was down from 60% growth in 2022.

In a recent report, Macquarie Equity Research said that despite the bearish estimates on EVs in 2024, an influx of new models, falling battery prices and the federal tax credit in the U.S. could result in surprise growth for fully electric vehicles.

Of course, there are risks to these forecasts. If Donald Trump, the presumptive Republican nominee for U.S. president, wins the general election in November, we believe his administration could roll back significant parts of the IRA.

Growth in EVs hinges in part on the expanded availability of charging stations. If the charging infrastructure buildout slows or there’s less demand for it, EV sales will likely slip.

Still, we suspect that if infrastructure improves for EVs and their prices fall, consumer demand may accelerate again. It’s uncertain when the auto industry will meet its once-rosy projections. But the industry is moving toward electric vehicles, not away from them.