Published on
Wednesday, May 1 2024
Authors :
Brian Graham (Senior Consultant)
The U.S. auto industry had a banner year in 2023, selling the most vehicles since 2019. Along with that success, the U.S. also sold more EVs than in any other year, topping 1 million (1.2 million) vehicles sold for the first time. At first glance it would appear that the auto industry has recovered from the supply chain crisis of the post-pandemic era, and that the U.S. is well on its way towards a transition to electric vehicles. However, despite the successes of 2023, there are market undercurrents that suggest that challenges still remain.
The auto industry’s strong 2023 results are impressive, given the challenges that were presented by union strikes and inflation. The strike lasted more than a month and resulted in an estimated $4.18 billion (Anderson Economic Group) in OEM lost profits and increased costs for the automotive industry. The Consumer Price Index (CPI) for a new vehicle increased by 20% from January 2021 to January 2024, and is likely to continue climbing due to these increased costs. This is a problem for the automotive industry because it pushes consumers from the new car market into the used car market. It’s also a problem for the U.S. EV market because these vehicles tend to be higher cost than Internal Combustion Engine (ICE) vehicles, which limits market penetration for middle to lower income individuals.
As the auto industry returns to normal, the EV market continues its upward trajectory, increasing from an estimated 5.9% (0.8 million) of auto sales in 2022 to 7.6% (1.2 million) in 2023, according to Cox Automotive. Despite strong organic growth of EV sales, several auto manufacturers have been anticipating an acceleration of EV adoption. Ford Motor Company notably has bet big on EVs in recent years, with plans to invest $50 billion in EV and battery production globally through 2026. As is true with the U.S. market as a whole, the increase in supply has not been met with a proportional increase in consumption. As such, the industry average EV inventory supply increased to 114 days, well above the new vehicle inventory of 71 days (Cox Automotive), leading many in the industry to cut EV production and drop prices to try to reduce inventory. For example, in 4Q23 Ford announced it was pushing back $12 billion in EV investments after losing what would end up being $4.7 billion in EBIT for the year, and in 1Q24 Tesla saw its first reduction in deliveries in nearly four years despite dropping prices by 16% YoY (February 2024, Cox Automotive) to combat missed expectations.
As EV adoption struggles to take hold, the pace is much slower than the ambitious goals of the federal government. With a goal to grow EV sales to 50% of the new vehicle market by 2030, the government has been pushing to accelerate this pace. On March 20, 2024, The U.S. EPA announced final national fuel efficiency standards for passenger cars, light-duty trucks, and medium-duty vehicles. The new final rule provides projected targets that cut light-duty vehicle greenhouse gas (GHG) emissions roughly in half from 2027 to 2032. The EPA provides a mix of technology scenarios that would be expected to achieve this new rule.
The new emission standards would take electric vehicles and hybrids from 16% of the market in 2023 (EIA) to 72-84% of the market in 2032. Where emission standards in the past have shaped the fuel efficiency of ICE vehicles, these new standards would force an energy transition that the market is not yet ready to make on its own. While it is yet to be seen what the market looks like in 2032, the thought that electric vehicles and hybrids would increase from 16% of sales to 36% of sales (as shown in the above table), a 125% increase, by 2027 feels far-fetched.
The government’s attempt to force consumers to choose a technology that they’re not yet prepared to accept puts dealers and auto makers in a tough situation. These companies rely on customer relationships to support future business, but many times they’re forced to be the face of regulatory policies that are in direct conflict with consumer preferences. While the EV market shows promise, and on its own will likely continue its organic course toward higher penetration levels, these latest regulations are so aggressive that consumers will be forced to decide between their own interests and those of the government. Invariably the auto market will be forced to adapt to increase sales, which would likely include building more affordable EVs and lobbying for more infrastructure and government incentives. However, if the government doesn’t provide some relief on the implementation of these regulations, dealers may be left with vehicle lots full of EVs, unhappy customers, and diminishing profits. With all these challenges against the ambitious plans laid out by the EPA, something’s gotta give.
