Why US carmakers are betting on electric vehicles and SUVs at the same time

In an apparent attempt to punish General Motors for the planned job cuts it announced last week, the White House said Monday that eliminating subsidies for electric cars is now its official policy, Reuters reported.

Currently, automakers get a $2,500 to $7,500 subsidy in the form of a tax credit for consumers for their first 200,000 electric vehicle sales. EV maker Tesla has already hit the cap, GM will hit it later this year, and the auto industry wants an extension.

The fact that manufacturers are hitting their EV subsidy caps is a testament to the success of EVs on US roads. Automakers and utilities just celebrated the sale of more than 1 million electric vehicles in the US. And EV sales are now expected to surge. The Edison Electric Institute, which represents investor-owned power utilities, projects there will be 18.7 million EVs on US roads by 2030.

These vehicles are critical to lowering our emissions and limiting climate change. Electrifying transportation will help make our economy more efficient and eventually reduce overall energy demand.

But as GM’s recent restructuring plan shows, US automakers also aren’t finished manufacturing larger, less fuel-efficient vehicles. The company announced last week that it will end production of several sedans, including the Volt, a plug-in electric hybrid, to focus on larger cars. (GM said it also wants to devote more attention to Bolt, an all-electric car starting at $36,000, other EVs, and self-driving cars.) Earlier this year, Ford said it was pulling back from cars like the Focus and Taurus in favor of SUVs and crossovers.

So the US auto industry is in a weird spot, simultaneously betting on cleaner electric cars and bigger, more expensive cars.

Meanwhile, the Trump administration’s policies are threatening both of these tacks. Trump’s proposed tariffs on imported vehicles and car parts, as well as implemented tariffs on steel and aluminum, are threatening to raise the price of cars in the US. Cars, particularly EVs, now have a global supply chain, so seeing tariffs on components like batteries would make them less competitive. And while Trump can’t revoke the EV tax credits on his own since the subsidies for electric cars were put into place by Congress, he may embolden Republicans in Congress who want to eliminate them.

“We pay a lot of attention to what any president says,” said Dan Turton, vice president for North American policy at General Motors, at an industry event last week. “But this electrification movement is going forward anyway.”

It’s a bit of a quagmire, so let’s walk through what White House policy could mean for both the present and the future of the US auto industry.

The $2,500 to $7,500 electric vehicle tax credit was a critical incentive to encourage EV adoption as it knocked a big chunk off the sticker price. And lately, some lawmakers and environmental groups have called for lifting the cap and extending the tax credit to more vehicles to encourage more sales instead of ending the EV subsidy.

“I think it would be shortsighted to end it now, especially when American companies are going to be hit,” said David Reichmuth, a senior engineer for clean vehicles at the Union of Concerned Scientists. Automakers say losing the tax credit now would hurt EV sales just as they are starting to take off.

The transportation sector is the largest source of greenhouse gases in the United States. Cars and light trucks comprise 60 percent of these emissions, making them an important target for any climate change mitigation strategy.

From an environmental perspective, it makes sense to invest in electric cars.

The trouble is building a mass-market electric car requires striking a difficult balance, and the incentives are not always there. While the first electric cars hit the roads in the 1800s, the battery systems have only recently caught up in price and performance to their fossil-fueled competitors. There’s still a price premium for purely electric cars, and the charging infrastructure is still lacking in many areas.

But beyond targeting electric car credits, Trump’s actions on trade have made it more difficult and expensive to build cars in the US. Increasingly, cars made in the United States have a global supply chain, especially as they incorporate more high-tech materials and parts. Tariffs on components like steel could raise new car prices by upward of $7,000.

Trump’s new version of NAFTA, the United States-Mexico-Canada Agreement, raised the share of car components that must be sourced in North America for tariff exemptions to 75 percent. It’s expected to add $1,000 to the price tag of some vehicles.

For electric vehicle manufacturers, these developments are especially worrying. Take the lithium-ion battery, the current power source for most EVs, for example. Much of the world’s raw lithium comes from South America and Australia. That material is then shipped to China to assemble battery packs, which in turn are built into vehicles in the United States. With components that cross so many borders, tariffs and retaliatory tariffs stand to raise electric vehicle prices for buyers, which in turn could depress sales.

“These discussions about trade and potential limitations on trade are of some concern, but we’re also working toward making sure our production network is more flexible,” said Bryan Jacobs, vice president for government and external affairs at BMW Group, at an industry event last week. “Open and free trade is a formula for success, regardless of whether you are talking about making batteries or any other supply or component.”

Some manufacturers are already investing in building more components in the United State. Tesla’s gigafactory in Nevada is on pace to produce 60 percent of the world’s lithium-ion batteries.

The administration is now trying to freeze fuel economy standards put in place under Obama. Tougher fuel economy rules give an advantage to cars and trucks that don’t need fuel.

But manufacturers like Tesla also count on selling credits to other car companies that are having a harder time meeting the high mileage standards. It’s an important source of revenue for the companies, but if the rules get laxer, manufacturers have less of an incentive to build EVs.

And even as more electrics roll out, the bulk of the vehicles on the road will still run on fossil fuels for years, so making them more efficient is a crucial tactic in cutting greenhouse gas emissions.

“The push for electrification is good, but we still need conventional [fuel economy] standards,” Reichmuth said.

Carmakers seem to be convinced that electric cars will eventually dominate the roads. Yet they also think that for now, car buyers still want bigger, more luxurious cars that guzzle lots of fuel.

US car buyers have shown that they prefer larger vehicles. More than 17 million cars were sold in 2017. Two-thirds of them were SUVs and pickup trucks.

Witness the rise of bigger-than-a-car, smaller-than-a-truck crossover vehicles. These are typically built on the same platforms as sedans but are bigger and often sell at a higher price. While automakers like to brag that these crossovers can get about the same mileage as sedans from a decade ago, around 30 mpg, they still aren’t as efficient as smaller cars for sale now.

These vehicles also help make the business case for continuing to build cars in the US, where labor tends to be more expensive. “Higher-priced vehicles can tolerate higher labor costs,” explained Willy Shih, a professor of management practice at Harvard Business School.

Even foreign automakers with factories in the US tend to use them to build larger vehicles. Toyota builds Tacoma and Tundra pickup trucks in Texas. BMW builds SUVs and crossovers in South Carolina. Volkswagen is launching an SUV offensive with a new model to be built in Tennessee.

“If you think about it, it doesn’t mean sedan demand has gone away; it means a lot of sedan demand is captured by imports,” Shih said.

That’s led to a situation where US carmakers have proffered tepid support for their smaller, more efficient offerings. Volt customers have complained that dealers often knew little about the car and even tried to steer them away from it. Environmental groups have also argued that the automakers are not putting much weight into advertising cleaner cars, particularly electrics.

But while consumers are shelling out more money for bigger cars, they don’t want to spend more on gas. SUV sales tend to rise as gas prices fall. Gas prices are currently low, which undermines the case for a vehicle that doesn’t use any.

Politically, it’s hard to argue for higher fuel prices, even on environmental grounds. President Obama’s first energy secretary, Steven Chu, was excoriated in 2008 when he suggested raising gasoline prices as a tactic to promote fuel efficiency, while his boss later bragged about low gas prices on his watch.

If the price of gasoline surges again, we could see a crash in sales of larger vehicles and a surge in electrics. For now, fossil fuel-powered cars aren’t going anywhere. Electrics are still a tiny slice of the overall car market, so there is vast room to grow as sticker prices fall. The market is in fact big enough for both of them.

And in other countries, electric vehicles may come to dominate the roads much sooner. According to McKinsey & Company, China has a larger EV market than the United States and Europe combined. The vast majority of China’s EVs are made by Chinese companies, which in turn want to sell their cars around the world.

China and India are both weighing bans of fossil fuel vehicles, as a way to both improve air quality and boost their respective fledgling electric car industries. That means more than one-third of the world’s population will live in an area where internal combustion engines are no longer allowed.