Electric vehicle sales rise, why are automakers still anxious?

Recently, automakers such as General Motors and Ford Motor Co. have announced adjustments to their battery-electric vehicle deployment plans, sparking media concerns about a slowdown in electric vehicle sales. However, some experts believe these worries may be somewhat overblown—sales are still climbing and inventories are declining, but the situation automakers face is indeed complex.

"Third-quarter sales were actually not bad," said Stephanie Brinley, principal automotive analyst for the Auto Intelligence service at S&P Global Mobility.

According to estimates from Kelley Blue Book, U.S. electric vehicle sales reached a record 313,086 units in the third quarter of 2023, up 49.8% year-over-year. This marked the first time quarterly sales surpassed 300,000 units, bringing cumulative sales for the first three quarters to over 873,000 units. It is almost certain that annual U.S. sales will surpass 1 million units for the first time, possibly around Thanksgiving. Cox Automotive data shows U.S. electric vehicle sales have grown for 13 consecutive quarters.

Over the past few weeks, third-quarter earnings reports from automakers like GM and Ford have also shown relatively strong electric vehicle sales.

Major global automakers saw quarterly battery-electric sales grow by double or even triple digits

Notably, Stellantis did not disclose third-quarter battery-electric sales but said its electric vehicle sales rose 37% year-over-year. Hyundai Motor Group, while not separately reporting battery-electric sales, sold nearly 169,000 hybrid, plug-in hybrid, and battery-electric vehicles in the third quarter.

Why automakers are concerned

Despite record electric vehicle sales in the third quarter and expectations of continued record-breaking, automakers worry that the pace of adoption among new car buyers is slowing—electric vehicle market share rose only 0.7 percentage points from the second quarter to the third quarter.

"Market share growth hasn't jumped the way it did last year," Brinley said.

Brinley noted that electric vehicle sales are still growing, but not at the "frenzied pace" suggested by data from 2022 and early 2023. This remains the case despite lower prices, more available models, and ample inventory.

"The slowdown in electric vehicle demand growth is a topic everyone has been discussing," said Paul Jacobson, CFO of General Motors, during last month's earnings call.

With Tesla cutting prices by 25% year-over-year, Cox data shows the average electric vehicle price fell to $50,683 in September, well below the over $65,000 a year earlier. Electric vehicle incentives accounted for 9.8% of the average transaction price, close to $5,000.

Brinley believes automakers are concerned about falling prices because they make it harder to profit from electric vehicle sales. "That seems to be the root of much of the concern about electric vehicle sales," she said.

High raw material costs are also squeezing automakers' profit margins. According to AlixPartners analysis, U.S. automakers pay about $4,500 per battery-electric vehicle for dedicated raw materials, down 38% from 2022 but still double 2020 levels.

"If you rush ahead without knowing where the profit will come from... it's unlikely to just appear out of thin air later."

—Stephanie Brinley, principal automotive analyst, Auto Intelligence service, S&P Global Mobility

Take General Motors, for example, which is striving to achieve profitable electric vehicle production.

"Clearly, given the industry's changing price and demand outlook, as well as higher labor costs, we must work to ensure we achieve our low- to mid-single-digit EBIT margin target in 2025 and maintain a strong 8-10% EBIT margin in North America," wrote GM Chair and CEO Mary Barra in a letter to shareholders.

The price decline stems partly from intensifying competition in the electric vehicle market. Cox data shows that in the third quarter of 2023, there were 14 more electric models on sale in the U.S. than a year earlier, with inventory days reaching 97 in early October, after peaking at 111 days in early July. This is a significant increase from about 52 days earlier this year (52 days for both internal combustion engine and electric models). Internal combustion engine vehicle inventory has hovered between 52 and 58 days, slightly below the industry's ideal 60-day supply.

The combination of slowing growth, falling prices, and rising inventory is unsettling automakers, prompting some to adjust their electrification plans to shore up finances.

Last month, General Motors abandoned its plan to produce 400,000 electric vehicles from 2022 to mid-2024 and delayed the start of production for electric trucks, including the Chevrolet Silverado EV and GMC Sierra EV. The company also pulled out of a $5 billion plan with Honda to develop affordable electric vehicles for North America.

During last month's earnings call, Barra said the Detroit-based automaker is "taking immediate steps to improve the profitability of its electric vehicle portfolio and adapt to the recent slowdown in growth."

Ford has also delayed about $12 billion in electric vehicle manufacturing investments, including pausing construction of its $3.5 billion electric vehicle battery plant in Marshall, Michigan.

"We remain optimistic about Model e and our electric vehicle future, but clearly, the market is changing—it's a moving target," said Ford CEO Jim Farley on an October earnings call.

Meanwhile, Volkswagen Group scrapped plans to build a $2.1 billion (2 billion euro) electric vehicle plant in Germany.

Experts say automakers should expect electric vehicle sales growth to be slower than in the past two years, especially as internal combustion engine vehicle inventory has recovered, offering new car buyers plenty of viable alternatives.

Stephanie Valdez-Streaty, director of industry insights at Cox Automotive, believes a slowdown in electric vehicle adoption is almost inevitable. Early adopters were less sensitive to barriers such as high prices, limited infrastructure, shorter range, and longer charging times, she noted.

Meanwhile, product supply continues to outpace infrastructure deployment, and for the foreseeable future, this will intensify competition and limit pricing power in a slowing growth market.

Electric vehicle prices remain too high for consumers

A survey released Wednesday by S&P Global Mobility shows that high prices are the main reason new car buyers do not consider electric vehicles. Among 7,500 consumers surveyed globally, nearly half (48%) said electric vehicles are too expensive.

"The luxury car market is saturated."

—Yen Chen, chief economist, Center for Automotive Research

Yen Chen, chief economist at the Center for Automotive Research, said that as the auto industry encounters issues with second- and third-wave adopters, lowering prices could further drive electric vehicle adoption.

Chen noted that over the past few years, as new car prices surged about 30%, electric vehicles became more price-competitive compared with internal combustion engine models, especially in the luxury market. But that is changing as internal combustion engine production recovers and logistics bottlenecks ease.

Despite significant price drops from last year, most electric vehicles are still priced near luxury levels, and many consumers cannot afford them. Chen believes automakers need to offer more electric vehicles at "mainstream" prices to accelerate adoption.

"The luxury car market is saturated," Chen said.

In the U.S., the Biden administration is trying to lower the purchase price of electric vehicles by allowing new car buyers to transfer the up to $7,500 clean vehicle tax credit from the Inflation Reduction Act to dealers. Currently, buyers must wait until they file taxes to claim the credit, which is inconvenient.

However, Biden has not revoked former President Trump's 25% tariff on vehicles made in China. Chen said this has helped keep more affordable electric vehicles out of the U.S. market.

Reuters reported Wednesday that bipartisan U.S. lawmakers want the White House to further raise these tariffs and find ways to prevent Chinese companies from exporting vehicles to the U.S. from Mexico.

Experts say that while lower prices make it harder for automakers to profit from electric vehicles, they are crucial for consumer adoption.

How automakers are addressing electric vehicle adoption challenges

Valdez-Streaty said automakers can help boost electric vehicle sales by improving consumer engagement. For example, automakers can better educate dealers on how to alleviate consumer concerns about range, charging infrastructure, maintenance, and how to leverage tax credits and other policies that make electric vehicles more affordable.

At the same time, automakers can partner with utility companies, community groups, and other organizations to help educate the public about electric vehicle adoption, Valdez-Streaty said.

"OEMs must consider continuously reducing product costs and squeezing out as much pricing space as possible."

—Arun Kumar, partner and managing director, AlixPartners

Arun Kumar, partner and managing director at consulting firm AlixPartners, added that the lack of penetration in the mass-market electric vehicle segment makes it harder for consumers to understand how switching to electric vehicles will affect their lives, because a smaller proportion of people know electric vehicle owners.

"Friends and family are important influencers when buying an electric vehicle compared with internal combustion engine models," Kumar said.

Automakers can also make it easier for drivers to charge their vehicles.

Consumers have said: "'Don't sell me a car and then leave me to figure out where to charge it,'" Kumar said.

Automakers are starting to listen, with many planning to adopt Tesla's electric vehicle charging plug—the North American Charging Standard (NACS)—and give more drivers access to Tesla's vast Supercharger network. Automakers including Mercedes-Benz are also launching their own charging networks and forming charging joint ventures with other manufacturers.

However, experts say reducing production and procurement costs may be the most important step automakers can take to boost electric vehicle sales, as it would allow them to sell more vehicles at lower prices.

"OEMs must consider continuously reducing product costs and squeezing out as much pricing space as possible," Kumar said.

Lowering battery costs would go a long way. According to U.S. Department of Energy data, battery prices fell 89% from 2008 to 2022, from $1,355 per kilowatt-hour to $153. BloombergNEF predicts prices could fall below $100 per kilowatt-hour by 2026.

But experts say there are other ways to cut costs. For example, Tesla reduced assembly costs by mounting seats onto the vehicle's battery pack and installing components from the bottom, rather than installing seats through door openings like most automakers, Kumar said.

Automakers must navigate the "profit desert" on their own

Experts say that despite this, automakers will still struggle to profit from electric vehicles for some time, and they need to find a business model that works for them during this period. Kumar calls it the "profit desert."

"You have to cross the desert, or you won't see profits. But at the end of the desert, there is water," Kumar said. "Not everyone can cross the desert."

On Mercedes-Benz's third-quarter earnings call, Harald Wilhelm, board member responsible for finance and controlling, called the electric vehicle market "a rather brutal field" due to intensifying competition. But with profitable internal combustion engine sales, the company has been able to weather the storm.

"This is precisely the advantage that companies transitioning from internal combustion engines to battery-electric, rather than pure battery-electric companies, have," Wilhelm added.

Meanwhile, Tesla's U.S. market share has fallen to 50%, while other pure battery-electric manufacturers like Lucid are struggling to meet production and sales targets.

Experts say the transition from internal combustion engines to electric vehicles is complex and will be full of ups and downs.

"This is a marathon, not a sprint," Brinley said.

Brinley added that automakers are continuously learning how to design, manufacture, and sell electric vehicles more efficiently. For example, GM and Ford said they adjusted their electric vehicle plans based on what they learned. This is an experience other automakers can draw on.

"Slowing down and focusing on cost efficiency is better than rushing ahead and pretending you can find profits elsewhere. Because you won't," Brinley said. "If you rush ahead without knowing where the profit will come from... it's unlikely to just appear out of thin air later."