Reasons For The Legacy EV Retreat

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This started as a response to Zach’s recent article asking “Why Have Automakers Written Off $55 Billion In EV Investments?” Zach encouraged me to flesh it out a little and post it as a followup article. Here are a few reasons why Detroit automakers were able to rack up such large investments in the name of producing EVs, only to write much of those investments off and return to focusing on ICE pickups and SUVs:

1. Detroit is incompetent at making EVs. They were never able to sell EVs for more than it cost to manufacture them. In other words, they were selling below Cost Of Goods Sold (COGS), or posting a Gross Loss. They were not close to recuperating their operating expenditures for marketing and development. GM’s stock went up when they retreated and announced smaller EV volume going forward because their associated gross and operating losses would reduce. There are companies that are profitable on EVs, but they are not based in Detroit. Detroit was also incompetent at making the small, fuel efficient cars that they now also no longer make. Past attempts that looked promising only led to cutting corners and expensive recalls that sent the programs back into an overall loss. Of note, they also received US government support to manufacture those cars. They now use facilities built with that support to make larger vehicles.
2. Saying it was for EVs led to massive subsidies. While the convenient false narrative was that China had unfair subsidies, US subsidies were far more, particularly on a per vehicle basis. Say the manufacturing upgrade was to make EVs, and you could get a 30% tax credit, grants, subsidized loans, and a wide range of other subsidies that paid for much of the cost. States often added on to the haul. Say the R&D was for EVs and you could get more of the costs paid for with tax credits and other tax breaks. While the consumer tax credit has gone away, many of the other subsidies still exist. Write off assets, get another tax break. Fundamentally, focusing the tax code to subsidize industry is politically convenient, but it is also relatively ineffective and prone to abuse. Politicians can claim that their transferrable tax credits are a “tax break” and not a “big government subsidy,” but the difference is largely semantic. Meanwhile, much of the policy administration is left to the creativity of corporate accountants. However, they can reuse those subsidized production facilities to make ICE vehicles now, and nobody is asking for their money back.
3. The closed market blocked the best competitors. The best EVs are now made in China. The US blocked them to protect politically connected domestic legacy automakers and their unionized workforces, as well as to support legacy energy (fossil fuel) interests. That meant that domestic automakers did not need to compete. It also meant that the overall EV product available in the US was weaker. Trying to stop creative destruction hinders progress. That has limited overall EV market penetration and scale. Subsidies or not, the US market started falling behind the rest of the world in EV adoption when it started blocking Chinese competition. The elimination of regulatory compliance needs at the request of US automakers only set us further behind. If we had an open market, EV sales would be positioned for massive growth. Detroit automakers would have been forced to at least try to compete. The narrative that their return to ICE is simply responding to what the market wants would not be possible. Their lobbying distorted the market to favor ICEVs and block competition. They are getting what they asked for. They are not victims.
4. Detroit never really intended to win with EVs. Not making profitable EVs was justified by the regulatory compliance needed to produce ICE vehicles. They might have tried to reduce their losses or stay somewhat relevant, but it never was the core strategy for business success. They designed to regulatory compliance and then tried to reduce the cost of that compliance, rather than designing to a cost that created a viable business. And they moved too slow. Meanwhile, NEV-only automakers saw this as their path forward. As Carlos Ghosn put it: “Chinese automakers have achieved what Western OEMs thought impossible: profitable EVs at price points below comparable ICE vehicles.” Fierce competition accelerated the speed of technological development. New regulations in China are forcing only viable businesses to compete. The best EV makers found ways to build growing, profitable businesses.
5. As long as our market remains closed, we will fall further behind. A new administration may throw more money at Detroit in the name of EVs. Especially if there is another major recession and they need another bailout. Detroit-based automakers will take it, and new headlines will come out about stimulating billions in EV investment. They may introduce more models, but they will be generations behind the best EVs available in other markets when they come out. The subsidies will not make legacy automakers globally competitive without a fundamental reset. Fossil fuel interests will be happy to keep the market closed to clean technology imports and keep people dependent on burning their product. If given a way out, legacy automakers will take their subsidized assets and use them again to make ICE vehicles. We need global competition to enter the US, disrupt the market, and create change.