The week of July 29, 2024: The EV fiasco, regulation, tax, California, and much, much more.
The week of July 29, 2024: The EV fiasco, regulation, tax, California, and much, much more.The week of July 29, 2024: The EV fiasco, regulation, tax, California, and much, much more.
The Chinese juggernaut continues to roll up and down the electric vehicle (EV) supply chain, fueled by the ambition of a mercantilist state. In the West, the turmoil unleashed, not by innovation and the marketplace, but by the top-down, state-driven, forced transition to EVs that gave China its chance, continues to get worse.
Writing a few days ago about the state of the Western EV sector, the Daily Telegraph’s Matthew Lynn was not impressed:
[I]t has become clear that the EV industry is on the brink of collapse. Hundreds of billions of euros, dollars and pounds have been pumped into this industry by political leaders and the subsidy junkies that surround them…
Billions squandered in one of history’s great episodes of capital misallocation, oh yes. Serious financial trouble ahead? Yes. Serious political trouble? Yes. Bailouts? I’ve thought so for a while. But, for now, “on the brink of collapse” is an overstatement. For now.
Lynn:
There is too much capacity in the industry, with companies over-investing in too many factories and distribution centres. Demand for the end product has started to crumble, with consumers increasingly nervous over what may become obsolete technology. Insurance and maintenance costs are proving far higher than expected for many, once the vehicles are actually on the road.
And then there’s the inconvenience too, much of it revolving around charging.
Lynn:
And all that was before the Chinese entered the market with a new range of slick, cheap vehicles. The word “bloodbath” is used too often in business journalism. But right now, it may be the only one appropriate to describe the state of the Western EV industry…
[T]oo much investment creates overcapacity. Markets are better at deciding which technologies work than politicians, and if there is a genuine demand for a product then no one has to receive a grant to manufacture it, since the potential profits to be made will be incentive enough.
The carnage in the EV industry is only just getting started and already it has cost billions…
Lynn mentions a number of companies that have recently reported poor results. I have added others to the list.
Volkswagen
In early July, Volkswagen warned that it might close its Audi plant in Brussels owing to a sharp drop in demand in Europe for its higher-priced EV lines. This would be its first factory closure since 1988, and its first ever in Europe. VW was reportedly considering scrapping its Audi Q8 e-tron, first introduced in 2018. According to Reuters, the cost of closing the plant (or finding an alternative use for it) could amount to as much as $2.8 billion.
This raises once again the question of how automakers will be able to keep funding their investment in EVs when their profits from selling conventional cars start to dry up because of regulatory pressure and any economic downturn. In VW’s case, there is also the small matter of its exposure to Chinese competition, not only in Europe, but in China (where it is heavily invested). In China VW’s EV sales fell by 20 percent last year.
Ford
Matt Oliver, writing in the Daily Telegraph (July 25):
[Ford] posted a loss of $1.1bn for its electric vehicle division, Ford E – equivalent to about $47,600 per car. It sold 23,957 electric vehicles (EVs), an increase of 61pc from a year earlier.
The numbers contributed to a torrid first half in which Ford E lost $2.5bn, with the business on track to lose $5bn overall this year.
[Ford] is saying that its cost-cutting efforts aren’t enough to make up for the price cuts it is being forced to make to attract buyers. To put that $47,585 per-EV loss in perspective, a Ford dealer in Austin currently has more than 20 Mustang Mach-E vehicles in stock selling for less than $47,000.
A bit more background on the company’s sales helps illustrate the scale of Ford’s faltering EV business. During the second quarter, Ford sold 199,463 F-Series trucks. Further, it sold more than half a million internal combustion engine vehicles (ICEVs). Thus, as seen above, the Dearborn-based auto giant sold 21 times more ICEVs [traditional cars] than EVs.
Look at that ratio when considering the growing number of regulatory mandates that insist or will insist that automakers’ sales are increasingly made up of EVs.
Bryce:
The ongoing disaster in EVs has (finally) awakened Ford’s leaders from their money-losing stupor. Last Thursday, the company announced it would spend $3 billion to expand production capacity for its super-profitable F-Series line. In a July 18 press release, it said to meet “customer demand for one of its most popular and profitable vehicles,” it will add “initial capacity for 100,000 F-Series Super Duty trucks, including future multi-energy technology, at Oakville Assembly Complex in Ontario, Canada.”
Sooner or later, something is going to give.
General Motors
GM talks excitedly about continuing to roll out new EVs (largest growth opportunity, etc.), but (via the Wall Street Journal, July 23):
[The company] said it would delay plans for a new Buick electric vehicle and push back the opening of an EV truck factory, the latest retrenchment by automakers that had been pushing hard into battery-powered cars.
GM Chief Executive Mary Barra told Wall Street analysts Tuesday that GM is deferring investments to ensure the company doesn’t get ahead of demand.
It’s a bit late for that.
Daimler-Benz
Mercedes has walked back their electric vehicle ambitions and decided to invest more into internal combustion engines.
While EVs are struggling, plug-in hybrid sales skyrocketed 524% in the second quarter. Mercedes-Benz USA CEO Dimitris Psillakis expects this “momentum will continue to build as we expand our plug-in hybrid portfolio with the highly anticipated U.S. launch of the GLC 350e and the stunning AMG SL 63e S in Q3.”
I’m old enough to remember when state pension funds, assuming an activist role, as they not infrequently do in blue states (with other people’s money) campaigned against Toyota’s Akio Toyoda for sticking with a strategy in which hybrids had a role to play.
Tesla
Tesla reported a 9% drop in revenue in the first quarter, the steepest year-over-year decline since 2012. As of Tuesday’s close, the company’s stock price is down more than 40% this year as Tesla faces increased competition across the globe.
Sales growth across EVs is slowing, and Tesla and key rivals have been slashing EV prices, on and off for months, to try to spur demand.
Tesla has, of course, benefited directly and directly from U.S. government support, an example of industrial policy at work. Nevertheless, there is a certain irony in the fact that what is — to use the language of industrial policy — an American national champion may be being hit by the effects, direct or otherwise, of that same industrial policy.
Stellantis
The company’s CEO has described the auto industry as being “in turmoil.”
Looking specifically at the U.K., the Daily Telegraph’s Oliver also reports that Stellantis is complaining about the way in which under UK legislation (thank you, Tories!), carmakers are penalized if they do not sell enough EVs 2024. In 2024, that’s meant to be 22 percent, rising to 80 percent by 2030. For every (traditional) car a manufacturer sells above its quota — yes, this sounds suitably Soviet — it will be fined £15,000.
According to Britain’s Society of Motor Manufacturers and Traders EVs only accounted for 16 percent of new cars sold in the country in the first five months of 2024.
Auto manufacturers in the UK will have to ration the sales of conventional cars to avoid the fines. That will push up the prices of the (traditional) cars that people actually want to buy. That’s not going to be popular.
Oliver:
Stellantis has accused the Government of moving ahead of consumer demand and threatened to close its factories in the UK if the regime is not relaxed, amid complaints the targets risk pushing its British division into the red.
Making matters worse, Britain’s new Labour government, which is already proving far more leftwingthan wishful thinkers had assumed, is planning to return the date for outlawing the sale of all new traditional cars from 2035 to 2030, the absurd deadline set by the absurd Boris Johnson, but later reversed by one of his successors, Rishi Sunak.
The U.K. is a comparatively small market. It might make sense for auto manufacturers to abandon it to the Chinese. Doing so might send a valuable message to regulators and politicians in other more important markets: pour encourager les autres and all that.
Renault
Renault’s CEO, Luca de Meo is saying that his company will not slow down its shift to EVs. Even he is saying that the EU will need to ease up on its plans to ban the sale of new internal combustion engine powered cars by 2035. This ban includes hybrids, which seems like madness. Then again, hybrids are now doing so well that their sales could hit the demand for EVs. And that would not do.
The EV ecosystem
The troubles in the EV sector are not confined to automakers. On July 29, Bloomberg reported thatUmicore, a Belgian battery producer, was delaying production of a $2.6 billion plant. This was after announcing that it was reviewing production plans across the world in view of the EV slowdown.
In 2019, Varta, a storied German manufacturer, announced that it would start manufacturing EV batteries. In 2020, it was agreed that Varta would receive €300 million ($338 million) in taxpayer funding to develop large format lithium-ion cells, a project that Energy Storage News reported had been “declared an Important Project of Common European Interest (IPCEI). Energy Storage News added that “leading figures in the European Commission-backed European Battery Alliance believe the sector can create large numbers of jobs and create huge economic value as well as more sustainable value chains.
If you want industrial policy, this surely is it. Declared an Important Project! Promises of huge (huge) economic value and large numbers of jobs! And, of course, “sustainability,” a word that is, all too often, a warning sign of waste and cant, two pillars of industrial policy.
The Varta stock peaked at around €150 in January 2021. Two years later it was trading at €18. It had further down to go.
Reuters (July 22, 2024) (my emphasis added):
Varta stock plunged as much as 80% [from very low levels] to a record low on Monday after the German battery maker said restructuring options to avert insolvency, potentially with the help of Porsche would leave shareholders with nothing…
Varta has suffered from bad investment bets in its traditional field of small batteries for consumer electronics but an expensive foray into V4Drive-branded batteries for hybrid sportscars that did not catch on has accelerated the group’s decline…
Porsche confirmed on Sunday that it had been in talks to take a majority stake in V4Drive to preserve a key German-made technology but financial support for the entire Varta group was now also on the cards under certain conditions.
Umicore and Varta have not been alone in their woes.
The Financial Times (July 8, 2024):
Europe’s nascent battery industry is reeling from the global slowdown in electric car sales, forcing companies to cancel or postpone projects that would have powered more than 2mn EVs for a year.
Slow consumer uptake and competition from Chinese cell manufacturers have led to a pullback in investment plans for about 158 gigawatt hours of forecast production in the region since the start of the year, according to lithium battery consultancy SC Insights…
European car companies have wound back on electrification plans after battery-powered vehicle sales only grew 2.4 per cent in the region in the first five months of 2024 to about 800,000 units from a year ago. In a sign of worsening demand, sales fell 11 per cent year on year in May alone, according to data from CRU Group, a commodities business intelligence company.
By contrast, the Chinese battery manufacturer, CATL, continues to advance, flourish, taking advantage of the current downturn to build market share.
Umcore’s CEO commented that people had been taken by surprise by the slowdown in EV demand and the problems in the battery sector “because everybody put in a lot of money” into EVs and battery production. As an example of the hubris running through central planning and industrial policy, that will do nicely. The essence of the market process is the continuing “dialogue” between consumer and manufacturer. In deciding what to make the manufacturer does not simply pour billions into a product and just assume that the customers will come. Well, unless it is operating in an economy in which there is no choice. East German car buyers waited for years to buy Trabants because that was just about all there was. That’s why the most likely way that EVs will find a mass market in the West is by the banning of sales of autos powered by rival technologies. And that, unsurprisingly, is the direction in which EV regulations are headed.
America’s EV saga is a classic example of how industrial policy works, from to the locking in of a “winning” technology to the subordination of its (stated) industrial objectives to political considerations.
The Wall Street Journal (July 28, 2024):
In early 2021, the new Biden administration began making plans to implement its campaign promises to boost electric vehicles.
At the time, Musk’s Tesla produced about two-thirds of the EVs on U.S. roads. But Tesla is also the only major U.S. car manufacturer that doesn’t have unionized factory workers, and some of its labor practices were under scrutiny by federal regulators.
Tesla officials reached out to the White House multiple times after the inauguration, hoping to connect Biden and Musk, according to people familiar with the matter. The Tesla boss, who said in a television interview that he voted for Biden—and has said he voted exclusively for Democrats until a few years ago—repeatedly got the cold shoulder.
The reason: Biden officials didn’t want to anger the powerful United Auto Workers union, which leaned on the White House to keep its distance from Musk, according to people familiar with the matter….
“In the auto industry, Detroit’s leading the world in electric vehicles,” Biden said at a November 2021 event while promoting the new infrastructure bill. He then turned to GM’s Mary Barra and praised the CEO. “You electrified the entire automobile industry. I’m serious. You led, and it matters,” Biden said.
Tesla’s leaders, including Musk, were outraged. During the fourth quarter of 2021, when Biden made these remarks, Tesla delivered more than 115,000 EVs in the U.S. while GM produced just 26.
The top-down imposition by the U.S. government of a transition away from conventional autos to EVs was never likely to have gone well, but its progress might have been a little smoother had Musk not been kept at arm’s length.
The Biden-Harris administration has been reacting to the problems created by its EV diktats by throwing money around, particularly in swing states, a reminder of industrial policy’s political role.
On July 16, the Institute for Energy Research published a summary of some recent government spending to back up U.S. EV manufacturing:
The Biden administration plans to award General Motors and Chrysler-parent Stellantis nearly $1.1 billion in grants to convert existing car manufacturing plants to build electric vehicles and components. The Department of Energy (DOE) announced $1.7 billion in planned grants to help fund the conversion of 11 “at risk” plants in eight states to enable the production of 1 million electric vehicles annually, help retain 15,000 existing jobs, and create 3,000 new positions. The plants are “at risk” because of EV transition policies being forced by Washington, D.C. The awards are for plants in Michigan, Ohio, Pennsylvania, Georgia, Illinois, Indiana, Maryland, and Virginia….
The most striking detail contained in that paragraph is not the sums of money, but how few “new” jobs are being created. Most of the money being spent is to protect jobs that would be destroyed by that switch to EVs. That (if the propaganda is to be believed) is not what a job-creating “new deal” is meant to look like. Fifteen thousand existing jobs are to be saved, but only 3,000 new jobs created.
Donald Trump has promised to “end the electric vehicle mandate on day 1, thereby saving the U.S. auto industry from complete obliteration.” If free market principles are to limp back into the auto sector, that would be a good move, as would the elimination of all subsidies and incentives connected to the sector, although the latter comes with the potential for enough disruption for a phase-out rather than, as would otherwise be desirable, an overnight cut to zero.
If EVs are the technology of the future, they will have to prove it by competing on a level playing field, where “level,” incidentally, does not include throwing the door wide open to the dumped products of a hostile, mercantilist superpower. Who could I mean by that?
Meanwhile Elon Musk, responding to Trump’s comment, had this to say:
Obliteration is coming anyway.
I doubt it, but huge bailouts are. And that will add still further to this country’s unsustainable debt burden.
Central planning/industrial policy is what it is.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, makes use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 181st episode, David is joined today by Dr. David Innes, long-time politics professor at The King’s College and current pastor in the great city of Phoenix, Ariz. They discuss the idea of a Christianized state, the tension between liberty and religion, the economic implications in the state facilitating a common good, the need for localism, the need for sphere sovereignty, and the role of wisdom in adjudicating state jurisdiction. This is a discussion that will challenge you and leave you wanting more!
The Capital Matters week that was . . .
Working from Home
I’ll admit to having been a skeptic about how long working from home would endure as a mass phenomenon. I’ll also admit to having been wrong about this (so far).
I had not expected this twist (via Axios) either…
Regulation
Critics of Chevron deference say it gave regulators too much power, by giving them too much leeway to interpret rules, and thus fueled the growth of the administrative state. The recent Supreme Court ruling in the Loper Bright case that overturned it will put more agency regulations at risk of being struck down by judicial review.
How much federal regulation does the typical business even face? Unfortunately, that important question is nearly impossible to answer. The Code of Federal Regulations is so large — more than 100 million words — that it would take years for anyone to read it.
Europe’s puny tech sector — the product of regulation on steroids — has furnished no serious competition to such giants as Google or Microsoft. To level the playing field, European lawmakers have enacted statutes that do not help their own firms but restrain the U.S. tech sector’s competitiveness.
Cutting federal regulations can feel a little bit like being a mosquito in a nudist colony: It’s hard to know where to begin.
Despite wagering venues’ prominent place in the election process, a federal financial regulator is now pushing to ban them from taking Americans’ bets. A sweeping regulation proposed by the Commodity Futures Trading Commission (CFTC) would explicitly ban wagering on the outcome of elections and other “event contracts.” The vote in May for the proposed rule was 3–2 along party lines, with all Democratic appointees — including Christy Goldsmith Romero, whom Biden recently nominated to head the scandal-ridden Federal Deposit Insurance Corporation — voting in favor…
Taxation
Dominic has an excellent post about J. D. Vance’s argument that childless adults should pay a higher tax rate than those with children. He is correct that Vance seems ignorant about our current tax code and its implications: The tax code already taxes people without kids more heavily than it taxes those with kids. It does so not just with the child tax credit but also with the earned-income tax credit, the larger head of household deduction, dependent-care credit, and numerous other items in the tax code…
The most common forms of the flat tax (those proposed by Robert Hall, Alvin Rabushka, and Steve Forbes) have exempted a minimum amount of income from taxation, and that minimum has depended on family size. The tax code has long included a similar provision, even before the introduction of the child tax credit. I take the durability of this feature of the tax code to reflect a widespread judgment that between two households with the same income, one with more children should pay lower taxes in recognition of its different circumstances…
Former president Donald Trump’s “no tax on tips” proposal figured prominently in his nomination-acceptance speech at the Republican National Convention, confirming that he’s serious about it. Critics from the Left and the Right claim it’s a political ploy that would benefit few workers and reduce tax revenue. Without question, tax policy should be designed to increase tax revenue, not to accomplish political goals. But some policies, such as this one, could achieve both…
The Debt
The U.S. national debt exceeded $35 trillion for the first time on Monday. It first exceeded $34 trillion 209 days ago…
Climate Policy
Three trillion dollars, eh? I wonder where that is supposed to come from, especially the money Yellen would expect to be invested in less-developed countries? As, apparently, it is “the single greatest opportunity of the 21st century,” investors will be fighting to get a slice of the green pie and will need no encouragement from governments before putting this money to work across the globe.
Well, maybe not…
Climate warriors, like other environmentalists, are often infatuated with Nature (capital N, please), and the (supposedly) natural. It’s an infatuation that typically owes more to aesthetics and emotion than #science, but as the peddlers of “organic” food know, it shouldn’t be underestimated. And well beyond the ranks of the committed, the word “natural” plays well.
As a result, climatists regard the name “natural gas” as dangerously misleading. It makes this evil fossil fuel sound too, well, nice…
The Olympics
It was supposed to be a symbolic triumph of environmentalism and good government. Paris mayor Anne Hidalgo swam in the Seine on July 17 to demonstrate the water was safe. It has been illegal to swim in the polluted river for a century, so Paris invested $1.5 billion in clean-up efforts to prepare it for open-water Olympic swimming events…
The idea that the Olympics could be, to use a junk adjective, “sustainable” is about as absurd as the notion that a rib-eye steak (from a cow, not a lab) could be a vegan treat. Nevertheless, like many religious or quasi-religious movements, climate fundamentalism attaches great importance to public displays of faith. It is not enough to believe: Believers, not least for messaging purposes, must be seen to believe, thus the insistence that the Paris Olympics must be a standard-bearer in the war against climate change…
ESG
Siri Terjesen & Allen Mendenhall:
Imagine your hard-earned retirement savings subsidizing causes you vehemently oppose. But you don’t have to imagine. It is happening now…
Tariffs
In a campaign speech in Henderson, Nev., on Tuesday, Republican vice-presidential nominee J. D. Vance said, “We believe that a million cheap, knockoff toasters aren’t worth the price of a single American manufacturing job.”
This comment came in a segment of his speech that was about the American dream, which is odd. Cheap and abundant household appliances are some of the things that people who move here from other countries love about America…
Industrial Policy
On Thursday, semiconductor chip manufacturer Intel announced it would be cutting 15,000 jobs as part of an overall cost-saving strategy. The company is also suspending its dividend payments. Intel reported a loss of $1.6 billion for the second quarter of this year.
Intel entered into an agreement with the federal government to receive an $8.5 billion grant through the CHIPS Act in March of this year. The agreement also included eligibility for a further $11 billion in federal loans. The company’s announcement at the time said the investments that the grant would support were “expected to create more than 10,000 company jobs…
Perhaps the revocation of the Starlink award had nothing to do with Musk’s purchase of Twitter in 2022 (and what followed). Perhaps. But if it had done, it would not be a surprise. All too often, part of the (unstated) purpose of industrial policy is the power it gives to politicians or bureaucrats to dispense favors, to punish behavior of which they disapprove, and to promote an ideological or political agenda on top of that which the policy is supposed to achieve, an agenda which, under certain circumstances can even work against the policy’s (stated) objectives….
Antitrust
The report offers a nice catchall for anything that disgruntles you about our times. If you’re on the left, it plays well into the Marxist belief that capitalism is fatally flawed. If you’re on the right, perhaps a “Khanservative” admirer of FTC Chair Lina Khan — such as J. D. Vance, the senator and vice-presidential candidate who said Khan “is doing a pretty good job,” or Senator Josh Hawley, who wants to ban all large mergers and acquisitions and vastly expand the FTC and its powers — you will also find this paper alluring…
Interest Rates
Today’s jobs report was the worst in a while, with employment increasing by 114,000 jobs in July and the unemployment rate increasing to 4.3 percent. A year ago, the unemployment rate was 3.5 percent, and a month ago it was 4.1 percent.
This will increase pressure on the Federal Reserve to cut interest rates. The July jobs report triggered the Sahm rule, named for former Federal Reserve economist Claudia Sahm, which is a recession indicator.
California
Chevron’s CEO, Mike Wirth, is saying that the decision to move is not about politics, but about “what’s good for our company to compete and perform.” In reality, it’s obviously about both. He has clearly been eyeing Texas for a while and describes Houston as “the energy capital of the world.” Bloomberg quotes Wirth as telling an audience in, well, Houston back in 2019 that “policies in California have become pretty restrictive on a lot of business fronts, not just the environment.” …
Ukraine
Russia’s invasion of Ukraine puts at risk trillions of dollars’ worth of its natural resources, including fossil fuels, minerals, crops, infrastructure, and human capital. If successful, this blatant resource grab would rank as the largest heist in human history….
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