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Tax incentives might run out on Tesla, but electric cars will be just fine

Everybody get in.
Everybody get in.
Image: Reuters/Stephen Lam
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Tesla likes to argue that its customers don’t need government subsidies to buy electric vehicles. “In fact, the incentives give us a relative disadvantage,” Tesla CEO Elon Musk said on a May 3 investor call. “Tesla has succeeded in spite of the incentives not because of them.”

Maybe Tesla doesn’t need tax breaks, but they sure help. The end of one tax credit in Hong Kong raised the effective price of a Tesla Model S 60 from $72,900 (HK$570,000) to $118,400 (HK$925,500), similar to the cost of a Mercedes-Benz. After the policy took effect in April, first-time Tesla registrations fell from 2,939 in March to zero the next month. The US saw a comparable drop when the end of a $5,000, Georgia state tax credit in 2015 sent EV sales down 90% over the course of a year.

In the US, a federal rebate program gives buyers of electric vehicles a $7,500 tax credit for the first 200,000 electric vehicles (EV) a carmaker delivers. The credit gradually phases out once the manufacturer passes the 200,000 mark. Tesla has already sold more than 100,000 cars in the US.

Can Tesla sell mass-market EVs without the credits? Maybe not, argues Michelle Krebs of Autotrader. “There isn’t enough consumer demand on their own to drive sales, even with the tax credit,” she argued in an interview, pointing to dealer discounting and an inventory buildup as signs of a soft market for EVs. GM’s Chevy Bolt, its first all-electric, 236-mile range car which has sold about 7,600 cars this year, hasn’t exactly taken the US market by storm. Only 1% of new vehicles sold in the US are all-electric. Tesla, which rolled out its first mass-market Model 3 on July 8, plans to produce 500,000 a year by 2018. “I think it boils down to we have to figure out what it’s going to take consumers to buy these kinds of vehicles,” said Krebs.

Yet incentives are the last thing EVs will need, argues Tona Seba of RethinkX, a think tank analyzing new technologies. Global electric vehicle sales are still rising fast (up 36% in 2016), and should eclipse gas-powered ones by 2040. Outliers like Hong Kong (a tiny market) or Georgia’s tax incentives (only EVs with less than a 200-mile range, a dealbreaker for many drivers, were available at the time) obscure the longer trend line. Electric vehicles are winning, says Seba, because of simple  economics: They perform better at a cheaper price.

Seba argues we’re at an inflection point where the price of EVs from Tesla and Chevy are within a few percentage points of the median US car price of $34,968. EV prices will only go lower as carmakers capitalize on economies of scale, and battery prices decline by about 20% per year (for example, the price of the all-electric Nissan Leaf fell from $35,430 in 2011 to $21,500 last year). Soon, he notes, drivers will be able to buy an EV that costs less upfront, while cutting 90% of the maintenance and fuel costs involved in driving a gasoline car.

“What you’re seeing in Hong Kong is irrelevant over the long run,” Seba argues.”The rational economic choice will be to buy the EV. The trend is pretty clear: Eventually EVs are going to blow out internal-combustion vehicles for economic reasons.” That cost advantage only grows once autonomous, all-electric fleets, such as the one proposed by Tesla, let car owners rent out their vehicles to ride-hailing services. Renting out their vehicle could earn the average American family about $5,600 annually by 2021, estimates RethinkX.

Of course, Tesla must sell its cars now, not in 2021. It already has a remarkable 400,000 or so pre-orders from customers waiting to buy its Model 3, an unprecedented feat for any carmaker. No doubt the US tax incentives are crucial for the next two years. But Tesla is betting enough people will spring for a car that they want, rather than just the one they need. Musk joked it’s no coincidence Tesla’s model line up spells out “S3XY.”

On July 28, Tesla launch will throw a launch party for its Model 3. A warm reception by customers could give Tesla the momentum it needs to beat Detroit and the rest of the globe in an all-electric world. If not, look out for some steep discounts. ”Tesla does have a very strong brand. Chevy doesn’t have that,” says Krebs. “But they’ve got to launch flawlessly.”