Federal incentives--Per manufacturer: Help or Hurt?

[lpickup]

I happened to be thinking about this last night.

As you're aware, the $7500 federal tax credit program (proposed to be $10K: see http://www.chargedevs.com/content/news-wire/post/obama’s-budget-calls-increased-ev-tax-credit) was expanded from a limit of 200K automobiles (as originally created by George W. Bush) to 200K automobiles per manufacturer (under Obama).

On the surface this seems like a great thing for the EV community, but as I was thinking last night, maybe not...

Here's my line of thought:

As a BUSINESS, what incentive do companies have to lead the way? If you're a manufacturer on the leading edge of developing EVs, as one would expect, your development costs and manufacturing costs are going to be very high. You'll absolutely need those tax incentives to be able to price your car at a value that will sell. That's fine.

But what if you decided to just wait on the sidelines and let the other guy figure out all the hard stuff and wait for the price of technology and batteries fall. Then come in several years later when all the heavy lifting has been done. Now you can jack the price of your car up artificially because you've still got your 200K cars for which the credit applies and still compete with the other guy whose credit has "expired" because they passed the 200K mark.

I know there is a perceived value to being the industry leader with respect to a given technology, but is that going to matter a few years out? Look at IBM's market share in the PC market once the clones appeared and tell me that there is real market value in being the leader.

I'm not saying this is what is happening. Clearly not with Nissan. They are certainly leading the way here and I don't get the sense they are holding back. But what about the other companies? Are Chevy and Ford really in this to grow their sales as fast as they can, or are they holding back and letting Nissan and Mitsubishi do the heavy lifting?

Would the original Bush model be MORE of an incentive for manufacturers to grow EVs. Because under a fixed limit (of 200K or whatever number is appropriate) then all manufacturers are now incentivized to do their development work early on while they can still recoup some of that cost in the form of a higher MSRP that's still competitive because of available tax credits. Those that sit on the sideline waiting to see how things play out could be left in a situation where they have to sell their early cars at a loss because to be competitive pricing-wise they need to sell their cars at a level that doesn't recoup their development costs. So I see that model as creating more of a real race: a manufacturer wants the largest share they can get of those 200K slots and thus will be plenty motivated to get off their butts and start developing EVs.

What are your thoughts?

 

[redLEAF]

Just like with any government program; it's subject to change, look at CA reducing the state level incentive or the 'cash for clunker's' deal a few years back both were limited programs and didn't really have a HUGE impact. In Nissan's case, their next EV will 'only' have incentives less the amount of LEAF's already sold by that point; just like GM (whether it brings out another EV Chevy, Buick, Cadillac or GMC) will be restricted less the amount of Volt's sold. Ford has sold very few EV's but the same rules apply. What I mean to say, is that even though 200K cars sounds like a lot, in the grand scheme of things where 12M cars are sold annually, 200K cars will not make that much of a difference or a real or perceived advantage to any mfg.; including niche players like Tesla who will probably never challenge the big guys. In Toyota's case, the small numbers of Tesla-battery powered RAV4's will be a drop in the bucket towards that 200K (although not sure on the specific's of say the intro on the plug-in Prius towards it; may be a decent seller due to the popularity of the 'regular' Prius). As there is a fair amount of collaboration on some of the EV technology you may actually see some of it being shared between mfg.'s as their are many examples of this in the past -- Mazda with Ford, Honda with Isuzu, Isuzu with Lotus, Isuzu with GM, Toyota with GM, VW with Chrysler, etc., etc. some of these were simply re-badged cars, some were powerplants, but typically they were done to help both companies; I think you'll see even more of that in the future regardless of what happens with incentives.

 

[lpickup]

The actual number aside (although I do acknowledge that whether the number if 2M vs. 2K does make a difference in how the model operates), I'm just considering the model itself (per manufacturer, or single limit).

Maybe what you're saying is that 200K is so "small" that the incentives don't really make a difference. Granted 200K is peanuts compared to ALL cars produced, but it's very significant compared to number of EVs produced, at least for the next few years, and I do feel that it's probably a fair number on a per manufacturer basis to recoup development costs and kick start economies of scale and reduce risk for manufacturers.

So whatever the optimal number is (e.g., 200K/mfg vs. 1M/total) I'm interested in hearing your thoughts about the per manufacturer model vs. single limit model.

As for the collaboration factor, yes, that's certainly likely to exist and could potentially be a good thing for EVs in general as it spreads out development costs and advances the technology faster. But, how does the per manufacturer model affect collaboration? Consider this scenario: Honda and Isuzu decide to team up to collaborate on EV technology. Honda goes forward with this joint technology and brings out several models of cars with that technology in it and reaches their 200K limit rather quickly. Isuzu sees an opportunity and limits their introduction of the technology to just a single niche vehicle, waits a few years for mfg costs to drop and THEN rolls out the technology in a more widespread fashion, artificially jacking up their sales prices because they've got the credit to bring the "real" cost down. They could stand to make over $1B on this tactic alone, so it's real money, even at the 200K level. So given this scenario, do you think that companies are going to be more or less willing to collaborate on EV technology?

 

[DaveinOlyWA]

i understand your line of reasoning but IF you were not Nissan and you were at least 2 years away from a viable EV (which most manufaturers are) then why bother to rush when you know that Nissan/Volt/MiEV will have 3/4 of the first 200,000 sold before yours gets into the ordering system?

that would impede the rush to market. now that each can get that incentive. they can 1) not rush garbage to market. 2) have that sale incentive when others might be running out.

2nd thing; this tax benefit can be withdrawn at any time and i dont see it running more than another...oh say, 4 years and 10 months or so?? and i feel that to be more than fair. EVs will be settled into their initial niche and well on their way to developing another niche which i hope to be the battery lease BP model.

 

[lpickup]

i understand your line of reasoning but IF you were not Nissan and you were at least 2 years away from a viable EV (which most manufaturers are) then why bother to rush when you know that Nissan/Volt/MiEV will have 3/4 of the first 200,000 sold before yours gets into the ordering system?

Maybe because I wouldn't get in that position in the first place. If the demand is there to sell 200K EVs (or 1M if we take the current per manufacturer number and scale it up by a reasonable number of manufacturers...maybe even 1.2M) my market research would've told me that, and my competitive analysis would have told me that the competition is working on EVs, and if I'm serious about playing in that game and think there is money to be made in it, then I'm not going to let myself get 2 years behind.

Besides, if LEAF/Volt/MiEV sell out the incentives, and the number of incentives is appropriately set so that the critical mass in terms of technology and infrastructure is in place, then I guess I don't care that others are late to the game. Now if it was a single manufacturer, that would be a problem. But those are 3 manufacturers (and I think Toyota should have no problem contributing heavily to that number as well) so that creates enough competition to keep the prices down to competitive levels.

In most consumer markets there is a huge incentive to get to market first as the highest profits are within the first several months of something new coming out. The same can be true for these incentives, but keeping it on a per manufacturer basis skews the economics and I think reduces that incentive to get to market first since the incentive is still there at a later time, so why not wait?

If you're point is that it's too late to change the rules now, because if we did then those manufacturers without programs that are far enough along will just throw their arms up and wait it out, I do agree. I'm not suggesting we change the model now, but for future technologies I think we should re-think the whole per manufacturer model.

 

[DaveinOlyWA]

i agree and i think a unit volume per manufacturer along with a time limit is appropriate. there is always a risk with radically new technology and New Tech 1.0 is well, you know sometimes not the best option so incentives should be available to those are willing to find the bugs and smooth that bleeding edge.

it also is nice as a bit of an offset to the higher introductory price and in this case a yet to be developed charging infrastructure and the inconveniences that brings to the table