The electric car revolution hits a snag due to rising interest rates
The electric vehicle (EV) market suffered a huge setback on Oct. 25 when Honda and GM scrapped plans to co-develop affordable electric cars.
The planned $5 billion investment was canceled because EV demand isn’t living up to the hype, and both companies are shifting their focus elsewhere.
In the case of GM, the Detroit auto juggernaut plans to focus on profitability for the time being.
"We're taking immediate steps to enhance the profitability of our EV portfolio and adjust to slowing near-term growth,” GM CEO Mary Barra told analysts during an earnings call.
Honda said its long-term goal of becoming an EV-only automaker hasn’t changed, but that the current initiative “would be difficult as a business,” according to CEO Toshihiro Mibe.
Like other manufacturers, automakers are struggling with rising interest rates and higher production costs.
It’s also come to light that achieving the ambitious targets of climate regulators isn’t feasible in the short term because EV demand isn’t growing as expected.
Translating buyer interest into actual sales
While demand for EVs is still growing, actual sales and competition from the likes of Tesla make it difficult for automakers to commit more resources to the technology.
“EV demand next year could be lower than expectations,” according to Lee Chang-sil, CFO at South Korean battery maker LG Energy Solution.
Evidence of slowing demand already appears as EV inventories pile up at dealers.
According to Cox Automotive, as of late June, it took over 100 days for dealers to sell their supply of electric vehicles. The auto-industry average is just 53 days.
These trends seem to contradict what Americans say they want. In a recent J.D. Power survey, 26% of consumers said they’d very likely consider purchasing an EV in the next 12 months.
But as the data shows, buyer interest and actual sales are two different things.
Automakers know this all too well.
“Building EVs is one thing, and many in the industry are proving excellent at that skill. Selling EVs is something different altogether,” Cox Automotive said.
The U.S. Energy Information Administration (EIA) estimates it’ll take several decades before an EV-majority market is even possible.
EIA forecasts that battery-powered EVs and hybrids will comprise only 17-19% of new car sales by 2050—and that’s with oil prices as high as $190 a barrel.
Tesla sounds the alarm
Tesla—arguably the poster child of the EV industry—also has reservations about where the market is headed. Earlier this month, the company posted a disappointing 44% decline in profits.
During the earnings call, CEO Elon Musk said he was worried “about the high interest rate environment that we’re in,” which is surely impacting demand for more expensive electric vehicles.
“I just can't emphasize enough that the vast majority of people buying a car is about the monthly payment. If interest rates remain high or if they go even higher, it's that much harder for people to buy the car,” he said.
Tesla attempted to remedy the problem by slashing prices on its most popular models. This worked to increase sales but came at the expense of profits, which plunged 44% in the third quarter compared to last year.