Why the electric vehicle ‘cost parity’ conversation doesn’t make any sense

GM CEO Mary Barra was recently asked about profitability targets for the company’s electric vehicle line and said that it’s on track for EV profitability in 2025.

But, frankly, the whole conversation about EV profitability and cost parity doesn’t make a lot of sense, and here’s why.

Barra is at the Aspen Ideas Festival this week, and conversations have predictably included lots of talk about electric vehicles. She sat down with Andrew Ross Sorkin from CNBC for an interview about the company’s EV transition, and the question of EV profitability came up, as it often does.

Barra gave the kind of answer we’ve heard before – EV profitability isn’t here but is coming soon, and affordable vehicles are going to be the hardest ones to make profitably.

Here’s the full exchange:

Sorkin: You’ve also talked about the challenges of producing cheaper vehicles, so $30,000 to $40,000 vehicles, and doing that profitably, that’s gonna take ’til when now?

Barra: Well a lot of the vehicles that we’re putting out now as we get to scale, because we’ve brought battery manufacturing inside, we have plans and we’ve said – I don’t talk about individual product line profitability – but we’re on track for 2025 to be in that low mid single digits, and that’s before IRA, and then we’ve said later in the decade we’re gonna be at parity with ICE. So a lot of it is going to rely on continuing to improve battery chemistry and getting cost of out of the battery, ’cause that’s where the cost opportunity is.

Sorkin: Is the idea that there will be vehicles that you will sell, effectively unprofitably, to “seed the market,” if you will?

Barra: I would say we’re going to where we know the consumer has to be to get to the volume, and we’re gonna drive to profitability as quickly as possible, and then when you put things like IRA on top of it, along with the software services, I think we’re gonna see profitability even in those affordable vehicles more quickly than anyone’s expecting.

The most crucial statement here is that Barra reiterated that the company’s EVs will be profitable in 2025, and she specified here that this is without accounting for Inflation Reduction Act tax credits. IRA includes significant credits both for consumers and manufacturers.

Barra’s comments didn’t split out individual product lines, so perhaps she was talking about overall profitability across all of GM’s EV projects. This is necessarily going to be low at the moment because GM is currently spending a lot of money building manufacturing for its Ultium platform, which hasn’t produced many EVs yet. Product lines usually don’t become profitable until they’ve been manufactured for a while, as companies recoup initial investments and get costs down over time.

But what about the Bolt EV? It’s been in production for a long time now – to the point that it’s about to be discontinued. Has GM really not made any money on any of the units it has sold? Could it have done so if it had produced the car in higher volume or hadn’t dealt with an extended recall (which LG ended up paying for anyway)?

But this whole conversation is strange and has been for a long time for several reasons.

A short history of “cost parity” in EVs

There is a long history of car companies saying they can’t produce EVs profitably. One of the earliest was Fiat’s late CEO Sergio Marchionne, who famously told customers not to buy his company’s Fiat 500e because Fiat supposedly lost $14k per unit (among a lot of other bonkers EV-related comments).

Currently, most manufacturers will tell you that they are not making a direct profit on their electric vehicle lines. The most notable exception is Tesla, a company that’s focused entirely on making electric cars and, at times, has had higher margins than anyone in the overall auto industry. Those margins have now dropped as Tesla has dropped prices, starting a price war that is threatening other automakers due to Tesla’s significant apparent cost advantage.

So it is definitely strange to have every company saying that EVs are less profitable, except for the one most profitable company. That company also happens to be the one that has taken EVs the most seriously and for the longest period of time.

And, importantly, Tesla is one of few companies that doesn’t have an interest in making the public think that EVs are inferior in some way or otherwise pushing back the timeline for EV adoption. Because Tesla’s current product mix isn’t heavily fossil-based like the rest of the industry is.

But lest we think Tesla is the only exception that proves the rule, it’s not the only company that has generated a profit on EVs. The unassuming Nissan Leaf, which is currently and has historically been one of the lowest-price EVs (and lowest-price vehicles period – after state & federal credits, many buyers can get one for under 20k), started making a profit in 2014. At the time, more Leafs had been sold than any other EV worldwide, which remained the case until the Model 3 eclipsed it in 2020.

So we know that EVs can produce profit – even a lot of profit – and we know that this has been the case for a long time, even for low-cost EVs.

What does this mean for consumers?

The question Barra answered assumed that cost parity would be hard to meet, particularly in “cheaper vehicles” in the $30-40k range.

But for consumers, the cheapest vehicles have already reached price parity in many cases.

Currently, and for the better part of a year, the Chevy Bolt has been a screaming deal with its $26k base price. Then you can apply the $7,500 federal tax credit and potentially state and regional credits or other various discounts, bringing it down to a price on par with the cheapest new vehicles in America.

And that’s not just some bare-bones get-you-there car like the universally-panned Mitsubishi Mirage, but a vehicle good enough to earn Electrek’s Vehicle of the Year award despite being at the end of its lifecycle. So you’re not just getting a low-price car, but a good car – meaning the quality-for-price metric is through the roof.

While the Bolt is being discontinued, the Leaf is still around, is still cheap, and is also a good car. The package is a little worse on value than the current Bolt is, but there will still be a solid EV in the $20k range post-credit (which is applicable at point of sale starting 6 months from now), which is about as low as you can expect new gas cars to go.

This holds true as you go up in price, with EVs standing out in terms of value against price competitors. The Tesla Model 3 is a phenomenal car and starts at around $30k after credits. Meanwhile, its cousin, the Tesla Model Y, is currently the best-selling vehicle on Earth because of its value proposition against the competition.

And throughout all of this, we’ve only talked about the purchase price. Running costs, both fuel and maintenance, tend to be cheaper on EVs and, as such, make the total cost parity calculation even more beneficial.

And this all has been the case for some time as well. There’s been no shortage of great EV lease deals in the past, with periods where EVs could be leased at $100-200 a month with little to nothing down (after taking into account state rebates). Admittedly, many of those have dried up recently due to excessively high EV demand, but leasing is one way to get around income-based restrictions in the tax credit, and the credit will be available at point-of-sale starting January 1st 2024 anyway.

So it doesn’t make a lot of sense to say that EVs can’t reach price parity for consumers until some time in the future because it’s clear that they’ve already there, even in low-price segments.

How this conversation damages EV adoption

But really, is this even a productive conversation to be having?

The constant discussion of EV profitability and “cost parity” tends to migrate out of the purely financial press and make its way into consumer circles. And through the stock market, retirement plans, and so on, some consumers are concerned about a company’s ability to make a car profitably and don’t want that company to make cars with less profit, even if that could mean lower costs for them as a consumer.

So by stating that EVs are unprofitable, companies throw cold water on the idea of EVs and make everyone feel like the “proper time” to “switch” to EVs is some time in the future rather than now. These companies that are so heavily invested in the status quo want consumers to keep buying the models they offer – which are majority-ICE for nearly every automaker out there.

The conversation itself is harmful to EV adoption, at least in the way it is commonly presented – that this timeline is coming “in the future” rather than now (that said, Barra did say that this would come “sooner than anyone’s expecting,” which is a nice improvement in messaging).

The fact is: it doesn’t matter that much if an individual car, line, or effort is profitable, depending on how it fits into the company’s strategy. And companies know this because they keep making these EVs even though they claim they’re not profitable.

Why would companies do “unprofitable” things?

Companies exist to make a profit above all. But in the course of their existence, this doesn’t mean that every decision a company makes must drive a profit immediately.

Lower-cost vehicles, regardless of powertrain, tend to have lower profit margins. These are made up for by high volume and the expectation that the company may build brand loyalty amongst customers who, as they proceed in life, may end up in a position to purchase higher-priced, higher-margin vehicles.

And as mentioned in the Barra interview, everyone sees that the market is turning towards EVs, and companies are trying to establish a presence in the EV market, which is growing rapidly while gas car sales plateau. This means that companies may consider current EVs a “loss leader” to attempt to establish market share, especially if upfront investments in future capacity – growth of the company’s EV line – are accounted for as “losses” in the present due to the high upfront costs required.

Additionally, government requirements around the world are getting stricter in terms of required EV share. Companies simply have to sell a certain amount of EVs, so it doesn’t matter if they make a profit on any individual vehicle because if they don’t do it, they will be punished. The cost of that punishment (or the cost of credit-trading schemes) is greater than whatever they claim they’re losing on EVs.

This is why, for example, Fiat still sold the 500e in 2014 despite claiming it lost money – because selling the car meant it could continue selling in California, which made Fiat more profit than not doing so.

Companies and society have different goals

One could call this “picking winners and losers,” but that is, again, a narrow view of the situation. Companies and governments (should) have different goals. Companies are in it for profit, but governments ought to be in it to enhance the public good. And these goals can be in opposition to one another.

To a company, the costs are whatever dollars it has to spend on materials, labor, distribution, etc. But other costs are ignored by a company, and instead absorbed by the rest of society. There is a long history of doing business by externalizing costs and privatizing profits – see the parable of the tragedy of the commons.

With cars, this means exhaust pollution, which is the largest contributor to smog that harms human health. The air is a common resource that all of us need, and the pollution put into that air by automotive and oil company products is responsible for enormous health and environmental costs (e.g., wildfires due to climate change, which are currently devastating much of North America, causing lung problems and property damage). Those costs are largely not borne by the polluters that are largely responsible for them, but instead borne by all of us on the back end.

It costs manufacturers more money to install pollution control equipment and engineer more efficient vehicles than it would if they didn’t have to do either of those things. Companies lobby fiercely against any requirement that might save you money – even if it costs them little to implement – because they only care about their own costs, not society’s.

But government at least should be different than that. Governments ought to account for these additional costs to society and tell polluters they need to pay those costs upfront.

Until they do, any discussion of “cost parity” is incomplete. If each EV saves $10,000 for society in health costs alone, then it is in the public interest to have more of them and fewer of the vehicles that are choking us. And if we spend all our time focusing on the cost of EV subsidies and not the much higher costs of fossil fuel subsidies, then we aren’t truly calculating which of these technologies has higher actual costs.

For these reasons, I believe we need to retire (or at least reframe) the whole conversation about “cost parity” for EVs. Consumers can already see parity in low-cost EVs and quality-for-price across various price ranges. Companies can already see it, assuming they’re taking their EV lines seriously and not just trying to throw cold water on the whole idea of EVs in the first place. And society can already see it, given that EVs are already making the air cleaner, resulting in lower societal costs that will compound in the future.

So why do we keep talking about some incredibly narrow definition of cost parity and perpetually say that it’s coming sometime in the future when, by so many meaningful metrics, we’re already here, and everybody in the industry already knows why they have to make EVs anyway? It just doesn’t make any sense.

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