No, for crying out loud, killing EV subsidies will not help an EV company

In light of Tesla and its CEO Elon Musk’s support of ending EV credits in the US, many have said that this will somehow help Tesla against the competition. But it won’t, and here’s why.

This line of thinking seems to have become common in recent weeks, with the general public seeming desperate to tease some rationality out of the irrational choice of a business asking the government to make its products $7,500 more expensive.

The argument seems to go that because Tesla is the best at making EVs, and can make them with better margins than other companies, removing subsidies will reduce everyone’s margins to the point where they aren’t profitable, except Tesla, which means that all the competition will be taken out of the market and Tesla will be the only ones able to make EVs.

It’s a somewhat attractive argument for a long-term-focused investor who might feel attracted to the idea that Tesla will somehow become the only EV company, and who are bullish on EVs succeeding in the market no matter what happens, thus leading to the thought that Tesla will, in the long term, own 100% of the US car market.

But there are a lot of underlying assumptions here which seem unlikely to pan out.

A Tesla EV monopoly relies on lots of assumptions

First, this assumes that other companies will not invest in EVs if their margins falter. But we’ve already seen other companies invest money into EVs when they don’t have positive margins yet, because that’s how businesses work – when you invest in something new, you often take losses for a while before eventually reaping gains. This happened with Tesla itself, so we should not be surprised if it can happen with other companies.

Second, where is the money coming from? For startups, perhaps they will have a harder time finding money – unless they’re able to capture investors who are bullish on the future of EVs and willing to take losses, which Tesla has shown definitely do exist (especially in light of this very story, where TSLA investors are asking to have their margins cut based on a shaky premise that it will help the business).

But for big established auto businesses, the money for the EV fund is coming from… their gas car sales, which will continue, and whose profitability wouldn’t be affected by a change in EV credits (or in fact could conceivably go up, as removal of the EV credit means that gas cars could raise prices as TCO of competing EVs goes up).

Tesla, however, doesn’t have that other source of money. Its money comes from EV sales, and its margins have already dropped from their record highs at the peak of COVID-related auto supply issues. In Q3 2024, Tesla made $6,886 per vehicle – which I hope I don’t need to remind the reader is a smaller number than $7,500.

Now, not all of Tesla’s vehicles come along with the $7,500 credit, so after taking that into account, Tesla would likely have still made money. But you can see how a drop of $7,500 worth of margin in most of the vehicles Tesla sells would cut profits by a lot – which means less money to reinvest in growth, less money to chase other pie-in-the-sky projects that are inflating the stock price right now, and less chance of Tesla becoming the sole EV provider for the Western world as some investors seem to think might happen.

And third, for this to be true then we must also think that people will accept a transportation monopoly long term. Not only do consumers choose non-Tesla EVs for many reasons – aesthetic concerns, brand loyalty, aforementioned distaste for Musk or Tesla, desire for certain features, etc etc etc – but we also like to say that a free market naturally abhors a monopoly, or that regulators will do something about monopolies when they crop up.

But the bigger problem here is: all of these assumptions focus on EVs, and not on Tesla’s real competition.

Tesla’s competition is gas cars, not other EVs

Besides, the whole thing is wrong to begin with about what Tesla’s “competition” actually is.

It’s common for people to compare EVs against each other, rather than against gas vehicles. This can be for several reasons – similarity, of course; the assumption that buyers have already decided on a powertrain and will shop within that powertrain, instead of cross-shopping; and perhaps aided by EV-focused publications like ourselves that tend to compare EVs against each other because, frankly, we don’t care about gas cars and see no reason anyone would should buy one, so why bother reviewing them when they’re all terrible anyway?

But the reality is that the vast majority of the US car market does not consist of electric vehicles. Nine out of every ten cars sold in this country are still powered by oil – but only about one out of every twenty cars sold in the US are EVs sold by a company not named Tesla.

So if Tesla wants to grow its sales, that 90+% of gas car market share seems like a lot bigger target than the ~5% – especially given that much of those 5% have indicated their disinterest in buying a car associated with Elon Musk.

So, how does increasing the price of the 5% of non-EV Teslas help Tesla at all, especially when Tesla’s prices would also go up? And when the vast majority of its competition will not go up in price?

Inevitably, this thinking only leads to a “big fish in a small pond” result, even in the most optimistic case. An EV market where prices all go up by $7,500 would inevitably shrink in the short term, but even if it didn’t, and if all other EVs were forced out of it (which is unlikely), Tesla would have access to 5% more of the market, not 90% more. Maybe that would be a nice change from Tesla’s falling sales in a growing EV market this year, but it’s hardly justification for a market cap that’s higher than the rest of the industry combined.

So even if all this magical thinking about a Tesla EV monopoly does turn out to be accurate, it still doesn’t represent a strike against the real competition for Tesla, nor does it target the part of the market that could result in real long-term growth for the company. (And ironically, the one place where Tesla could have had a near-monopoly is charging, where the charging team executed a coup turning the entire industry to Tesla’s plug… and then Musk swiftly fired everyone, causing total chaos and losing lots of talent to competitors).

But eliminating subsidies would help EVs… if gas subsidies died too

In the past, Musk has pointed this out and correctly said that EVs would be more competitive on price if externalities from gasoline vehicles were taken into account.

If you consider the cost of the pollution that gas cars produce (as we should), gas cars are tens of thousands of dollars more expensive over the course of their lifetime.

Some old-guard republicans have suggested a solution to this problem – putting a price on those externalities. There was at one point a bipartisan and revenue-neutral bill to solve this problem – but that bill is no longer bipartisan (as the republican party has fallen further into the grasp of an ignoramus), despite that a majority of Americans in every state support requiring fossil fuel companies to pay back this subsidy.

In Musk’s recent advocacy, he seems to forget half of that equation (just as he seems to have forgotten how climate change works). We have not seen him push for removing fossil car subsidies, just EV subsidies.

And Musk’s allies are also not talking about removing subsidies for electric and gas cars equally. Rather, they want to eliminate subsidies for the better, less-subsidized, cleaner option – EVs – and increase subsidies for gas cars – the dirtier, more-subsidized option.

So what Musk has proposed here is not only to make all of his own products $7,500 more expensive when compared to their direct competition, but his allies want to make the competition even cheaper, leading to a $15,000 swing in comparative pricing between the two. No normal business benefits from this (Veblen goods notwithstanding).

Tesla, for its part, even recognizes all of this itself. It has lobbied routinely for all of the incentives and regulations that are currently in place, it lobbied for the new EPA exhaust rule which Musk’s allies oppose (even though they have no idea what the rule is), and it’s currently asking other governments to correctly account for the costs of gas vehicles.

Finally, lest we forget, the company’s mission is “to accelerate the advent of sustainable transport” – not to drive other EVs out of the market and in the vain attempt to ensure that EVs remain a niche market that Tesla can dominate while gas cars are allowed to flourish with the support of a man whose money has effectively all been made by electric vehicle sales.

So, either all of Tesla is mystified by the inscrutable brilliance of its fearless leader Elon Musk and has been making poor decisions, throughout its entire existence and across its sales territories, all directed in the past by Musk himself, and only now has it started to recognize the genius behind making its products more expensive for no reason, but only in one market… or maybe, just maybe, this new idea to remove an incentive that has brought the company literally billions of dollars is actually just as idiotic as it seems on its face.

B… but… Elon’s not dumb though!

I believe that the reason people are twisting themselves into knots over this is because they just can’t believe that Musk would have such a stupid idea. They look at their past understanding of him as an intelligent individual and think that there must be some sort of secret plan.

But sometimes, a dumb idea is just a dumb idea. Lowering Tesla’s margins is simply not a good business move.

The fact that people think it would be is simply an indicator of just how detached from reality Musk and his ilk have become. This has been readily apparent for quite some time now – but, if you spend all your time on a platform where a chain of emojis passes for a clever idea and correctness is decided by whoever has more successfully weaponized their fanbase towards repeatedly clicking a digital heart on each of the myriad bot accounts they have access to, you might have missed it.

But that is indeed where Musk spends all his time, on a website that he lost tens of billions of dollars of his and other people’s money on so that he could regurgitate whatever nonsense that passes through his eye-holes to a captive audience, shut down any criticism or truth about his allies, and otherwise trap himself into an echo chamber of his own design.

There, when Musk has a bad idea, he can’t be corrected, because he has isolated himself from anyone who would correct it. Instead, he only hears from people who think that he’s the smartest man in the world – and thus, that every idea of his must be good in some way. What a boost to the ego that must be.

So they will desperately grasp for straws to find any sort of rationality in actions that are inherently irrational, and so easy to see that they’re irrational. And in a world where truth seems to matter less than ever and opposites are accepted as reality, you end up with a lot of people echoing the absurd idea that a business will benefit by losing money.

But it just won’t. So please, stop saying it will.

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