This has not been a good week for the electric-vehicle transition. On Wednesday, General Motors scrapped a self-imposed plan of building 400,000 electric vehicles by the middle of next year. Then it jettisoned plans with Honda to build a sub-$30,000 EV. On Thursday, Mercedes Benz announced that its profits had fallen in part due to turbulence in the EV market, and Hertz ditched a plan to have EVs make up 25% of its fleet by 2024.
Nor has the past month been much better. Ford has slowed down its EV factory build-out. Elon Musk announced that Tesla was taking a wait-and-see approach to opening its next plant, in Mexico, and The Wall Street Journal has reported that EV demand is proving weaker than once expected. Higher interest rates and, perhaps, a continued lack of public chargers now seem to be impairing the EV transition.
It’s an odd time, because while the day-to-day news is bad, the overall trend remains good — surprisingly good, even. More than 1 million EVs have been sold in America this year, and the country is likely to record 50% year-over-year EV market growth for two years in a row. That is not the usual sign of an industry in trouble. The industry is faltering, yes, but only compared to the rapid scale-up that companies once aimed for — and that the Paris Agreement’s climate targets demand. And at a global level, the news is better: The economics of batteries and trends in the Chinese and European markets leave little doubt that EVs will eventually win.
So how to make sense of this moment? Automakers, it seems, are not doubting whether the EV transition will happen; they are pausing to figure out how best to proceed. Journalists often talk about the “EV transition,” but this is something of a misnomer — there are really at least two different transitions, two different bridges to the EV future.
One of those transitions must be navigated by the legacy automakers, such as Ford and GM. The other must be completed by the new electric-only upstarts, such as Tesla and Rivian. Both transitions are, today, half-complete. What is notable about this moment is that both transitions are also in flux — and the companies and executives tasked with navigating them are struggling with their next steps.
The first bridge must be built by Ford, GM, Toyota, Volkswagen, and every other legacy automaker heavily invested in the U.S. market. You can think of it as a bridge made of cross-subsidies — subsidies not from the government, but from other cars in their product line.
Right now, many automakers earn their biggest profits by selling big, gas-burning vehicles: crossovers, SUVs, and pickup trucks. They lose money, meanwhile, on each EV that they sell. So over the next few years, these companies must take the huge profits from their SUV-and-truck business and reinvest them into scaling up their EV business.
You can see how difficult this will be by looking at Ford, which conveniently reports earnings from its internal combustion business separately from its electric vehicle business. During the first half of 2023, Ford’s global gas and hybrid sales earned $4.9 billion before interest or taxes. Ford’s EV business, meanwhile, lost $1.8 billion before interest or taxes.
During this same period, Ford sold nearly half a million trucks and SUVs in the U.S. alone, and roughly 25,000 electric vehicles. By one calculation, Ford lost $60,000 for every EV that it sold during the first quarter of this year.
This is the narrow bridge that Ford and its ilk must walk: They must remain mature businesses, delivering consistent profits to shareholders, even as they overhaul their entire product line and manufacturing system. And while these legacy automakers have certain advantages — brand cachet, a network of dealerships, and an understanding of how to make car bodies — they lack the deep familiarity with software or battery chemistries that underpin the EV business. What’s more, their current business rests on uneasy foundations: Because their profits are so heavily concentrated in just a few SUVs and trucks, a sudden shift in consumer tastes, fuel prices, or regulation could undercut their whole hustle.
We’ve already seen one consequence of this concentration in the United Autoworkers strike. By focusing its strikes on just a few factories at first, and then gradually expanding them to include each company’s most profitable facilities, the UAW was able to make its strike fund go further than outside commentators initially estimated. That strategy resulted in record high pay raises for workers in the UAW’s tentative deal with Ford; strikes continue at GM and Stellantis.
But this is, of course, only the first bridge to the EV future. Other companies — including Tesla, Rivian, and the early-stage EV startups Canoo and Fisker — have to build a different path across the river. You can think of this as the bridge of scaling up, although some auto-industry analysts give it a different name: crossing the EV valley of death.
These companies have to survive long enough to build up economies of scale. You can think of it this way: At the beginning of an EV company’s lifespan, it knows very little about how to mass-produce its EVs, but it has a lot of cash to burn. As it matures, it gets better at making EVs and grows its customer base, and it makes cars more frequently and more cheaply. Eventually, it reaches a point where it can sell lots of EVs for more money than they cost to make — that is, it can be a mature, profitable business.
But in the middle, it faces a hold-your-breath moment where its high costs can overwhelm its meager production. This is the valley of death, “the challenging period between developing a product and large-scale production, when a company isn’t earning much if any revenue, but operating and capital costs are high,” as the journalist Steve Levine puts it at The Information.
Nearly every EV company faces this problem to some extent right now. Elon Musk discussed it during a recent rambling Tesla earnings call. “People do not understand what is truly hard. That’s why I say prototypes are easy. Production is hard,” he said. “Going from a prototype to volume production is like 10,000% harder… than to make the prototype in the first place.”
Now, Tesla seems to have mostly cleared the valley of death with its Model 3 and Model Y this year, allowing it to undertake a campaign of aggressive price cuts that have increased demand while retaining some profitability.
But what Musk was talking about — and what Tesla is clearly struggling with — is the Cybertruck, which will debut next month after a multi-year delay. Musk warned that the company had “dug its own grave” by trying to build the Cybertruck and that there would be “enormous challenges” in producing it profitably and at scale.
But “this is simply normal,” he added. “When you've got a product with a lot of new technology or any brand-new vehicle program, but especially one that is as different and advanced as the Cybertruck, you will have problems proportionate to how many new things you're trying to solve at scale.”
Every other EV company finds itself on the same narrow bridge. Rivian, for instance, is somewhere further behind Tesla in general but is fast making up ground. It scaled up its production of its R1T and R1S models last quarter faster than analysts thought, but was at last report still losing money on each vehicle. Rivian’s CEO, R.J. Scaringe, told me that the company is focusing on making its next line of vehicles, the R2 series, easier and simpler to manufacture to avoid this problem.
Even further behind Rivian are Fisker, which claims to have delivered 5,000 of its Ocean SUVs, and Canoo, which is struggling to stay solvent.
What’s hard about this moment, then, is that the downsides and risks of each approach have never been clearer.
If a legacy company completes its EV transition too quickly, then it risks finding itself with a fleet of electric vehicles that the public isn’t ready to buy. Companies like Ford, GM, Volkswagen, and Toyota must scale up a profitable EV product line at the same time that they sell vehicles from their legacy business.
Worldwide, no historic automaker has transitioned fully to making battery-electric vehicles, although some have come very close: BYD, the Chinese automaker that has surpassed Tesla as the world’s biggest producer of EVs, opted to quit making internal-combustion vehicles last year, but it still sells plug-in hybrids. Volvo, too, is making an attempt: It has promised to stop selling internal-combustion cars by 2030. But Volvo is owned by the Chinese automaker Geely, meaning that both of these companies can sell their cars to a much larger and more EV-interested Chinese domestic market.
Yet the second transition is tough, too. Although it may seem that EV-only companies have a lot of freedom (by lacking a network of EV-skeptical dealerships, for instance), they also have no alternative revenue to cushion themselves through a period of soft demand — they can’t ever cross-subsidize. Although it sold buses and not private vehicles, the American EV-only vehicle maker Proterra is indicative here: It went bankrupt earlier this year after getting stuck halfway through the valley of death.
America is going to have a domestic EV industry. By the mid-2030s, most automakers will be integrated EV companies, building and selling electric vehicles that include some in-house hardware, software, and battery components. Consumers will think of their new vehicles more as technology than as a simple mode of transportation, and they will power them from ubiquitous charging stations, which will be as mundane and abundant as wall outlets are today.
That future is certain. But what kinds of cars will we be driving, and what companies will count themselves among the electric elect? I couldn’t tell you. It will all depend on what happens next — on who makes it across the narrow bridge.
Thermasol