Some observations about EVs and green-energy deals.
Noah Rothman discusses the possibility that there will be an UAW strike in a post here. For obvious reasons, this will be a story to watch, but I was particularly struck by this section in Noah’s account:
[T]he UAW made headlines in May when it sent a letter to members announcing its intention to withhold its endorsement of Joe Biden’s second term in office. “The federal government is pouring billions into the electric vehicle transition, with no strings attached and no commitment to workers,” the letter read. “We want to see national leadership have our back on this before we make any commitments.” If the Biden White House is forced to choose between the demands of autoworkers and the highly subsidized greening of the American economy, it will choose the latter.
There have been few political costs associated with the Democratic Party’s addiction to throwing money at the green-energy sector, but the prospect of a UAW strike might finally impose some. An ugly intra-coalition dispute would highlight traditional blue-collar labor’s secondary role in a party dominated by highly educated, well-heeled, culturally progressive Americans.
Rothman argues that, if forced to, the Biden administration will choose greenery over the demands of autoworkers, and he may well be right, although we can be sure that the administration will do what it can to avoid making that choice. Under the circumstances, the fact that the forced switch to EVs is leaving automakers unhealthily dependent on government means that the administration will be in a better position than usual to pressure the big three to concede some ground.
For an indication of how great that dependency is, it’s worth looking at this Wall Street Journal report from November.
Here’s an extract:
GM also said its capital expenditures would rise to between $11 billion and $13 billion a year through 2025, from $9 billion to $10 billion this year, as it brings forward EV investments. Such numbers play into investors’ fears that Detroit is on a hugely expensive road to a technology that expensive battery metals will make less profitable for years to come.
The good news: GM expects the Inflation Reduction Act to add between $3,500 to $5,500 per vehicle in profit — a transformative 5 to 7 percentage points in margin. Suddenly, EVs could be as profitable as conventional equivalents.
Consumers have understandably focused on the new $7,500 tax credit for their EV purchases available from next year, which comes with many more strings attached than the one it replaces. Notably, half of it will depend on manufacturers’ sourcing EV materials from outside of China, which will take time for anyone to meet.
But consumer tax credits are only one piece of the pie. A tax credit for business EV purchases of up to $7,500 isn’t subject to the same conditions, which may explain why GM said it would focus first on fleet sales when it launches its electric version of the Chevrolet Silverado pickup truck next year. And then there are huge tax credits for battery production: $35 million for every gigawatt-hour of cells, and a further $10 million to package those cells into modules. . . .
Who pays the piper. . . .
Against that, there is the reality that, even with government help, a huge increase in the big three’s wage bills may become hard for them to manage at the same time as they are pouring billions into EVs, especially if the profits from their conventional car business drop in line with the schedule envisaged by the EPA, the EU, the U.K. and various U.S. states, a situation that may be made worse by recession (should one come), and slower-than-expected uptake of EVs. And then factor in what might happen in Europe (which matters for both Ford and Stellantis) if a wave of imported Chinese EVs starts disrupting the auto markets there.
Put another way, it’s not too difficult to imagine a scenario in which the big three run into some serious turbulence, in which case they may have to turn to their not-so-silent partner (because that’s what the U.S. government now is) for help. Were that to happen, taxpayers would then get their chance to share in the pain that shareholders would already have felt.