Electric Vehicles and Consumer Demand: A Huge Market Miscalculation

A humiliating EV industry pullback is underway. The lesson? State-led industrial strategies never work in a market economy.

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All eyes were on the Michigan manufacturing plant where the Ford F-150 Lightning electric pickup truck was introduced to the world. President Biden visited in 2021 to much fanfare. Ford announced it would quadruple the volume of Lightning EVs before the first vehicles were even built. As recently as early 2023, Ford said it was struggling to meet the incredible demand for Lightning EVs, instituting an all-out push toward building out battery-operated vehicles of every type.

A few things were ignored along the way: An understanding of the buying preferences of the consumer, the realities of the market economy, and the market distortions caused by government interference.

For the last three years, the U.S. government has been steering the auto industry toward EVs by dangling hundreds of billions of dollars in subsidies, zero-interest loans, and cash infusions for battery production, EV charging networks, and consumer tax breaks. Automakers began cashing in on state-led EV market speculation, with lofty goals of phasing out most of their gas-powered models within a decade. At one point, Ford even raised prices of their Lightning EVs by as much as $20,000 over sticker price.

Gradually…then suddenly…

And then, in October 2023, an abrupt unraveling took place. Average interest rates on the purchase of EVs jumped from 4.9 percent to 7 percent, making monthly payments on a base level Lightning almost $1,000. An EV waiting list earlier in the year transformed into six months of inventory sitting on a dealer’s lot. Ford pulled back on EV investments and slashed production of Lightning EVs by half in response to dealers canceling allocations due to a lack of consumer demand and the ensuing glut of inventory. Ford reported a staggering loss of $4.7 billion last year in its EV business sector and projects an even bigger loss this year, between $5 billion and $5.5 billion.

Thousands of automotive dealers sent an urgent letter to the White House in November, pleading for an easing of regulations that will require a “transformation” of their business model into EV-only sales. Today, many dealers are selling EVs below their cost just to get them off their lots.

Reality sets in

Among consumers, the reality of EV ownership and operation has become too visible to be ignored. Early adopters of EVs willing to pay a premium for a battery-powered vehicle have already made their purchase, and the next wave of potential customers are proving to be much more hesitant. Many of them have friends and neighbors with stories of public charging challenges, high insurance and repair costs, and range depletion in hot and cold weather conditions. Few EV owners would dream of giving up their gas-powered vehicle as a backup.

Automakers are claiming that they are still confident that EVs will “eventually” gain market traction, though at a slower pace than initially stated. But today, a massive miscalculation in market demand and the inability to profitably produce EVs at scale has left automakers (not named Tesla) in a tremendous bind, facing low demand for its excessive inventory of unwanted EVs, plus the work stoppage in many factories that were intended for EV and battery production, not to mention the billions of dollars in sunk costs as well as expected losses in the future.

Such a reality has caused Chinese automaker Geely to take over funding of struggling EV maker Polestar from Volvo, the largest consolidation within the EV industry in nearly twenty years. Renault recently canceled plans for an IPO of its Ampere EV unit. A price war, caused by “easing demand,” is pushing EV makers Lucid and Rivian to offer steep discounts and unprecedented purchase incentives. And GM announced a one-year delay of a $4 billion factory overhaul to build new EVs a, citing “evolving EV demand.”

What have we learned?

There is a lesson in this humiliating auto industry pullback within the EV “transition:” State-led industrial strategies never work. There are three primary reasons why:

1) Centralized decision making is almost always wrong. Because it is nearly impossible to predict what the market will want in five- or ten-years’ time, it is best to leave this up to private companies to make their own bets, reap the rewards when they get it right, and bear the losses when they don’t. Hertz is a great example of a private company making a big market adjustment when their customers reacted unfavorably.

2) Governments tend to over-invest. The auto industry had significant manufacturing over-capacity long before it was swamped with tens of billions of taxpayer dollars to build EVs, leading to a collapse of pricing and massive losses. We are seeing that playing out right before our eyes over at Ford. The rush to grab state-issued funding leads to poor decision making with no incentive to apply spending wisely.

3) The state distorts the market with subsidies, tariffs, and quotas. It begins by spending billions on EV factories, then it issues subsidies for the EVs so people will actually buy them, then imposes tariffs and quotas to limit imported EVs from other countries where other governments have also invested too much. In essence, the state will have to pay out even more to prop up the factories to make a money-losing product that nobody wants, creating a financial doom loop that is very hard to stop. Until it does.

The multiple billions of dollars spent on the “race for EVs” and the endless warnings that we risked “getting left behind” if we did not move immediately would have been even more destructive had the administrative state not been so incredibly inept and prone to failure. That alone might spare us the worst of the financial pain.

And so it goes; the about-face on the EV “transition” is underway. Auto manufacturers are pulling back, the grand projects for battery factories, shiny new EV plants, and charging infrastructure will be massively scaled back or scrapped altogether, and billions of taxpayer dollars will have been wasted.

The EV will then resume its rightful place in the market as niche product with limited utility for wealthy people who don’t have far to drive and with a garage to charge it in overnight, parked next to their gas-powered car which is used for travel that requires driving more than 200 miles in less-than-ideal weather without running out of fuel before returning home.