These EVs loses tax credits as U.S. boots China from supply chain
Top analysts say demand for electric vehicles could take a hit next year as the United States moves to cut China out of the battery supply chain, with several models expected to lose important tax credits. The U.S. Treasury and Energy Departments laid out plans earlier this month to end U.S. dependence on China and induce automakers to source parts and minerals domestically or from allies with which the U.S. has free trade agreements. Starting next year, electric vehicles will no longer be eligible for the $7,500 tax credit under the Inflation Reduction Act if their battery components are manufactured or assembled by Chinese-controlled companies. By 2025, those rules will become stricter and electric vehicles will no longer be eligible for the credit if they contain critical minerals extracted, processed or recycled by Chinese-controlled companies. Guggenheim analyst Ronald Jewikow wrote in a December report that these changes have a negative impact on overall EV adoption given China’s dominance of the U.S. battery supply chain. blow. JPMorgan analyst Rebecca Wen also believes the rules will hurt U.S. demand. One major caveat is that leasing a vehicle is not subject to these rules, although the tax credit in this case belongs to the company providing the lease, not the actual consumer. Barclays analyst Dan Levy expects automakers and dealers to pass on credit and offer more affordable leases as a solution. While automakers review the proposed rules, there is currently no complete list of electric vehicles that would be eligible for the 2024 tax credit and those that are currently ineligible. However, Tesla and Ford have said the best-selling models in their lineups will lose those benefits. Tesla informed potential buyers on its website that the tax credit for its Model 3 rear-wheel drive and long-range vehicles will end on December 31. The automaker did not provide a reason, but it purchased lithium iron phosphate batteries from Chinese company CATL for some models, according to JPMorgan. Ford said it expects to lose tax credits for its best-selling electric vehicle, the Mach-E. The new rules also create uncertainty about whether Ford and China’s Contemporary Amperex Technology Co., Ltd. will be allowed to sign a licensing agreement to produce batteries at the Michigan plant. For General Motors, the situation is unclear. The automaker said it is reviewing Treasury guidance but believes it “has the ability to maintain consumer purchasing momentum for many of our electric vehicles in 2024 and beyond.” Barclays expects “more pipelines to declare themselves ineligible for tax credits in 2024, with further increases in 2025 as raw material restrictions take effect,” Levy wrote in a December report. IRA rules increase risks Demand for electric vehicles is already facing headwinds in a rising interest rate environment as consumers worry about battery range, ease of charging and high prices compared with gasoline-powered cars and hybrids. About 57% of U.S. consumers said they were unlikely to buy an electric vehicle, according to a September survey by Yahoo Finance and Ipsos. When asked what their biggest concerns were when buying an electric car, 77% of respondents pointed to a lack of charging stations, 73% were worried about driving range, and 70% thought the car was too expensive. The poll had approximately 1,000 respondents. Wolfe Research said it expects the cost of electric powertrains to be in line with internal combustion engines until 2026 at the earliest. However, this forecast takes into account IRA tax credits, which are now increasingly difficult to obtain under stricter rules. According to Guggenheim research last August, electric vehicle manufacturers should be able to completely shift their battery supply chains domestically to meet stricter qualifications for IRA tax credits. But Guggenheim said that after 2024, the critical mineral requirements for the tax credit will be difficult to meet because China accounts for about 70% of global lithium processing capacity and more than 60% of global graphite supply. According to a report in December, Deutsche Bank has lowered its 2024 U.S. electric vehicle penetration forecast to 9% from the previous 11.8%. Wolff expects annual EV growth to slow from 50% in 2023 to 46% in 2024, then to 35% in 2025. Guggenheim: Tesla ‘relative winner’ Qualifying for tax credits will be difficult, but Tesla should be Guggenheim said the company is a “relative winner” in a tough environment because the company It does more than any other automaker to secure and source IRA-eligible supply. Tesla already produces batteries at scale in the U.S. “Ultimately, IRA eligibility will increasingly become a scale game, and TSLA has it,” Jewishkow wrote in a December note. Wolfe Research said Tesla is also the clear winner when it comes to charging, another industry headwind, as it costs less and is of much better quality than its competitors. Still, Tesla must now contend with sales growth as its most affordable model, the rear-wheel-drive Model 3, is expected to become more expensive due to the elimination of the tax credit. The electric car maker also noted that tax credits for Model Y and Model X may “reduce” after December 31. TSLA Shares of Tesla are up so far this year. Bernstein analyst Toni Sacconaghi, who is very bearish on the company, said Tesla has cut prices 16% this year to increase sales by 485,000 vehicles, which has given its gross margins brought downward pressure. Sacconaghi wrote in a December report that Tesla would have to cut prices again in 2024 to increase sales. These cuts will impact Tesla’s bottom line, with Sacconaghi forecasting earnings of $2.59 per share in 2024, compared with the consensus estimate of $3.34. Tesla’s third-quarter net profit fell 44% year-on-year. Chief Executive Musk said he was concerned about high interest rates and said consumers were focused on the cost of their monthly car payments. Yet Tesla’s shares are still up more than 80% this year, seemingly overcoming the headwinds the company faces — at least for now. According to the December report, Deutsche Bank, which has long been bullish on Tesla, was worried that its sales forecast of 2.2 million vehicles in 2024 would ultimately disappoint, so it was revised down to 2 million vehicles. Sacconaghi suggested that investors should short Tesla. He believes that the electric vehicle market is saturated, its model lineup is narrow, and competition has become more intense. His price target for Tesla is $150, down about 37% from the previous closing price of $237.01. However, analysts at Bernstein have a different view. Wall Street’s average price target for Tesla is $239.39, which implies no upside but also minimal loss in value. Analysts are broadly split, with 43% rating Tesla an overweight or buy, and 43% recommending a hold, according to FactSet. Headwinds for General Motors and Ford Among traditional automakers, General Motors’ problem will be how to increase profits from its cars. Deutsche Bank said the automaker has set a high bar for improving electric vehicle profit margins in 2024, but faces the risk of missing the target given its unproven track record and unclear sales trajectory. General Motors is trying to shift electric vehicle margins from negative to mid-single-digit profitability by 2025, but the company is facing difficulty in ramping up production. The automaker faces production delays for its Ultium EV platform as delivery issues from automation equipment suppliers limit production capacity. GM Chief Executive Marry Barra told analysts on the company’s third-quarter earnings call that so far this year, GM is “slowing” the pace of its electric vehicle production acceleration in 2024 and 2025. to maintain strong pricing. Deutsche Bank said Ford faces questions about whether electric vehicle losses will worsen in 2024. The automaker announced in October it was delaying $12 billion in spending on electric vehicle manufacturing capacity, saying customers were no longer willing to pay a premium for hybrid and gasoline-powered vehicles. Barclays said that while the Mach-E may lose tax credits, the all-electric F-150 Lightning is expected to qualify for them. But Ford plans to cut F-150 Lightning production in half in 2024 due to demand headwinds. JPMorgan Chase said that as for Ford’s electric vehicle battery factory in Michigan, the automaker will discuss with CATL to find ways to formulate a licensing agreement to meet the new IRA rules. Florida Republican Sen. Marco Rubio recently said the plant appeared to qualify as an IRA, but nothing has been finalized yet. However, Ford announced last month that it would cut the plant’s production capacity by 43%, to 20 gigawatt hours per year, and cut employment from 2,500 to 1,700. The two automakers have collectively fallen this year, with Ford down more than 6% and General Motors down 1.46% as the recently ended UAW strike weighs on shares. Are there any surprises in store for 2024? Deutsche Bank said that despite the headwinds faced by Ford and General Motors, investors may view traditional automakers as “tactically safer” bets due to deep cost cuts, rationalization of capital expenditures and lower electric vehicle production than previously expected. They could surprise higher in 2024. Shares of Ford and GM have surged over the past month after they reached an agreement to end the UAW strike, although Ford has lagged GM. Ford shares rose about 10%, while General Motors rose 23.5%. GM’s stock price also benefited from a recently announced $10 billion in stock buybacks and a 33% increase in its quarterly dividend. About 46% of analysts have a buy or overweight rating on Ford, and 42% have a hold rating, according to FactSet. The average price target is $13.09, which represents a 17% upside from Tuesday’s closing price of $11.16. . According to FactSet data, Wall Street is now more optimistic about General Motors, with 65% of analysts buying or increasing their holdings, of which 31% are holding. The average price target is $45.65, which is a 36% increase from Tuesday’s closing price of $33.42. UBS recommends General Motors over Ford despite buying both stocks, noting the automaker’s progress in bringing more Ultium models to market and delivering mid-single-digit margins on its electric vehicles path with confidence. But GM’s EV margin target now includes IRA tax credits, creating some uncertainty about whether the target could face headwinds if some of its vehicles fail to qualify under the new rules. . Overall, Deutsche Bank recommends socks that are broadly diversified across both powertrain types, gas and electric, as a hedge against recent EV forecast downward revisions. Investors may want to avoid investing in automakers and stick with parts suppliers that don’t have many eggs in the EV basket. Parts supplier Autoliv is Deutsche Bank’s top choice because it won’t be hurt by slower-than-expected adoption of electric vehicles. A majority of analysts (52%) hold Autoliv stock, but 40% view the company as a buy or overweight, according to FactSet. The $111 average price target implies an 8.7% upside from Tuesday’s closing price of $101.29. Deutsche Bank also recommends Mobileye because its business is evenly distributed between electric vehicles and combustion vehicles. The company said its cost-effective advanced driver assistance systems will be favored by global automakers. Analysts are very bullish on Mobileye, with 82% rating the stock a buy or overweight, and the average price target is $48.13, a 19% increase from Tuesday’s closing price of $40.35. The bank also selected Goodyear, which is undergoing a strategic transformation that should unlock significant value and has the potential to become one of the more attractive investments in 2024. Analysts are currently split on Goodyear, with half calling it a buy and the other half calling it a hold. The average price target is $16.40, which is 17% higher than Tuesday’s closing price of $14.03. —CNBC’s Michael Wayland contributed to this report
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