Do Tax Incentives Hike the Price of Plug-In Cars?

By Bill Moore

Posted: 26 Mar 2010

We know electric cars are going to be expensive: Tesla told us that. You can't fabricate a 50+ kWh battery pack from some 6,400 lithium ion laptop computer cells, not to mention all their attendant controls and auxiliary systems, as well as the drive motor, controllers, etc., and expect to pay the same price as a Kia Rio or Chevy Aveo.

No, electric cars have to be expensive, at least initially, but not for long. While its Roadster costs over $100,000, its next generation vehicle, the Model S, is slated to be about half that much. It's the same story over at its competitor, Fisker, where their second production model could be about half the price of the Karma. In fact, its starting to look like the sweet spot for advance plug-in cars, either battery-only or range-extended and blended mode plug-in hybrids is in the $30,000 to $45,000 price range, which, while still too rich for many middle class consumers, certainly falls into the market of the upper middle class of business, legal and medical professionals.

But could electric cars actually be priced even less? More specifically, are government incentives, in effect, jacking up the price of plug-in cars?

Take the case of Mitsubishi's i-MiEV, a wonderful little electric four-door that I first got to drive at the Tokyo Auto Show in 2007. While we all assumed the price of the vehicle was going to be more than its gasoline engine sibling, I wasn't prepared to hear that the price in Japan would be equivalent to somewhere in the neighborhood of US$48,000. I was certainly expecting something closer to U$30,000 or, hopefully less, a lot less. Well, it turns out that with government subsidies in Japan, the effective purchase price of the car is just over 3 million Yen or about $33,000, according to a June 2009 report in USA Today, representing a whopping 43% price reduction, or increase depending on your perspective.

Nissan just announced the price of the Leaf, which for months now they have hinted would be comparable to a vehicle like the Prius, thus putting the sticker price possibly in the upper US$20,000s range. The announced (or speculated) price will be between US$38,000-44,000 in the US, before the US$7,500 federal tax credit. Over in the UK, things are bit more confused with announced pricing between £28680 and £ 38699 for the i-MiEV. Here the government is offering a £ 5000 subsidy.

So, with all these subsidies, incentives, grants and tax credits flying around, one starts to wonder if OEMs aren't simply hiking the price of their cars to consumers at taxpayer expense. Of course, there's no way to know for certain, but human nature being what it is -- I am reading "Freakonomics" at the moment -- I wouldn't be at all surprised to learn that carmaker management is taking advantage of the all that money floating around. And in reality, even with these fat little inducements, I suspect that they are still losing money on these vehicles for which there is no certain market. If you knew you could sell half a million of them in 4 years time, you could amortize development costs and have a pretty good idea where your break even point is. But PHEVs and BEVs market projections are all over the map from less than 2% of car sales in 2020 to 10%; take your pick.

Of course, nothing gets the attention of the market quicker than good, ol' competition, especially from the likes of China and India, especially India and Tata's Nano. A recent survey of readers of TheStreet, indicated the more than 80% of them would buy a Nano EV if the price were under US$10,000, a number I came up with, as did Morningstar, the investment service. This likely explains why GM is working with Reva in India on an EV version of the Spark, and why Daimler and BYD are joining forces on a new brand of EVs. My sense is that by the time we hit the 2020s, and taking inflation into account, the price range of consumer affordable EVs and PHEVs will have long dipped below the US$30,000 price range and possibly even below $20,000, and all this without cushy government support.

So, while the majors need a bit of "pump priming" to get them interested in building EVs and PHEVs, I wouldn't get too comfortable with federal largess when it comes to doing the numbers on how much you can charge for an electric car in the future.

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