Competition, government incentives and falling raw material prices are making battery-powered cars more affordable sooner than expected.a
More quickly than seemed possible a few months ago, sticker prices for electric vehicles are falling closer to the point where they could soon be on a par with gasoline cars.
Increased competition, government incentives and falling prices for lithium and other battery materials are making electric vehicles noticeably more affordable. The tipping point when electric vehicles become as cheap as or cheaper than cars with internal combustion engines could arrive this year for some mass market models and is already the case for some luxury vehicles.
Prices are likely to continue trending lower as Tesla, General Motors, Ford Motor and their battery suppliers ramp up new factories, reaping the cost savings that come from mass production. New electric vehicles from companies like Volkswagen, Nissan and Hyundai will add to competitive pressure.
The battery-powered version of G.M.’s Equinox crossover, for example, will start around $30,000 when it arrives this fall, the carmaker has said. That is $3,400 more than the least expensive gasoline-fueled Equinox. But factoring in government incentives, the electric Equinox should be cheaper. Like all electric vehicles, the car will need less maintenance, and the electricity to power it will cost less than the gasoline used by its combustion engine equivalent.
Only a few months ago, electric vehicle buyers faced long waiting lists, and dealers marked up sticker prices by thousands of dollars. Used electric vehicles sometimes sold for more than new ones because buyers were willing to pay a premium to get one right away. At the end of 2022, the average price of an electric vehicle was $61,488, compared with $49,507 for all passenger cars and trucks, according to Kelley Blue Book.
There are still waiting lists for some models like the Ford F-150 Lightning pickup truck, but it has become easier and cheaper to find and buy new and used electric models.
The first major crack in the trend of rising prices came in January when Tesla cut prices for the Model 3 and Model Y, the two best-selling electric cars, by thousands of dollars. With a starting price of $43,500 before government incentives, a Model 3 is now $300 less than the least expensive BMW 3 Series sedan. A Model Y, at $55,000 before tax credits, costs about as much as a comparable Lexus RX.
Ford also cut the price of its Mustang Mach-E, the best-selling electric vehicle in the United States after the Teslas. Even Lucid Motors, a maker of expensive electric sedans that do not qualify for tax credits, is feeling pressure to cut prices and this week began offering $7,500 discounts on cars that start at $107,400.
Tesla “saw there is increasing competition and some of the competition is quite good,” said Brian Moody, executive editor for Kelley Blue Book. He added, “If the No. 1 seller of a certain type of car reduces their prices, that is going to have an impact on the average.”
Major impetus for the price cuts came from the Inflation Reduction Act, legislation passed by Democrats in Congress last year that provides tax credits of up to $7,500 for electric car buyers. To qualify, battery-powered or plug-in hybrid sedans have to sell for less than $55,000, while pickups and sport utility vehicles qualify only if the retail price is below $80,000. By cutting prices, Ford and Tesla increased the number of models that could benefit from the tax credits.
Manufacturers “are working to continue to pull in shoppers by making these vehicles eligible for tax credits,” said Jenni Newman, editor in chief of Cars.com, an online auto sales site.
Potentially more significant are subsidies paid to companies that manufacture batteries in the United States, part of a drive by the Biden administration to establish a domestic supply chain and reduce dependence on China.
The subsidies, which were also part of the Inflation Reduction Act, could cut the cost of making electric vehicles by as much as $9,000. That break and the tax credits for buyers of electric cars could allow battery-powered vehicles to achieve price parity with gasoline cars as soon as this year, according to the International Council on Clean Transportation, a research and advocacy group. That is three to five years sooner than would be the case without incentives.
“If the automakers pass that on to consumers, consumers will really benefit,” said Stephanie Searle, a program director at the council who oversees research on passenger vehicles.
Declines in new car prices are pushing down used electric vehicle prices, too. They have fallen 17 percent since July, according to Recurrent, which tracks the used car market. That’s largely because Tesla cut the price of the Model 3 and G.M. lowered the price of the Chevrolet Bolt by almost $6,000 last year. Under the Inflation Reduction Act, used cars can also qualify for a tax credit of up to $4,000. That is important because most people buy used vehicles.
Falling prices for materials like lithium and cobalt have also helped. The price of lithium used in batteries has fallen 20 percent from its peak in November, though the metal still costs more than twice as much as it did at the end of 2021. Cobalt has fallen by more than half since May, in part because carmakers are selling some models that do not require it, reducing demand.
New lithium mines are beginning to produce ore, which could keep a lid on prices. Sigma Lithium will begin shipping raw material from a site in Brazil to LG Energy Solution, its main customer, as early as April, Ana Cabral Gardner, Sigma Lithium’s chief executive, said in an interview. The site will be the first new source of lithium in Latin America for several years.
“It’s doable, and we’re there,” Ms. Cabral Gardner said.
Of course, these advantages could fade because of new supply chain problems. Lithium remains in short supply, and prices could spike again. Beginning next month, new regulations governing the $7,500 tax credits will require electric car batteries to be made in the United States, Canada or Mexico with raw materials from North America or another U.S. trade ally. It is unclear how many vehicles will meet those requirements.
Right now, the Inflation Reduction Act tax credits are available to vehicles assembled in North America, which partly shields the U.S. automakers from competitors like Hyundai. The company’s Ioniq 5 has sold well, but it is imported from South Korea. Hyundai is building a factory in Georgia that will start assembling electric vehicles in 2025. (Buyers may still collect a tax credit indirectly if they lease foreign-made electric vehicles.)
The Treasury Department, which is responsible for carrying out the Inflation Reduction Act, gave in to auto industry lobbying this month and classified several popular crossovers as S.U.V.s rather than sedans. That allows vehicles like the Mustang Mach-E and all versions of the Model Y to qualify for tax credits if they sell for $80,000 or less. Before that change, the Mustang and lighter versions of the Model Y were classified as sedans, subject to the $55,000 limit.
The decision removes some pressure on the carmakers to keep prices low. Tesla quickly raised the price of the Model Y by $2,000. Ford said it had no plans to raise prices of the Mach-E.
The Inflation Reduction Act is also under attack by many congressional Republicans even though automakers and battery companies are building factories in states, like South Carolina, Texas and Tennessee, where voters tend to elect Republicans.
But arguably the most powerful force driving down prices is not the commodity markets or Washington.
As electric vehicle sales soar — rising 66 percent in the United States last year to 810,000, according to Kelley Blue Book — automakers are getting better at making them. Ford has reduced the weight of the Mach-E by 70 pounds, increasing range and lowering cost, by eliminating some wiring, Jim Farley, the company’s chief executive, told investors this month.
General Motors and LG Energy Solution began producing batteries at a new plant in Ohio last year through a joint venture, Ultium Cells. A second Ultium plant, in Tennessee, is expected to begin production this year, and a third is slated for Michigan. Generally speaking, costs come down as companies produce more of a product.
Auto executives say they are finding it is easier and cheaper to design and build new electric models than gasoline-powered ones.
The battery cells made by Ultium, for example, are part of a collection of components that can be mixed and matched in many types of vehicles. Carmakers have long used the same platforms in multiple models, but the strategy works even better with electric vehicles because the cars have far fewer parts than internal combustion vehicles.
The Ultium platform cuts the time needed to develop a new vehicle by almost two years, Dan Nicholson, vice president of electrification at G.M., said at a Federal Reserve Bank of Chicago conference in January.
As a result, G.M. will be able to introduce three Chevrolet electric vehicles this year: the Equinox, a Silverado pickup truck and a Blazer S.U.V. “That’s how we get the economies of scale,” Mr. Nicholson said.
Suppliers have been looking for efficiencies, too. Matthews International, based in Pittsburgh, has developed a process for coating the metal foil that separates the positive and negative electrodes of a battery. Instead of a liquid solution, the process uses a powder.
The process requires less equipment and a lot less space, said Greg Babe, the company’s chief technology officer. Those kinds of incremental improvements reduce costs without major technical breakthroughs.
Interest in the approach developed by Matthews has soared since President Biden signed the Inflation Reduction Act. “It changed almost overnight,” Mr. Babe said. “The floodgates opened.”