The electric vehicle (EV) market has gained a lot of traction in the past few years. This trend is due to a couple of reasons: one, governments worldwide have been pouring money into the industry, usually via subsidies, and two, consumers have begun shifting their preferences from carbon emissions vehicles. As this industry receives record levels of investment from governments and ordinary investors alike and continues to pique the interest of consumers, stock market investors should be on the lookout for the following EV market trends.
First, examining the U.S. domestic EV market, investors in EV stocks should expect to have a clearer sense of how the new EV tax credit structure embedded in the 2022 Inflation Reduction Act (IRA) in the U.S. has impacted consumer interest in the car market.
On the international stage, the first trend to observe is any renewed dynamism in China’s EV market, the world’s largest. China ended its zero-Covid strategy in December 2022, and since then, the country has reopened. Although China’s recovery has been slower than many analysts expected, consumer spending should pick up towards the latter end of 2023. This could positively impact electric vehicle makers such as Tesla (NASDAQ:TSLA) and BYD (OTCMKTS:BYDDY). Lastly, investors will see if the European Union continues to be a potential market for Chinese EV makers or if geopolitics will create new headwinds.
IRA Tax Credit Consequences
In August 2022, the Biden administration signed the Inflation Reduction Act (IRA) into law, and this bill came with several subsidies and tax credits to stimulate growth in the renewable energy sector. In particular, IRA increased the tax credit for electric vehicle purchases to $7,500, but there’s a catch. For an EV to qualify for the tax credit, it must have its final assembly in North America. This requirement made vehicles from several foreign manufacturers, including Japan’s Nissan (OTCMKTS:NSANY) and South Korea’s Hyundai (OTCMKTS:HYMTF), ineligible for the tax credit.
Although seemingly well-intentioned, the “made in America” stipulation could effectively limit consumers’ choices in a still-growing yet nascent market. Consumers could delay or reject purchasing an electric vehicle if they cannot purchase from certain car brands they prefer and trust. Still, policymakers in the U.S. government are still bullish on electric vehicles. According to a February publication this year, the Bureau of Labor Statistics, citing an S&P Global Mobility forecast, expects approximately 40% of passenger cars in the United States to be EVs by 2030
Reinvigorated EV Demand From Chinese Consumers
China is home to the world’s largest EV market, with over 6 million vehicles sold in 2022. The country also is the largest EV producer, generating 64% of global volume. In December 2022, the government finally ended its zero-Covid policy that kept many citizens at home and severely dampened economic activity. With most of these restrictive measures scrapped, China’s economy is in recovery mode, and this could mean a revival for EV makers selling to the Chinese market. However, there are important headwinds of which investors should be aware.
China’s government agencies have recently released economic data for April, and these figures largely underperformed analysts’ expectations, with industrial production up 5.6% year-over-year compared to the expected 10.9% and retail sales up 18.1% year-over-year compared to the forecasted 21%.
By market share, the two largest EV players in China are BYD and Tesla, with 35% and 14% of the “new energy vehicle” market, respectively. As China’s government focuses on recovery and stimulating domestic demand, these companies could benefit from the renewed demand.
The Effects of Geopolitics on Global EV Markets
The EV market is expanding because companies worldwide are competing to deliver quality products. Geopolitics could put a wrench into that model of global cohesion and trade.
As mentioned previously, the Inflation Reduction Act increased electric vehicle tax credits so consumers could claim up to $7500. Still, these tax credits are only eligible for cars manufactured in North America. Effectively, these measures will make many car companies with their manufacturing primarily based in Asia, specifically Japanese, Korean, and Chinese companies, less competitive. Couple this with the fact the U.S. and China are in the midst of a growing geopolitical rivalry, and Chinese EV companies are the most likely to rule out a strong push into the U.S. domestic market.
The European Union could be another test of whether or not geopolitical alignments triumph over what makes sense for average consumers. While the EV market in the EU is still dominated by expensive vehicles primarily made by European car companies, Chinese companies like BYD are gaining a foothold in the region. In Germany, shares of imported electric vehicles from China almost quadrupled from more than a year ago, from 8% to 28%. Whether the EU continues to keep an open market or opts to side with U.S.’s strategy in keeping the domestic market only for companies from Western-friendly nations is something EV stock-pickers should continue to watch.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
