Electric vehicle demand could take a hit next year with several models expected to lose crucial tax credits as the U.S. moves to cut China out of its battery supply chain, according to top analysts. The Treasury and Energy Departments earlier this month laid out plans to end U.S. dependence on China and cajole carmakers into sourcing components and minerals domestically or from allied nations that have free trade agreements with the U.S. Starting next year, electric vehicles will not qualify for the $7,500 tax credit under the Inflation Reduction Act if the battery components are manufactured or assembled by companies controlled by China. The rules grow stricter in 2025 with electric vehicles no longer qualifying for the credit if they contain critical minerals extracted, processed or recycled by companies controlled by China. The changes are a blow to overall electric vehicle adoption given the dominant role China plays in the U.S. battery supply chain, Ronald Jewsikow, an analyst with Guggenheim, wrote in a December note. Rebecca Wen, an JP Morgan analyst, also sees the rules hurting U.S. demand. A major caveat is that leased vehicles are not subject to these rules, though the tax credit in this case goes to the company that provides the lease, not the actual consumer. Barclays analyst Dan Levy expects automakers and dealers to pass the credit on and offer more affordable leases as a workaround. There is no complete list of EVs that will qualify for the tax credits in 2024 and those that will not at the moment as automakers review the proposed rules. Tesla and Ford, however, have already indicated that top selling models in their lineups will lose the benefits. Tesla has notified potential buyers on its website that tax credits for its Model 3 rear-wheel drive and long range vehicles will end on Dec. 31. The automaker did not provide a reason, but it sources lithium iron phosphate batteries from the Chinese company CATL for some of its models, according to JP Morgan. Ford ‘s Mach-E, the automaker’s top selling EV, is expected lose its tax credit, according to the company. The new rules also create uncertainty about whether a licensing agreement between Ford and China’s CATL to produce batteries at a plant in Michigan will be allowed. With GM, the picture is unclear at the moment. The automaker said it is reviewing the Treasury’s guidance, but believes it is “well positioned to maintain the consumer purchase incentive for many of our EVs in 2024 and beyond.” Levy wrote in a December note that Barclays expects “additional vehicles to announce tax credit ineligibility for 2024 — further increasing in 2025 as raw material restrictions come into effect.” IRA rules add to risk Demand for electric vehicles was already facing headwinds as consumers worry about battery range, accessibility to charging, and high prices compared to gas-powered vehicles and hybrids in an environment of elevated interest rates. Some 57% of U.S. consumers said they were not likely to purchase an electric vehicle in a September survey conducted by Yahoo Finance and Ipsos . When asked what concerns them most about buying an EV, 77% of those polled pointed to the lack of charging stations, while 73% worried about driving range and 70% felt the cars were too expensive. The poll had about 1,000 respondents. The cost of electric powertrains is not expected to come into line with internal combustion engines until 2026 at the earliest, according to a Wolfe Research. That projection, however, factors in IRA tax credits that are now becoming more difficult to qualify for under the tighter rules. Electric vehicle makers should be able to fully on-shore their battery supply chains to meet the tighter qualifications for IRA tax credits, according to Guggenheim research from August last year. But the critical minerals requirement for tax credits will be difficult to meet after 2024 with China accounting for about 70% global lithium processing capacity and more than 60% of the world’s graphite supply, according to Guggenheim. Deutsche Bank has slashed its forecast for U.S. electric vehicle penetration in 2024 to 9% from 11.8% prior, according to a December note. Wolfe sees year-over-year electric vehicle growth slowing from 50% in 2023 to 46% in 2024 and then dropping to 35% in 2025. Guggenheim: Tesla ‘relative winner’ Qualifying for tax credits will be difficult, but Tesla should emerge as a “relative winner” in a tough environment because the company has done more than any other carmaker to secure and source supply that is IRA eligible, according to Guggenheim. Tesla is already manufacturing batteries at scale in the U.S. “Ultimately, IRA eligibility will increasingly become a scale game, and TSLA has it,” Jewsikow wrote in his December note. Tesla is also the clear winner when it comes to charging, another industry headwind, with lower costs and far better quality compared to its competitors, according to Wolfe Research. Still, Tesla now has to contend with boosting sales when its most affordable vehicle, the Model 3 rear wheel drive, is expected to become more expensive due to the loss of tax credits. The electric vehicle maker has also noted that “reductions” to tax credits for the Model Y and Model X are likely after Dec. 31. TSLA YTD mountain Tesla shares year to date. Tesla has already slashed prices by 16% this year in an effort to increase its volume by 485,000 vehicles, putting downward pressure on its gross margins, according to Bernstein analyst Toni Sacconaghi, who is very bearish on the company . Tesla will have to cut prices again in 2024 to grow volume, Sacconaghi wrote in a December note. Those cuts will weigh on Tesla’s profits, with Sacconaghi projecting earnings per share of $2.59 for 2024 compared to the consensus estimate of $3.34. Tesla’s third-quarter net income plummeted 44% from a year ago. CEO Elon Musk said he was worried about high interest rates, saying consumers are focused on how much monthly car payments will cost. Yet Tesla’s stock is still up more than 80% for the year, seeming to defy the headwinds the company faces — at least for now. Deutsche Bank, which is bullish on Tesla long term, is worried that the consensus 2024 volume outlook of 2.2 million will ultimately disappoint and be revised downward to 2 million, according to December note. Sacconaghi, for his part, is recommending that investors short Tesla, arguing that the EV market is saturated with its narrow lineup of vehicles at time when there is a lot more competition. His stock price target for Tesla is $150, implying about 37% downside from the last closing price of $237.01. The Bernstein analyst’s view, however, is contrarian. Wall Street has an average price target for Tesla of $239.39, which implies no upside but also little value lost. Analysts are about equally divided with 43% rating Tesla as overweight or buy and 43% recommending a hold, according to FactSet. GM, Ford headwinds Among the traditional automakers, GM’s issue will be making the cars more profitable. The automaker has set the bar high for improving its EV margins in 2024 and the company faces a risk that it will not deliver given its unproven track record and unclear volume trajectory, according to Deutsche Bank. GM is trying to swing from negative EV margins to mid-single digit profitability by 2025, but the company is facing difficulties accelerating its production volume. The automaker has faced delays ramping up production of its Ultium EV platform due to delivery issues with its automation equipment supplier, which is constraining capacity. GM YTD mountain GM shares year to date GM is “moderating” the pace of its EV production acceleration in 2024 and 2025 to maintain strong pricing, CEO Marry Barra told analysts during the company’s third-quarter earnings call. Ford faces the question of whether its EV losses will deepen in 2024, according to Deutsche. The automaker announced in October that it was postponing $12 billion in spending on EV manufacturing capacity, saying customers were no longer willing to pay a premium to hybrids and gas-powered cars. While the Mach-E will likely lose tax credits, the all-electric F-150 Lightning is expected to qualify for the benefit, according to Barclays. But Ford is slashing production of the F-150 Lightning by half in 2024 due to demand headwinds. As for Ford’s EV battery plant in Michigan, the automaker will enter discussions with CATL to find a way to construct the licensing agreement so it meets the new IRA rules, according to JP Morgan. Sen. Marco Rubio, R-Fla., recently said the plant appears to be IRA eligible, though nothing is final yet. F YTD mountain Ford shares year to date Ford, however, announced last month that it will scale back production capacity at the plant by 43% to 20 gigawatt hours per year and slash employment to 1,700 jobs from 2,500. The two automakers are down overall for the year with Ford stock having shed more than 6% while GM is down 1.46%, as the recently concluded United Auto Workers strike weighed on the stocks. Upside surprise in 2024? Though Ford and GM faces headwinds, investors could view the traditional automakers as “tactically safer” bets with potential for upside surprise in 2024 due to deep cost cuts, rationalized capital spending and smaller EV volumes than previously assumed, according to Deutsche. Ford’s and GM’s stock have surged in the past month after they reached agreements to end the UAW strike, though Ford is underperforming GM. Ford shares have gained about 10% while GM has rallied 23.5%. GM shares have also ridden a recently announced $10 billion share buyback and a 33% bump in its quarterly dividend. Some 46% of analysts have a buy or overweight rating on Ford, while 42% have placed a hold with an average stock price target of $13.09, implying 17% upside from Tuesday’s closing price of $11.16, according to FactSet. Wall Street is more bullish on GM right now with 65% of analysts buy or overweight with 31% placing a hold with an average price target of $45.65, suggesting 36% upside from Tuesday’s close of $33.42, according to FactSet. UBS recommends GM over Ford, though the bank is a buy on both stocks, pointing to the automaker’s progress on delivering more Ultium models to market and citing confidence in its path to mid-single-digit margins on electric vehicles. But GM’s margin target for EVs now includes the IRA tax credits, creating some uncertainty over whether the goal could face headwinds if some of its vehicles fail to qualify under the new rules. Playing the parts suppliers Overall, Deutsche Bank is recommending socks that are broadly diversified across both types of powertrains, gas and electric, as a hedge given the recent cuts to EV expectations. Investors may want to avoid investments in the automakers and stick with part suppliers that don’t have too many of their eggs in the electric basket. The parts supplier Autoliv is a top pick of Deutsche because it shouldn’t be hurt by the slower-than-expected EV adoption. A majority of analysts, 52%, have a hold on Autoliv’s stock, but 40% rate it buy or overweight, according to FactSet. The average price target of $111 implies 8.7% upside from Tuesday’s close of $101.29. Deutsche also recommends Mobileye because its business is spread equally across EVs and gas cars. Its cost-effective advanced driver-assistance systems will prove appetizing to automakers globally, the firm said. Analysts are very bullish on Mobileye with 82% rating the stock as buy or overweight with an average price target of $48.13, or 19% upside from Tuesday’s closing price of $40.35. The bank also picked Goodyear , which is undergoing a strategic transformation that should unlock serious value with the company potentially becoming one of the more compelling investments in 2024, the firm said. Analysts are divided on Goodyear right now with half saying buy and the other half calling for a hold. The average price target is $16.40, which is 17% above Tuesday’s close of $14.03. — CNBC’s Michael Wayland contributed to this report
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