The Six Months That Short-Circuited the Electric-Vehicle Revolution
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The Six Months That Short-Circuited the Electric-Vehicle Revolution

By MIKE COLIAS
Thu, Feb 15, 2024 8:41amGrey Clock 7 min

The Michigan plant where the F-150 Lightning electric truck is built used to vibrate with excitement.

President Biden visited in 2021 and test drove the blazing-fast pickup. Before the first ones even started rolling off the assembly line in the spring of 2022, Ford said it would expand the factory to quadruple the number it could build.

That energy is rapidly fading. Ford is cutting the plant’s output by half, and workers are relocating to other facilities, mostly those making gas-powered pickups and SUVs.

The sudden change “was a little bit of a shocker,” said Matthew Schulte, who inspects trucks at the factory in suburban Detroit. “Reality has set in.”

As recently as a year ago, automakers were struggling to meet the hot demand for electric vehicles. In a span of months, though, the dynamic flipped, leaving them hitting the brakes on what for many had been an all-out push toward an electric transformation.

A confluence of factors had led many auto executives to see the potential for a dramatic societal shift to electric cars: government regulations, corporate climate goals, the rise of Chinese EV makers , and Tesla ’s stock valuation , which, at roughly $600 billion, still towers over the legacy car companies.

But the push overlooked an important constituency: the consumer.

Last summer, dealers began warning of unsold electric vehicles clogging their lots. Ford, General Motors , Volkswagen and others shifted from frenetic spending on EVs to delaying or downsizing some projects. Dealers who had been begging automakers to ship more EVs faster are now turning them down .

Even Tesla Chief Executive Elon Musk warned of “notably lower” growth in vehicle deliveries for the company in 2024.

“This has been a seismic change in the last six months of last year that will rapidly sort out winners and losers in our industry,” said Ford Chief Executive Jim Farley on an earnings call in early February.

EV sales continue to grow, and auto executives say they remain committed to the technology. But many are recalibrating their plans.

Ford has pulled back on EV investment and could delay some vehicle launches, while increasing production of hybrids , which run on both gasoline and electricity. It lost a staggering $4.7 billion last year on its battery-powered car business and projects an even bigger loss this year, in the range of $5 billion to $5.5 billion.

Some auto executives acknowledge they got ahead of the market with overzealous demand projections. Pandemic-era supply-chain shocks and a resulting car shortage created long waiting lists and early buzz for EVs, making the industry overly optimistic.

Only later, as a barrage of new EVs hit the market, did executives realise that car buyers were more discerning than they expected. Many were hesitant to pay a premium for a vehicle that came with compromises.

Farley and other industry CEOs are still confident that EVs will eventually take off, albeit at a slower pace than initially envisioned. But for now, the massive miscalculation has left the industry in a bind, facing a potential glut of EVs and half-empty factories while still having to meet stricter environmental regulations globally.

“Ultimately, we will follow the customer,” GM Chief Executive Mary Barra told analysts this month.

In 2020, as the car market unexpectedly heated up during pandemic lockdowns, traditional automakers shifted from dabbling in electric cars to launching an all-out blitz. They outlined plans to build dozens of battery factories, EV assembly plants and vehicle models, pledging more than a half-trillion dollars of investment in the technology through 2026, according to consulting firm AlixPartners.

The rapid rise of Elon Musk’s Tesla added to the urgency. Over just a few years, its market value rocketed past those of legacy car companies. Wall Street cheered strategic moves toward electrics and bid up shares of EV startups.

Tougher auto-emissions restrictions in Europe and China gave car companies little choice but to add more EVs or risk penalties. The Biden administration steered the industry toward more environmentally friendly cars, earmarking hundreds of billions in subsidies for battery production, consumer tax breaks and EV chargers.

At the start of 2023, car executives were expecting to cash in on their EV bets.

GM’s Barra had been among the earliest and most vocal industry advocates of shifting to EVs. The Detroit automaker set a goal of phasing out nearly all gas-engine vehicles by 2035.

“This is a breakout year,” Barra said on GM’s January 2023 earnings call . GM was finally making its own batteries and said it was ready to start cranking out EVs to satisfy pent-up demand for a new electric Cadillac SUV and Hummer pickup truck.

Ford, emboldened by swelling orders for the F-150 Lightning, increased prices for the pickups by as much as $20,000 over the original sticker. Elsewhere, car executives were talking up their plans to accelerate EV factory work.

Trouble ahead

Then warning signs began to appear. In mid-January of last year, Tesla slashed prices on some models by more than 20%, triggering a chain reaction.

Used-car dealers who had Tesla Model 3s and Model Ys in stock saw their values plummet by thousands of dollars. Customers who had bought Teslas at higher prices were furious.

“Why cut EV prices when demand is greater than supply?” Bank of America analyst John Murphy wondered.

Musk insisted that there was no demand problem. The company was trying to broaden appeal by making its cars more affordable, he told analysts.

Inside Ford, staffers analyzed what Tesla’s cuts might mean for its own EV sales. About two weeks later , Ford reduced prices on some versions of its Mustang Mach-E SUVs by nearly 9%.

Speaking to analysts in May, Farley largely shrugged off the pricing pressures, saying they weren’t reflective of broader interest in EVs. He remained upbeat about Ford’s outlook, reiterating plans to expand Lightning output.

Around that time, car dealer Mickey Anderson began noticing that EVs were accumulating on his lots in Kansas, Nebraska and Colorado.

At first, Anderson and other retailers thought the slower sales were a fluke. At meetings with manufacturers in the late spring and summer, the dealers compared notes.

“We were worried,” Anderson recalled. “We went from wait lists to six months of supply, seemingly in a matter of weeks.”

As car companies entered the summer-selling season, there were other worrying signs. U.S. EV sales for the first half of 2023 rose 50% from a year earlier, down from a 71% increase in the first half of 2022.

The wave of early EV adopters willing to splurge had receded, and the next round of potential customers was proving more hesitant. They had more questions about how far a car could go on a single charge , and the life expectancy of batteries. They worried about charging times, repair costs, and not having enough places to plug in, according to dealers and surveys.

Interest rates were rising, pushing up monthly payments on EVs, which already were selling, on average, for about $14,000 more per vehicle than gas-engine models, according to research firm J.D. Power.

Lyndsey Grover, a Dallas-based pediatric anesthesiologist, said her husband was pushing her last year to replace her hybrid Volvo with an all-electric version, for environmental reasons.

She looked at a Rivian SUV, Tesla Model Y and an electric Mercedes, but ended up with another Volvo—a plug-in hybrid that could travel some distance on battery power before switching to traditional hybrid mode.

Her husband already had a Tesla Model S. She said it often requires a full night of charging at home, and even then, its range on a single charge often fell below estimates displayed by the vehicle. She felt the family needed at least one gas-powered vehicle.

GM was having trouble processing battery cells , a bottleneck that was preventing it from getting EVs to showrooms. Manufacturing delays left buyers waiting for delivery of models such as the Cadillac SUV and Hummer pickup truck.

Late last July, GM’s Barra told analysts plenty of consumers still wanted the company’s EVs. “These vehicles are getting to the dealers’ lots, and if they’re not already sold, they’ve got a list of people who are waiting for them,” she said.

Two days later, Ford’s Farley struck a different tone . “The paradigm has shifted,” he told analysts. Although consumers were still buying EVs, Ford’s pricing power was deteriorating compared with gas-engine models, he said, and the market for EVs would remain volatile.

Jefferies analyst Philippe Houchois asked Farley what had changed. “A few weeks ago when we saw you in Detroit…it’s like you had religion” on EVs, he told the CEO.

Farley replied that Ford was responding to market realities.

A Ford spokesman said that producing significant numbers of electric pickups before its rivals enabled the company to become an EV truck leader and to attract customers from other brands. Learning about the habits of EV buyers, he said, would benefit future vehicle development.

Late last summer, Ford dealer Ed Jolliffe saw on his store’s computer system that the factory planned to ship him about a dozen Lightnings. That worried him.

Earlier, his Detroit-area dealership had been receiving one or two Lightnings at a time, and his salespeople had had no trouble finding buyers. More recently, prospective customers seemed more hung up on the monthly payment of nearly $1,000.

Jolliffe had spent a half-million dollars installing EV fast chargers. He was getting ready to rent a billboard along the nearby interstate declaring: “Fastest Chargers Downriver!”

“We were all-in,” he said. So he swallowed hard and agreed to take the trucks.

Changing plans

The unraveling came swiftly. In a single month last fall, the average interest rate on an electric-car purchase jumped from 4.9% to 7%, making monthly payments even less affordable for some shoppers, said Tyson Jominy, vice president of data and analytics for J.D. Power.

Suddenly, once-long waiting lists for EVs shrank and buyers dropped reservations.

Over a 10-day span in October, the tone of automakers in Detroit and beyond turned gloomier. GM said it would delay by one year a $4 billion overhaul of a suburban Detroit factory to build new electric pickup trucks, citing “evolving EV demand.”

The next day, Elon Musk said that not as many people could afford a Tesla given higher interest rates and tougher economic conditions. Affordability was keeping a lid on demand, he said during a call to discuss third-quarter results.

A week later, on GM’s quarterly call , Barra described the transition to EVs as “bumpy,” and said the company wouldn’t meet a self-imposed goal of producing 400,000 EVs over a two-year period through mid-2024.

Two days later, Ford said it would defer $12 billion in electric-vehicle investments and focus on increasing hybrid production, citing the need to better match demand.

By late last year, it was becoming clear that sales of hybrids—once dismissed by some automakers as an unnecessary half-measure—were taking off and would outsell EVs in 2023.

“People are finally seeing reality,” said Toyota Motor   Chairman Akio Toyoda . For years, Toyota and other EV-cautious carmakers had been touting hybrids as a consumer-friendly way to reduce carbon emissions.

In November, thousands of U.S. dealers signed a letter urging Biden to ease proposed regulations that would push the industry to sell more battery-powered cars. “Last year, there was a lot of hope and hype about EVs,” the dealers wrote. “But that enthusiasm has stalled.”

Some auto retailers say that they are now selling EVs at a loss to clear unwanted inventory.

Jolliffe, whose car dealership is a 25-minute drive from the Lightning plant, is struggling to understand what happened. On a recent weekday, he peeked out his window at eight Lightnings and four Mach-Es.

“Nobody’s opening the door” to check them out, he said. “There just seems to be this hesitancy that is hitting hard.”



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Is the Stock Market Near Its Top?

Don’t let the hum of the bull tune out signs warning that a bear may be lurking.

By ANDY KESSLER
Mon, Jul 15, 2024 3 min

The third season of the terrific show “The Bear” blends family dysfunction with the ups and downs of high-end restaurants. With markets chasing new highs—get out those Dow 40000 hats—this column is about a different kind of dysfunctional beast. Is the market bear dead, or is it about to sneak up on us?

A U.S. equity strategist told me the story of a Japanese portfolio manager who sat in his office in July 1987 asking for stock ideas. The strategist’s model was based on a proprietary survey of investor sentiment, though it never really worked. Nonetheless, he read off a list of dozens of stocks. The portfolio manager then asked if he would kindly put in an order for 20,000 shares of each. The Dow Jones Industrial Average peaked at 2722 in late August and crashed 22.6% on Oct. 19.

A friend was a portfolio manager of a massive growth-stock fund in 1999. He told me he bought shares of Yahoo, Cisco, F5 Networks, Infosys and others every day because money flowed into his fund every day. The tech-heavy Nasdaq index peaked on March 10, 2000. As money began to flow out, he had to sell every day. By year’s end, Nasdaq had fallen by more than half.

I met Cathie Wood as she was filing papers for her “disruptive innovation” funds—to “change the way the world works.” Her ARK Innovation exchange-traded fund, ARKK, launched in October 2014 and charges 0.75% management fees. In 2020 it was up 153% as stimulus money flew in, driving more buying. ARKK peaked in February 2021 with $28 billion in assets. Since then, its net asset value is down 70%, even amid a roaring bull market, especially in tech. Morningstar recently calculated that Ms. Wood’s Ark Invest funds have destroyed more than $14 billion in wealth. One of my favorite Wall Street sayings is, “Don’t mistake a bull market for brains.”

In almost every bull run, stock momentum lures in investors at the worst moment, I call them momos, ensuring they get burned when the buying stops. Since 2009, excepting a few brief sell-offs, cash has been trash. That made some sense during the era of zero interest rates. But now with higher inflation and short rates above 5%? Confusing. Maybe investors are already anticipating another Donald Trump antiregulation pro-growth presidency, forgetting that he is married to a growth-killing pro-tariff agenda. Is the bear dead, or does it have a long fuse?

Predicting stock markets is a fool’s errand. My Series 7 test for General Securities Representative Qualification lapsed long ago, so you won’t get investment advice from me. But there are warning signs.

Have we run out of buyers? Sometimes there are triggers that scare them away: oil shocks, viruses, bank failures. But sometimes they simply collapse from exhaustion. More than 40% of households reportedly own stocks—a higher percentage than in 2000. It was 20% in 2010. Some market indicators also point to asset managers being fully invested. Who’s left to buy?

Market breadth is concerning. The 1973 market peak was driven by stretched valuations of the Nifty Fifty, which included IBM , Coca-Cola and GE but also Polaroid and Xerox . Fifty? Now it’s the Magnificent Seven: Alphabet , Amazon , Apple , Meta , Microsoft , Nvidia and Tesla . Seven? Artificial-intelligence hype, way ahead of even the rosiest of realities, drove Nvidia to make up almost a third of the S&P 500’s first half gains. Another quarter came from Amazon, Meta, Microsoft and Eli Lilly . Maybe fat bulls need Mounjaro.

Stock values feel divorced from reality. The so-called Warren Buffett indicator—the ratio between total stock-market value and gross domestic product—was 138% in March 2000. It’s now 196%. Certainly not a buy signal. And Bitcoin, my go-to bubblicious bat signal, is down about 20% since March. A dead canary?

“Don’t worry, be happy,” the bulls sing. Inflation is slain, and the Fed will cut rates. But investors won’t like the reason for those cuts. We’re already seeing earnings disasters—Nike, Walgreens , Lululemon , Delta and Wells Fargo . If the economy slows, earnings glitches and stock implosions become contagious. Plus, banks’ exposure to commercial real estate is scary, with buildings being dumped at huge haircuts almost weekly. This is now infecting rental buildings, and there are signs of a private housing glut. Inventory in Denver is up nearly 37%. Sure, markets climb a “wall of worry,” and bull markets tend to last longer than people expect, but sometimes the nightmares are real. Recessions are like honey to bears.

Even writing about the bear is bullish. Bull runs end when everyone is a believer. Still, another favorite saying of mine is, “No one’s ever lost money taking a profit.” Someday, cash will be king again. I prefer to buy stocks when everyone hates them.

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