Bigger Isn’t Always Better: Why EVs Are Shrinking

The average electric vehicle (EV) in the United States costs about $60,000. That might be all that’s needed to understand why the EV market in the U.S. hasn’t taken off as quickly as expected. 

Beyond range anxiety, recharging times, the lack of charging stations on every street corner, and general distrust of new technologies, the cost of EVs is holding car buyers back. Industry experts share a broad consensus that the entry-level pricing of EVs should be about $25,000, but just finding an EV in the U.S. for under $35,000 is a real challenge. 

 

GMC Hummer electric pickup truck. Image used courtesy of General Motors 

 

How Did Cars Get So Big?

In 2018, with gasoline cheap and new-car loan interest rates low, Ford Motor Company decided to focus its efforts on high-profit trucks and SUVs and canceled all of its North American small-car programs except for the Mustang and the Ford Focus Active (which was eventually also canceled). Ford wasn’t the only U.S. company that recognized the profitability of jumbo-sized vehicles as General Motors (GM) and Stellantis (formerly Chrysler) put their eggs into the truck and SUV basket. It doesn’t cost much more to make a large-size truck than a smaller-size car, but the profits on a $75,000 Ford F-150 are significantly more than the profits on an economy-sized vehicle, and those profits make shareholders happy. 

Besides, since the 1970s, U.S. automakers haven’t been particularly good at building profitable small cars. Imported cars typically meet the growing demand for fuel-efficient cars. At the same time, U.S. manufacturers continue building the big sedans, wagons, pickup trucks, and eventually SUVs, which are the domestic industry’s bread and butter. 

Now, the world has changed. In 2023, 1.1 million EVs were sold in the U.S.—about 7 percent of the market. This represents an increase of 48 percent over 2022. Over half of those sales were Tesla models. In Europe, EV sales were 14.6 percent versus 12.1 percent in 2022. 

 

Trends in EV sales. Image used courtesy of Energy Information Administration

 

Going Big With EVs

To approach the growing demand for EVs, traditional U.S. car companies did what they knew—designed big, expensive vehicles with large, expensive batteries and rolled them out with high price tags. They reasoned that since they had never made any money on small cars in the past, the only way to build profitable EVs would be to build them big. Ford, GM, and Stellantis keep rolling out electrically powered SUVs, pickup trucks, and high-end luxury cars and now seem surprised that buyers aren’t rushing to buy them. The comically huge $100,000 GMC Hummer EV is an example of exactly the wrong direction U.S. legacy makers are going with their EV programs. 

But big EVs require equally big batteries, which cost about 40-50 percent of the total EV cost. It's hard to make a big EV anything but expensive. With high interest rates, the buyers for $60,000+ EVs just aren’t there in large enough numbers. 

To stimulate more demand for EVs, Ford has recently announced price cuts on its Mustang Mach-E of $8,100 and up to $12,500 off on its F-150 Lightning electric pickup truck. The company also dropped one of its two shifts at the Dearborn, Michigan, plant that builds the Lightning. GM is shifting some of its planned 2024 EV production into 2025, and even EV-darling Tesla has reduced the prices of its vehicles. U.S. automakers are also looking at using less expensive lithium iron phosphate (LFP) batteries instead of nickel-rich lithium-ion batteries. LFP batteries cost less but also have lower energy density, which reduces range and vehicle performance. 

 

A Looming Threat of Chinese EV Competition

Meanwhile, the EV market in China continues to grow. It accounted for 31 percent of its home market in 2023, with 9.49 million EVs sold. China is exporting its EV prowess, with nearly 60 percent of EV sales worldwide coming from Chinese companies. The majority of these Chinese EVs are increasingly attractive, reliable, and, above all, affordable. Because Chinese companies dominate the battery market, they have a leg up on building EVs. Europe has already seen an onslaught of Chinese EVs. Battery and EV giant BYD is building a car factory in Hungary to produce EVs for the European market by 2025 and looking at sites in Spain, Germany, and France for future expansion. 

 

BYD Seagull. Image used courtesy of BYD 

 

BYD has created the most inexpensive mass-produced EV in the world. The BYD Seagull costs around $10,200 in China and is an actual real car capable of seating four people. It has a range of around 200 miles on a charge. It is poised to become China’s best-selling car on its domestic market, but there are no plans at present to bring it to the U.S.

Significantly, Chinese car companies are not looking at building huge, heavy, and expensive EVs but are looking at smaller, more affordable electric cars to address the $25,000 entry-level vehicles analysts say consumers are looking for. Cars made in China and imported into the U.S. are subject to a 27.5 percent tax. 

 

Taking Aim on the U.S. EV Market

BYD, which at the end of last year passed Tesla as the world’s largest EV maker, is building a plant in Brazil to supply EVs to South American markets and is considering building a plant in Mexico to supply the North American market. Mexico makes a lot of sense for BYD as the export costs from that country are low, thanks to the 2020 U.S.-Mexico-Canada Agreement requiring at least 75 percent of vehicle parts to be produced in one of the three countries to qualify for potential tariff benefits. Eleven Chinese car companies entered the Mexican market over the last three years, and most view the country as a stepping stone to the U.S. In addition, legislators and consumers might be more accepting of cars made in Mexico than those made in China, even if the profits go back to China-based companies. 

The 2022 Inflation Reduction Act provides U.S. car buyers with a $7,500 tax incentive for EVs made in North America or those with whom the U.S. has free trade agreements. Those EVs made outside the region or whose components of battery materials come from places less friendly to the U.S. don’t qualify. This makes it more likely that China-based EV makers will find a way into the U.S. market by building their vehicles within North America. The odds of U.S. legacy makers being able to match the low-cost EVs from China once they hit the U.S. market in force are not very high. 

In reality, Chinese car companies have already arrived, as China-based Geely owns the formerly Swedish-made Volvo and its EV brand Polestar. It is building a factory in South Carolina to sell its mid-market cars and SUVs to the U.S. market. Chinese maker Nio plans to import its cars directly into the U.S. from China in 2025 but will concentrate on importing its higher-end models, at least at first.

 

What Chinese Cars Mean to US EV Makers

It’s not like U.S. makers don’t understand the threats low-cost EVs from China pose. Ford announced recently it was working on an affordable small EV priced near the $25,000 level, and Tesla has been working on its small Model 2 for several years to try to hit that target. At the same time, however, GM has discontinued its moderately priced (starting around $26,500) Bolt EV model with the promise it will return by 2025 with a new Ultium battery pack. The emphasis from U.S. makers is still on big, flashy SUVs, pickup trucks, and luxury cars, and not on the sub-$25,000 cars that experts say will help build and accelerate EV acceptance in the U.S. 

 

Chevrolet Bolt. Image used courtesy of General Motors 

 

In any case, the dismal track record American manufacturers have with building small cars doesn’t create a lot of confidence they will be able to compete once low-cost Chinese-based EVs begin to flood the markets, even as protectionist legislation attempts to stem the flow.