What Is the Future of Electric Cars?

The first electric vehicle was developed in 1884 in Britain by Thomas Parker. Unlike cars equipped with internal combustion engines, electric vehicles run using only electricity. In 1913, Edison even built an electric car with a battery he had developed after 10 years and 50,000 tests. But electric vehicles fell behind in convenience and disappeared into history. Consumers turned away from them.

Electric vehicles, once weeded out by the market, have returned after nearly 100 years. Tesla, a startup founded in 2003, introduced high-end electric vehicles and received an enthusiastic response. Tesla’s challenge is innovative. It is reminiscent of the Chung Ju-yung myth of winning ship orders without even building a shipyard first. Without even properly establishing its factories, it took hundreds of thousands of preorders. Its story has not yet ended in success. People continue to maintain their expectations, showing patience by reserving and waiting.

There are many factors people consider when buying a car. They choose a vehicle by considering features and design suited to their lifestyle and by looking at the price range. At that point, price plays a decisive role in the purchase.

Electric vehicles, which carry an environmentally friendly image and now even offer luxury, are something consumers would be willing to buy if the price were reasonable enough. But the manufacturing cost of electric vehicles is still high. If they were sold at a price that fully reflected production costs, they would not sell. Then why are electric vehicles selling now? Because of government regulation and subsidies.

Tesla in the United States has benefited from California regulations. According to Bloomberg, Tesla earned $1 billion over the past five years by selling “emissions credits” to other automakers in California. This is because California requires automakers to sell electric vehicles and similar cars at a certain ratio based on market share, so if companies fail to meet their electric vehicle sales quotas, they must buy emissions credits corresponding to the shortfall from Tesla. Tesla has said it will not depend solely on this regulation going forward, but whether it can sustain its business without the protection of regulation remains uncertain.

In other countries, government subsidies are supporting electric vehicle sales. Consumers who buy electric vehicles receive subsidies so they can purchase them more cheaply. For example, in Korea, an electric vehicle priced at over 40 million won can reportedly fall to the low 20 million won range once central and local government subsidies are applied. This year, based on passenger vehicles, the national subsidy for electric vehicles ranges from a minimum of 7.06 million won for the Kia Ray EV to a maximum of 12 million won for Tesla. Local government subsidies can be as high as 11 million won. On top of this come reductions in acquisition and registration taxes and other automobile tax discounts. In effect, the government is paying world-leading levels of subsidies on behalf of buyers.

The current electric vehicle market is structured so that sales can occur only up to the limits set by regulations and subsidy caps. The reason electric vehicles account for only about 1% of sales is that the intensity of regulation and the size of subsidies cannot be raised indefinitely. In fact, making it possible for people to buy expensive cars at others’ expense is not a sustainable business. The more electric vehicles are sold, the more losses companies incur, while the burden on government and the public grows.

Electric vehicles also involve large hidden costs during operation. Electricity generation receives government subsidies, while taxes can be imposed on gasoline and diesel consumption. As the share of electric vehicle use increases, government subsidies rise and tax revenue declines.

It is still unclear whether a paradigm shift toward electric vehicles will occur. What is certain is that such a change cannot be expected on the basis of an environmentally friendly image and public anticipation alone. Electric vehicles must become competitive enough to compete with internal combustion engine vehicles without government regulation and subsidies. The current situation calls for the entrepreneurship that can bring about such innovation. Otherwise, electric vehicles will once again disappear into history. But history teaches that such innovation has rarely emerged in sectors that have relied on regulation and subsidies.

Sung-no Choi

President, Center for Free Enterprise (CFE)

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Original title: 전기자동차의 미래는?

Author: Sung-no Choi

Date: 2018-05-02

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=26&idx=10903