Will Biden’s Energy Plan And EV Hype Prove A Fantasy?
“The presumptive Democratic presidential nominee recently rolled out his $2 trillion energy plan, which was much more aggressive than his campaign plan. Counting on EVs is typical of ‘save-the-day’ plans, but will they work? ”
Likely Democratic Presidential nominee Joe Biden has recently unveiled the energy plank of his campaign platform. The $2 trillion investment is a much more aggressive plan than the one Mr. Biden promoted during the Democratic primary season. At that time, after being pushed by his opponents to disclose his vision for energy, his plan involved only spending $1.7 trillion. Moreover, that $1.7 trillion would be spent over 10 years, rather than spending $2 trillion in four years, as he is promoting now!
The central message of both of Mr. Biden’s energy plans is driving the United States to achieve net-zero emissions by 2050. The new plan establishes a clean energy target for the power sector by 2035. The financing for the spending will come from reversing the Trump administration’s corporate tax cut by raising the tax rate to 28% from 21%, and taxing high-income earners more. We doubt those sources will come anywhere close to funding the energy plan’s spending, especially after Mr. Biden’s spokespeople said more details about funding the spending will be forthcoming after other economic plans are unveiled. Sounds suspiciously like more taxes coming.
With the new target calling for eliminating all carbon emissions from power plants by 2035, the plan is presented as an investment program driven by the need to immediately address climate change. The plan is also designed to create “good, union jobs that expand the middle class.” This commitment includes promoting union organizing efforts, with the Democrats hoping to revive union membership and its election power.
The key elements of the Biden energy plan were listed on his web site as:
1. Build a Modern Infrastructure
2. Position the U.S. Auto Industry to Win the 21st Century with technology invented in America
3. Achieve a Carbon Pollution-Free Power Sector by 2035
4. Make Dramatic Investments in Energy Efficiency in Buildings, including Completing 4 Million Retrofits and Building 1.5 Million New Affordable Homes
5. Pursue a Historic Investment in Clean Energy Innovation
6. Advance Sustainable Agriculture and Conservation
7. Secure Environmental Justice and Equitable Economy Opportunity
Most of these goals are aligned with the Democratic Green New Deal, a plan for a carbon-free economy unveiled in January 2019. Mr. Biden’s new energy plan brings him much closer to the far-left segment of his party than where he was when campaigning during the primaries. Spending $500 billion a year for the next four years, reminds us of how rushing to back questionable clean energy investments during the Obama administration led to spectacular failures. The highest profile failure was solar panel company Solyndra, which raised $1 billion from investors and received a $525 million loan guarantee from the federal government only to fail a short time later.
What we found interesting in response to Mr. Biden’s energy plan was the number of op-eds and news articles hyping electric vehicles. One op-ed appeared in The Providence Journal, written by a columnist who once was formerly a member of the paper’s editorial board. Her past op-eds focused on social issues. This op-ed demonstrated the shallowness of her research into a business issue. For her, the issue is that the Trump administration is frustrating the move to clean energy vehicles – namely electric vehicles (EV). She touted the success of Tesla and how much it has helped California. She was relying on a report from a couple of years ago contracted by and paid for by the company. The report was designed to promote how important Tesla was to the local counties where its operations are located, as it lobbied for further tax concessions.
While the op-ed quoted the headline of an article discussing the Tesla report, which was: “Tesla says it helped create more than 50,000 jobs in California in 2017,” the facts are slightly different. The report noted that Tesla employed 20,000 workers in California, 10,000 of which were working at the Freemont auto manufacturing plant, the rest must have been associated with sales, administration and its solar panel subsidiary. The report stated that Tesla’s indirect employment effect was 31,000 jobs. This suggests that Tesla was “supporting” 51,000 jobs, not that it “created” 51,000 jobs. Maybe this is a debate over semantics, but the use of the phrase was to highlight the company’s importance when it was looking for government handouts. Would the company go away if it didn’t get that support? History shows it would consider such an action.
Looking at the company’s annual reports filed with the Securities and Exchange Commission shows that at year end 2016, Tesla had a total of 30,025 employees. That total was divided into 17,782 employed by Tesla and 12,243 working for Solar City, the solar panel company Tesla merged with that year. At year-end 2017, Tesla’s total employment was 37,543, but that year included numerous new administrative, manufacturing and warehousing facilities, plus expansion of various other facilities. Interestingly, employment peaked at 48,817 at year-end 2018, and declined by 801 employees in 2019. Remember these are worldwide totals.
We find it interesting that Tesla is looking at downsizing its California presence by building a new manufacturing plant outside of Austin, Texas. Elon Musk, Tesla’s CEO, also announced he is selling his California homes and looking to relocate elsewhere. Texas Governor Greg Abbott announced Friday on CNBC that Mr. Musk has already swapped his California drivers’ license for a Texas one. Guess that confirms the ending of his love affair with California.
While the op-ed writer focused on how forward-thinking California has been, versus the backward actions of the Trump administration, California Tesla sales are struggling. According to data compiled by carsalesbase.com, Tesla’s California sales in 2019 increased by only 0.33%, or 623 vehicles.
Exhibit 9. Tesla California Sales Barely Grew in 2019 SOURCE: carsalesbase.com
The California EV market has become even tougher in 2020, partly due to Covid-19 and the lockdown, but also the loss of half the federal tax subsidy, as the company has exceeded the threshold for the full subsidy. Now that the company’s subsidy is shrinking further in accordance with the required phase-out, we expect further sales challenges. Recent data show that registrations in California fell by 16% in April to 6,260 new vehicles, compared to a year ago, according to Dominion’s Cross-Sell report. Registrations fell 70% to 1,447 in May. The report pointed out that industrywide, registrations in California fell by 52% in each month compared to comparable months in 2019.
While nationwide data wasn’t available at the time of The Wall Street Journal’s mid-June article, the Cross-Sell report across the 24 states it tracks showed Tesla registrations declining 33% to 14,151 for April and May compared to a year ago. The broader car industry registrations fell by 43%. Dominion says that the markets it tracks, including New York, Florida and Texas, make up 65% of the entire U.S. automobile market.
The European market is also proving challenging for Tesla. The Netherlands, Tesla’s third-largest market by revenue in 2019 after the U.S. and China, saw sales decline 57% in the first two months of the second quarter compared to a year ago. Audi’s new EV outsold Tesla in The Netherlands. The company’s fourth-largest sales market, Norway, collapsed by 94%. This market is particularly interesting for Tesla’s future, as it represents the most electrified vehicle fleet in the world. In 2019, 56% of Norway’s new cars were electric – either battery electric or plug-in hybrid. Through June of this year, that rate pushed closer to 60%. The battery electric vehicle share rose from 45% to 48% between January and June. Part of the increase is due to overall car sales declining more than 24%, while EV sales fell by only 19%. Tesla’s challenge is that other models entering the market are outselling it. Norwegians are looking forward to the introduction of VW’s first EV model. In Norway, where EVs are targeted to reach 100% of new vehicle sales by 2025 with substantial tax savings and subsidies, the more competitive landscape may not be good news for Tesla. That is certainly the hopes of auto manufacturers who are investing aggressively in EVs.
What is the role of the auto industry in the Biden clean energy plan? The plan calls for it to create one million new jobs in the “American auto industry, domestic auto supply chains, and auto infrastructure, from parts to materials to electric vehicle charging stations, positioning American auto workers and manufacturers to win the 21st century; and invest in U.S. auto workers to ensure their jobs are good jobs with a choice to join a union.” One of the problems with creating all these jobs is that EVs are less labor intensive to build.
Does anyone remember the GM strike last fall? The six-week strike, the longest in years for GM and the United Auto Workers, resulted in significant losses (over $2 billion) for the company, with only modest wage gains for the workers, including a lump sum payment to cover most of the lost wages while workers were on strike, better benefits, which had been reduced as part of the bankruptcy restructuring during the 2009 Financial Crisis, and a plan for temporary workers to transition to full-time employment. At the heart of the strike was the union’s demand to move GM vehicle manufacturing from Mexico to the U.S. in an effort to boost employment here. The union also had hoped to convince GM to reopen the Lordstown, Ohio assembly plant. That was not included in the agreement, although GM will start a battery plant near the shuttered assembly plant, but it will only employ a few hundred workers, not the 1,400 who lost their job when Lordstown closed. More significant is that GM says it wants the battery plant to be competitive, globally, meaning it will need to cut the wages of the workers.
The most important win for GM was its control over manufacturing location and employment flexibility. That is critical if EVs are to become a profitable business. Expensive batteries remain a competitive issue in the automobile market, but it is largely offset by subsidies. As the GM tax subsidy declines, lowering the battery cost will be critical for achieving profitability. But for workers, EVs are not a panacea. They are significantly easier to build, reducing the number of workers needed, something that seems to be ignored by everyone touting EVs as a manufacturing jobs driver.
According to Mark Wakefield, head of the automotive practice at consultant AlixPartners, hybrid cars, which combine electric drive hardware with a conventional, internal combustion engine, require 9.2 manhours to build compared with 6.2 hours for a typical gas-powered vehicle. A battery EV needs only 3.7 manhours, or 40% less time to assemble than a gas-powered car. What does this mean for future auto manufacturer employment?
Exhibit 10. Automakers Could Lose 40% Of Their Workers SOURCE: US Bureau of Labor Statistics
If we look at the latest employment data from the U.S. Bureau of Labor Statistics, employment in the motor vehicles and parts manufacturing sector in June has fallen by 124,300 jobs, or 12.4%, compared to employment in June 2019. However, last June’s employment reflected an industry that was building vehicles at an annual rate of nearly 18 million units. Last year’s vehicle manufacturing total was consistent with the annual rate for the past few years, suggesting a rate of 18 million units is the normal rate. That normal rate is reflective of the lengthening of car life, and the overall demand for vehicles, both new and used. What we don’t understand is how this normal annual new vehicle demand might change going forward following Covid-19. Will we have as many people commuting to work? Will there be mass exits from urban areas, necessitating vehicles for normal lifestyles? Will the Uberization of car traffic reduce the need for owning vehicles? How might autonomous vehicles impact the annual volume of new cars? Those are only some of the key questions that will impact the future size of the new vehicle market.
If all vehicle manufacturing were to be converted to EVs, the 40% labor differential suggests there might be jobs for only about 600,000 workers, not the one million working last year. We doubt the full labor time-savings for building EVs would translate directly into a headcount reduction, but there is little reason to see a significant increase in workers if we switched to building all EVs. If one thinks about it, auto manufacturers would be looking to minimize the number of workers needed for building EVs as a cost-savings offset to expensive batteries.
This isn’t the only employment consideration. EVs require little to no maintenance, given their fewer parts. They do not need regular oil changes or engine tune-ups. They don’t need transmission servicing, although that is a minimal servicing requirement during the life of gas-powered vehicles. Brakes will need to be serviced less frequently, as EVs use regenerative braking in which energy is recaptured and returned to a vehicle’s battery, reducing the wear on brake pads and other brake parts. According to AlixPartners, a typical dealer will lose about $1,300 in maintenance and repairs for the typical EV over a five-year ownership cycle compared to what a gas model car would need. EVs will slowly erode the profits of car dealers, who today make most of their money from their service departments and not from selling new cars. How many dealer jobs are at risk of being lost as EVs gain complete control over the automobile market?
While EV battery packs are complex, manufacturing them is largely an automated process, further reducing manpower needs. In addition, most automakers produce their own internal combustion engines, while they farm out batteries and battery packs to global suppliers, primarily based overseas. Employees that build conventional powertrains will also need to convert operations to supplying battery EV components, or risk going out of business. All of these workers are at risk of eventually losing their jobs.
As for fueling vehicles, almost all gasoline stations are self-serve today, other than in New Jersey and Oregon, although the latter experimented with allowing self-service during Covid-19. EV charging locations are self-service, so unless gasoline stations can survive financially on convenience store sales alone, they will close, reducing employment.
While there are environmental positives from EVs, it is difficult to see how they become a driver for more automobile manufacturing employment, especially of the magnitude Mr. Biden and his supporters are claiming is possible. There may be some employment for builders of EV charging units, but we suspect their assembly can be readily automated. Fantasies are always easier to sell than reality. If the reality means not only fewer jobs but higher costs, you will never hear that aspect of the EV fantasy.