EV Overcapacity

We’re well into the bust stretch of the EV boom-bust cycle.

The boom portion started just as we eased out of the COVID lockdowns. Tesla had nurtured—almost single-handedly—the market demand for EVs, much to the envy of the rest of the automotive industry, and the latter group was lining up to announce their own electrification roadmaps. Meanwhile, a cluster of new EV startups raised massive amounts of private capital to build their initial prototypes, and a small handful garnered further investments in the public markets to fund the mass manufacturing of their vehicles.

As COVID tended to do, it amplified this trend. The supply shortages drove up prices for cars across the board, and since EVs were already more expensive than their ICE equivalents, some of the people who got their launch preorders flipped them for 25–30% above MSRP. Dealerships eventually acclimated to the supply constraints too. Instead of bidding large amounts of inventory against other regional dealerships, most EVs were sold akin to Mercedes G-Wagons: waitlists, inexact build specs, inflated dealer markups, and cold calls to take immediate delivery1. Meanwhile, Hertz decided to go in on EVs in a major way and preorder 100k Tesla Model 3s, both to expand their rental fleet, and in partnership with Uber to provide drivers with low-maintenance vehicles.

The automotive shortages eventually abated, and supply and demand balanced out by early 2023 and then tilted in the other direction. Tesla’s price cuts were the canary in the coal mine for the industry; they saturated the markets at premium price points, and had to steadily lower MSRPs and add other incentives to broaden appeal. Gasoline prices, which have an outsized impact on vehicle purchase decisions in the moment, have subsided in the past year. Getting more EVs on the road also layered on other scaling challenges: repair costs are much higher with most EVs’ advanced electronics, while all the new cars strained servicing capacity as well as charging infrastructure2. Despite the price cuts, most prospective car buyers still see the category as too expensive. For Hertz, these complications eventually prompted the company to pull back from its EV-all-in strategy.

Now a couple of the traditional automakers are getting cold feet as well. Mercedes, GM, and Volkswagen are backing out of their initial plans for electrifying their lineups. Toyota dipped their toes into the EV game3 after dragging its feet for decades, but now looks vindicated in how they leaned into hybrid drivetrains. It’s a bit reminiscent of the dynamics in the media streaming industry of the past few years; incumbents chase after the hyped newcomer—Tesla analogous to Netflix here—only to find that their incumbency comes with certain business model expectations, and are now retreating to familiar territory.

A silver lining in too much supply is that there’s always the opportunity to make use of the overcapacity post-bust. Much of the fiber laid out in the dotcom boom and bust was bought for cheap by internet giants, and GPUs used to mine crypto are now repurposed to train AI models. For EVs, the “infrastructure” investments that remain go beyond extra cars: they’re also the new vehicle platforms, the iterations on battery and charging tech, the evolution of entrenched business models. The excess of this EV downturn may well be laying the foundation for the next boom.