Temporary beep or real transition?

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posted on February 12, 2022, through Charles Morris

Every crisis presents opportunity, it is said, but when looking at facts and figures amid the chaos, it can be difficult to identify what represents a crisis and what represents an opportunity.

Above: An Audi e-tron parked in front of Tesla Model 3s (Source: EVANNEX; Photo by Casey Murphy)

Last quarter, overall US auto sales fell, but electric vehicle sales jumped. Kelley Blue Book reports that total car sales fell 21.3% in Q4 2021 compared to Q4 2020, while electric vehicle sales increased 72%. Is this the beginning of the end of the age of oil, or just another temporary COVID-induced distortion of the normal market?

Let’s look at the case for the first. In most positive scenarios of the future of clean energy, the number of individual car owners will decline in response to a number of factors: more work (and play) on the internet; better public transport and more walkable cities; and new shared ownership models. Some, including Tesla’s Elon Musk, believe that self-driving vehicles will be in use most of the time, rather than parked most of the time, so less will be needed. (Others, citing the principle that when things get cheaper, they get used more, think the rise of robotaxis could lead to more traffic, not less.)

On the other hand, there are several reasons to be wary of extrapolating a long-term trend from the sales statistics of a very unusual quarter. By all accounts, the reason for the drop in auto sales is on the supply side. People still want to buy cars, as the exorbitant prices for used vehicles and the unattractive practice of auto dealers charging high markups on in-demand models clearly show. However, automakers are unable to supply them, due to continued chip shortages and other supply chain issues.

As for the fact that EV sales have skyrocketed, it would be more accurate to say that Tesla sales have skyrocketed. Kelley tells us that about 72% of all electric vehicles sold in the United States last quarter featured Tesla’s cat nose on their hoods. Tesla also dominated the overall luxury market, overtaking gasoline models from Audi, BMW, Lexus and Mercedes.

For several reasons, including its in-house software development and unified computing architecture, chip shortages have proven to be far less of an issue for Tesla than for legacy brands. It’s hard to escape the conclusion that the reason EVs have weathered the overall market decline is simply that all-electric Tesla had cars for sale, while other gasoline-centric brands didn’t.

Above: Discussion around the EV space (YouTube: CNBC Television)

So does this mean that once the industry resolves its supply chain issues, the market will return to “normal”? This heroic district of electric vehicles was only a temporary blow? Not likely. Just because an event can be explained by short-term factors doesn’t mean it doesn’t have long-term significance.

Each of these electric vehicles sold last quarter represents one less ICE car spewing pollutants into the air, and one more electric driver spreading the gasoline-free gospel to family and friends. Last but not least, eye-catching sales stats are generating mainstream media coverage of electric vehicles, which is finally starting to trend positively (a recent New York Times article was one of the first I’ve seen that doesn’t repeat not the debunked myth of the Long Exhaust Pipe).

Cars are fashion products, and news of increased sales has a snowball effect. Why has almost everyone on the planet decided they want an SUV? Because they’ve heard that almost everyone has one. Thoughtful car buyers who read that EV sales are trending up will start to worry about the questionable resale value of a new gas burner.

Perhaps more importantly, Tesla’s policies that helped it weather the chip shortage aren’t going to change. Legacy automakers will get their supply chains back to working smoothly, but it will take time, and going back to the status quo before the pandemic won’t be an option.

Savvy companies are learning from Tesla and starting to bring more of their software development in-house, while starting to build new supply chains for the electric future. Most experts expect the chip challenges and resulting production bottlenecks to be with us for at least another few months. By the time Big Auto returns to “normal,” Tesla will have ramped up production at its two new Gigafactories and will likely have taken steps to make its supply chain even more resilient.

Meanwhile, other electric dominoes are falling: electric vehicles outsell diesels in Europe; Porsche’s electric Taycan outsells its iconic 911 (which itself is setting sales records); Tesla’s Model 3 is the best-selling car of any kind in several countries; The Model Y is the second best-selling in California; and sales of ICE vehicles in fashionable Norway have slowed to a trickle.

Kelley Blue Book is just one of many industry watchers predicting that EV sales will continue to grow at an impressive rate in 2022. Considering all the new EV models expected to hit the market market this year, we could see the start of an avalanche.

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Written by: Charles Morris; Source: Kelley Blue Book