Recallsthe Federal Reserve, and Wall Street ratings all moved car stocks Wednesday, but investors should focus on federal purchase tax credits for electric vehicles.
It appears that all of the tax credits for EVs with Chinese parts might be going away faster than expected. Investors were ready for some tax credits to vanish, but not all. Such a change could affect sales and pricing of many
models and even some
EVs.
On Wednesday, Tesla’s website said the rear-wheel drive and long-range versions of its Model 3 will lose all of the $7,500 Federal purchase tax credit on Dec. 31. That is a notable change from just a few days ago, when the company’s guidance had suggested buyers of its EVs could still get at least half of the tax credit on those models. T
The credit qualifications for EVs were updated as part of the Inflation Reduction Act when it was passed in 2022. EVs that meet particular criteria can qualify for a purchase tax credit of up to $7,500 from the federal government.
The credits, however, depend on various factors, including the country where the vehicles, batteries, and even battery parts are manufactured. These rules get interpreted by the Treasury Department and implemented by the Internal Revenue Service, adding more layers of complication. The federal government considers China a country of concern.
China is the EV giant. It produces roughly 50% of the vehicles, 75% of the batteries, and 50% to 75% of key battery materials. Tesla sources batteries for some of its vehicles from
Contemporary Amperex Technology Co. Ltd.
,
a Chinese company that is better known as CATL. Those batteries are why half of the credit was expected to go away on some models.
Advertisement – Scroll to Continue
Earlier in December, Tesla’s website said that EVs with those batteries will lose half of the $7,500 credit in 2024. “Customers who take delivery of a qualified new Tesla and meet all federal requirements are eligible for a tax credit up to $7,500,” the site said. “Tax credit will reduce to $3,750 for Model 3 Rear-Wheel Drive and Model 3 Long Range on Jan 1, 2024. Take delivery by Dec 31 to qualify for full tax credit.”
Today, the language is notably different. The second half of the notice now reads: “Tax credit will end for Model 3 Rear-Wheel Drive and Model 3 Long Range on Dec 31, 2023 based on current view of new IRA guidance. Take delivery by Dec 31 for full tax credit. Only for eligible cash or loan purchases.”
Now, the entire federal tax credit might be going away on some models. That’s a surprise. Tesla didn’t respond to a request for comment about the change.
Advertisement – Scroll to Continue
The changes will roil pricing. A long-range Model 3 starts at about $46,000. A performance Model 3 starts at about $51,000. If the performance Model 3 qualifies for the federal tax credit and the long-range version doesn’t, the performance version will be $2,500 cheaper. The rear-wheel drive version starts at about $39,000. It will still be the cheapest version, but the price gap relative to the other cars will be different.
The change in tax credits comes on top of a recall of 2 million Tesla vehicles to update warnings and functionality of Tesla’s Autosteering function, which is part of its driver assistance products: Autopilot, Enhanced Autopilot, and Full Self Driving. Autonomous driving features are closely scrutinized by investors.
Tesla shares fell as much as 3.6% Wednesday, perhaps partly because of the recall, though its cost is minor. A secondary point is that the recall wasn’t really about Tesla’s technology, only how drivers interact with the technology. The National Highway Traffic Safety Administration wanted more warnings to ensure drivers were always paying attention.
The tax credit changes were likely a much bigger factor in Tesla stock price performance, though they were ultimately offset by signals from the Federal Reserve that interest-rate cuts could be coming in 2024. Tesla closed 1% higher at $239.29. The
and
Advertisement – Scroll to Continue
jumped 1.2% and 1.4%, respectively.
Other automakers’ shares were moving, all lower, in the aftermath of the tax-credit news. That is another sign that the reduction in the subsidy, and not the recall, was a bigger deal for investors.
and
stock were down about 2% and 3%, respectively, before the Federal Reserve news. Both were up in late trading on Wednesday.
Advertisement – Scroll to Continue
“The rules proposed by Treasury and Energy about Foreign Entities of Concern within the Inflation Reduction Act are detailed and extensive. We are working through them,” said a Ford spokesperson in an emailed statement. “Based on current information, it is unlikely that Mustang Mach-E will qualify for the Federal Tax Credit beginning January 1, 2024.”
The Mach-E only qualified for one-half of the tax credit in 2023. It’s only losing another $3,750.
GM said it was evaluating updated guidance from the Treasury Department.
Advertisement – Scroll to Continue
Auto makers have been reworking their supply chains to ensure they qualify for the credits, as the writers of the law intended them to. Whether things can be adjusted quickly enough to preserve the credits isn’t known. Tesla’s guidance makes it seem unlikely—for 2024 at least.
Ford stock was also downgraded to Hold from Buy on Wednesday by BNP Paribas. The downgrade is another factor to consider.
There is always a lot going on in the stock market, but the biggest deal for the auto sector Wednesday was the changing tax-credit language on Tesla’s website.
Write to Al Root at allen.root@dowjones.com