Have we passed peak electric car?

This week I got rid of my electric car. As a car, it was a pleasure to drive. I also enjoyed the fact that it disconcerted at least some of my liberal friends who would not naturally associate me with such a ‘progressive’ consumer choice.

But the downsides, as increasing numbers of people are realising, began to outweigh the advantages.  The reasons are familiar. The overclaiming by the manufacturers on range in normal traffic conditions, the problems of finding chargers outside London.

On top of all this, the favourable tax treatment of electric vehicles is gradually being withdrawn, right down to the discounts on residents’ parking spaces.

At the end of last year, Germany abandoned, almost without warning, the €4,500 subsidy to electric cars.  It was therefore no surprise to read that in March the sales there fell by 29 per cent compared to the same month a year ago.

More general evidence that the electric market is contracting is shown by the fact that Tesla, the biggest seller in many countries, announced that it is laying off 14,000 workers, 10 per cent of its labour force.

These stories reveal several points about consumers and their preferences which are vital to any government trying to move towards a net zero target.

The first is that there is a sizeable group of people who are in principle willing to buy into the agenda. In the UK, for example, electric car sales are still around 15 per cent of all new registrations, albeit a figure down slightly on 2023 as a whole.

Most of these early adopters, however, are affluent. Electric car prices remain significantly higher than their petrol competitors and they are financially out of reach of many.

This fits the classic pattern of how innovations come to be adopted. Consumers who are the first to take up a new technology, whatever it might be, tend to be well off, of relatively high social status and have gone through higher education.

For an innovation to spread more widely, two things needs to happen. This group of relatively early adopters needs to reach a critical size so that other people can readily notice that the technology is being used and therefore gain confidence to adopt it themselves.

In addition, advances in the technology need to lead to its initial high price falling, often rapidly.  Think, for example, of mobile phones or personal computers.

Electric cars simply have not improved rapidly enough. Their ranges remain restrictive and their price remains high.

And the early adopters, despite their affluence, respond to incentives in a rational way. Their income levels means that in general they are less sensitive to price changes than most. But they are not completely indifferent, as the example of the German market shows. A big cut in a subsidy has led to a huge fall in sales.

A further factor is that when people begin to use an innovative new product, they gradually learn more not only about how it works, but the costs and benefits. Because it is new, not everything about it is obvious at the start.

And so the group of early adopters are beginning to realise that the costs associated with electric cars are rather more than they imagined them to be. A simple point is the time and potential inconvenience associated with finding a charger and then waiting for it to charge.

The evidence on how innovations spread is very well documented and there are many examples. If the initial group of enthusiasts fails to reach a critical size, the product simply does not spread amongst the rest of the population.

Without massive price reductions or improvements in performance, the electric car market is at a dead end.

As published in City AM Wednesday 24th April 2024
Paul Ormerod
Image: Flickr

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