Tesla has indicated that the $7,500 federal tax credits currently available for its Model 3 and Model Y electric vehicles are likely to be reduced after December 31.
SurgeZirc NG learned this from a recent update on the automaker’s website.
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This announcement has raised concerns among analysts, as the tax incentives, along with Tesla’s previous price cuts, have contributed significantly to the company’s record-breaking delivery numbers.
If the tax credits were to be reduced or eliminated, Tesla could rely on lowering prices to maintain sales, but this strategy may negatively impact the company’s profit margins.
Tesla has not explicitly stated the reasons behind the anticipated reduction in federal tax credits.
However, one possible explanation could be the government’s plan to impose stricter regulations on batteries starting next year.
The tax credit is divided into two components, each valued at $3,750: a battery requirement and a critical minerals requirement.
For the battery requirement in 2023, 50% of the vehicle’s battery must be assembled or manufactured within North America. This percentage is set to increase to 60% in the following year.
To meet the critical minerals requirement in 2023, 40% of the minerals used in a car’s battery must be extracted from or processed within the United States.
Alternatively, it must be sourced from a country that has a free trade agreement with the U.S. By 2024, this percentage will rise to 50%.
Furthermore, starting in 2024, EVs cannot utilize battery parts from countries of concern, specifically China.
Also, by 2025, they must exclude critical minerals sourced from China or other countries of concern to maintain their eligibility for tax credits.
Tesla currently relies on batteries from Chinese company CATL and South Korean company Panasonic for its Model 3 vehicles.
Recently, the automaker has also partnered with Chinese automaker BYD for batteries used in its Model Y.
The stringent requirements imposed by the U.S. government aim to reduce dependence on China for battery manufacturing and parts.
However, despite substantial investments by automakers and battery manufacturers to establish domestic production capabilities, eliminating reliance on China is expected to be challenging.
China dominates the production of cathodes, anodes, and refined battery materials, with six of the top 10 battery manufacturing companies located in the country.
In 2022, China’s battery production capacity surpassed the rest of the world combined, reaching 838 GWh.
The United States had a capacity of only 70 GWh.
Although the U.S. battery production capacity is projected to grow tenfold by 2027 to approximately 908 GWh, it pales in comparison to China’s anticipated 600% increase.
The warning from Tesla about the potential reduction in tax credits may also serve as a strategic move to boost sales in the current year.
By encouraging customers to order a Model 3 or Model Y in the coming months, Tesla aims to capitalize on the near-guarantee of receiving the full tax credit.
It is worth noting that Tesla had only recently obtained approval in June for its Model 3s to be eligible for the full credit, as opposed to just half.
On the other hand, all Model Ys have been eligible for the full credit since the new rules went into effect.
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By warning customers about the potential decrease in tax credits, Tesla seeks to drive sales in the near term while the full credit is still available.
The outcome of these changes will undoubtedly impact Tesla’s market position and the broader electric vehicle industry.
