Tesla Anticipates Reduction in Model 3 and Model Y Tax Credits by 2024

Description: Tesla has announced that the federal tax credits for its Model 3 and Model Y electric vehicles are expected to be reduced after December 31. Find out more about the potential impact on the company’s margins and the reasons behind this decision.

Introduction: Tesla has revealed that the current federal tax credits of $7,500 for its popular Model 3 and Model Y electric vehicles are likely to face reductions after December 31. This change, highlighted on the automaker’s website, raises concerns about the impact on Tesla’s margins, considering the significant role these tax incentives have played in achieving record delivery numbers. The company’s ability to counterbalance the potential loss of tax credits with price cuts is being closely observed by analysts. The reasons behind this anticipated reduction have not been explicitly stated by Tesla, but stricter regulations on batteries in the coming year could be a contributing factor.

Changes in Tax Credit Requirements: The federal tax credit is divided into two components, each valued at $3,750: the battery requirement and the critical minerals requirement. To meet the battery requirement in 2023, at least 50% of a vehicle’s battery must be assembled or manufactured within North America. This percentage will increase to 60% in the following year. Similarly, the critical minerals requirement stipulates that, in 2023, 40% of the critical minerals used in a car’s battery must be sourced or processed within the U.S. or from a country with a free trade agreement with the U.S. By 2024, this percentage will rise to 50%. Moreover, starting from 2024, EVs cannot incorporate battery parts from countries of concern such as China. By 2025, vehicles must avoid using critical minerals sourced from China or other countries of concern to maintain their tax credits.

Challenges in Battery Manufacturing Localization: The United States’ stringent requirements aim to reduce reliance on China for battery manufacturing and components. Despite substantial investments from automakers and battery manufacturers to localize production, ending this reliance poses significant challenges. China currently dominates cathode, anode, and refined battery materials production, with six of the top 10 battery manufacturing companies based in the country. Bloembergen data reveals that in 2022, China’s battery production capacity surpassed the rest of the world combined, reaching 838 GWh, in contrast to the U.S.’s capacity of 70 GWh. Although the U.S. expects a tenfold increase in battery production capacity by 2027, reaching approximately 908 GWh, it remains modest compared to China’s projected 600% surge.

Tesla’s Battery Suppliers and Sales Strategy: Tesla currently relies on Chinese company CATL and South Korean company Panasonic for the batteries used in its Model 3 vehicles. In a bid to diversify its supply chain, the automaker has recently engaged Chinese automaker BYD for batteries in its Model Y. The alert from Tesla regarding the potential reduction in tax credits may serve as a tactic to stimulate sales in the current year. By encouraging buyers to order Model 3 or Model Y vehicles within the next few months, Tesla aims to capitalize on the near-guarantee of receiving the full tax credit. Notably, while the Model Y has already been eligible for the full credit since the new rules were implemented, the Model 3 was granted the same eligibility just in June.

Conclusion: Tesla’s warning about the likely reduction in tax credits for its Model 3 and Model Y electric vehicles by 2024 raises concerns about the company’s margins. The impact of losing tax incentives, coupled with potential price cuts, remains a point of analysis for industry experts. Stricter regulations on battery sourcing and manufacturing are believed to be contributing factors behind this anticipated change. Tesla’s ability to adapt to these evolving requirements while maintaining its market position will be crucial in the coming years.

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