Pathway to Cheaper EVs May Be Cut Short by Tariffs

Apart from problems with the availability and reliability of public charging infrastructure, the next-biggest challenge to battery EV (BEV) adoption in the US is affordability. Average transaction prices for BEVs remain stubbornly high, as do interest rates, and there are few new vehicle options at the lower end of the price spectrum. Earlier this month, Tesla discontinued the most affordable vehicle it offers, the standard-range Model 3, and tariffs may be at least partly to blame.

One of the best solutions automakers have been pursuing to bring down the price of BEVs was adoption of lithium iron phosphate (LFP) battery packs. Without nickel or cobalt as key cathode materials, LFP batteries are at least 30% cheaper on a per-kilowatt-hour basis than the nickel-rich batteries commonly found in BEVs in North America. Iron and phosphorus have far less price volatility than nickel and cobalt and are widely available everywhere.

What’s not yet widely available everywhere are LFP batteries. Although they were invented in the US, and A123 Systems—originally headquartered in Massachusetts—was one of the first cell manufacturers to commercialize the technology, very few are currently manufactured here. While North America went all-in on nickel-rich batteries for the added range (nickel cobalt cells typically have about 30% more energy density than LFP cells), more price-conscious Chinese consumers have favored LFP batteries. Driving patterns in China include fewer long-distance road trips, making the lower cost batteries a preferred choice. LFP batteries currently account for more than two-thirds of Chinese BEV sales.

As a result, Chinese manufacturers like CATL, BYD, and Gotion have come to dominate the market for LFP batteries. Several LFP factories are under construction in the US, but they won’t be in volume production until 2026. In the meantime, China is the only viable source for LFP batteries for BEVs.

Tesla has been using CATL-supplied LFP batteries in the lowest cost standard-range Model 3 for at least 2 years. But as of October 1, 2024, Tesla’s LFP-equipped Model 3 is no longer available to order. This is likely due to new 25% tariffs that have gone into effect on Chinese-made batteries, which would bring the production cost of the standard-range Model 3 close to that of the long-range rear-wheel drive version that uses US-made cells from Panasonic. The long-range Model 3 sells for $3,500 more, and the tariff likely consumes any profit margin Tesla had on that variant. With a reduced price gap to the long-range Model 3, there would be little incentive left for consumers to buy the standard range, so it makes sense for Tesla to drop it for now.

Ford also started using Chinese-made LFP batteries in its standard-range Mach-E in 2023 and had planned to offer them in the F-150 Lightning as well. With the new tariff, Ford will likely revert to using LG-sourced nickel manganese cobalt batteries in the standard-range Mach-E. The automaker has already announced it will begin getting batteries from LG’s newly expanded Holland, Michigan, plant rather than from its plant in Poland. This may help close some of the cost gap until Ford’s new LFP factory in Marshall, Michigan, comes online in 2026, but we may see price increases on the standard-range models in the interim.

With new car loan rates still averaging over 9.5% in September 2024, BEV affordability will likely remain challenging for some time. New models like the Chevrolet Equinox EV have a starting price before incentives of $35,000 with a range of over 300 miles, and Chevrolet has promised a new generation of the Bolt to be launched in late 2025 that should be even less expensive. However, that Bolt was to use an LFP battery, and it’s not clear where it will be sourced from. Other manufacturers such as Kia are also expected to bring BEVs under $30,000 to the US market soon, but the tariffs on Chinese batteries will make doing so difficult for at least a couple of years.