Tesla Reaches 200,000 Sales, Federal Incentive Phaseout Begins

In July, Tesla officially confirmed that it had reached 200,000 EV sales under the federal tax incentive program. Based on current sales numbers, GM is expected to hit this mark in the next few months as well. Once an automaker sells 200,000 EV units that cash in on the federal tax break ($7,500 for battery EVs [BEVs]), they enter the phaseout period. For Tesla, this means the phaseout period has begun, which is broken down in the table below. Based on current sales trends, it is expected that GM will begin the phaseout period in April 2019.

Tesla’s Phaseout Period: 2018-2019

(Source: Guidehouse Insights)

Implications of Change

The phaseout and eventual elimination of the tax credit on an OEM by OEM basis effectively makes the vehicles more expensive for consumers. The incentive is essential for Model 3 purchases, as opposed to the Model S or X, as the vehicle is marketed as an economy priced vehicle. Unless the EV brands can hold up as being worth the premium manufacturers will have to lower prices to keep vehicles competitive without the incentive, either by finding ways to lower manufacturing costs or reduce their margin. For a company like Tesla, which continues to struggle with profitability, this would lower revenue from each unit sold and further complicate its appeal to Wall Street.

Tesla also faces competition from other OEMs bringing long-range BEVs to market that will continue to receive the tax credit. Vehicles like the new Porsche Taycan and Jaguar iPace would still receive tax credits, along with BMW and Volvo models, that directly compete with Tesla’s Model S and X. Coming to the US market in the next year, BEVs like the Hyundai Kona Electric and the Kia Niro will increase competition for the Model 3 as well as the Chevrolet Bolt. BMW, Porsche, Volvo, Jaguar, Hyundai, and Kia are not anticipated to meet the 200,000 EV sales mark in the near future. The increasing competition and advantage of the tax credit will increase the challenge for Tesla to retain market share as the phase out of its credits continues.

History Repeats Itself?

In the past, phasing out purchase incentives has been followed by an immediate dip in sales. One example is the PEV tax credit in Georgia, which was eliminated in 2015. The month preceding the end of the credit saw a sales boost in Georgia, and then a sharp drop off once the credit was officially eliminated. Tesla recently experienced a similar drop off in sales in Ontario after the trade-in tax credit of CAD$14,000 ($10,757.60 USD) was ended. The changes hit Tesla particularly hard because dealers were only eligible to receive the credit on orders placed on or before July 11. Since Tesla does not have dealerships, each individual delivery after July 11—regardless of order date—no longer received the tax credit, while inventory currently on lots or making their way to dealers would still receive the benefit. Tesla sued Ontario to receive the purchase incentive for vehicles that had been ordered prior to July while the credit was in place (the court recently ruled in Tesla’s favor). The company’s sales took a significant hit in Ontario in July and August.

Only time will tell how these changes will effect Tesla (and soon GM), but it is likely the automaker will see some implications from the phase out of the tax credit on its bottom line and stronger sales from direct competitors in the near term.