A Bumpy Road Ahead for Onshoring EVs - Thoughts on the Market

Summary

Thoughts on the Market: A Bumpy Road Ahead for Onshoring EVs

Podcast Information:

Title: Thoughts on the Market
Host/Author: Morgan Stanley
Episode: A Bumpy Road Ahead for Onshoring EVs
Release Date: January 2, 2025

Introduction

In the January 2, 2025 episode of Thoughts on the Market, Morgan Stanley’s Head of Global Autos and Shared Mobility, Adam Jonas, delves into the current and future landscape of the U.S. automotive industry, with a particular focus on electric vehicles (EVs). Jonas sets the stage by addressing the immediate impact of the upcoming Trump administration on auto stocks and the broader implications for EV adoption in the United States.

Market Outlook for U.S. Automakers and EVs

Jonas begins by presenting the 2025 outlook for U.S. auto sales, forecasting a demand of 16.3 million units, a modest increase from the previous year. This projection is supported by an anticipated U.S. GDP growth of approximately 1.9% and lower policy interest rates for auto loans. Specifically addressing EVs, Jonas explains a nuanced forecast:

"We think the trajectory will be first a dip, then a RIP scenario" ([00:45]).

He adjusts the 2025 forecast for U.S. EV penetration to 8.5%, slightly down from the earlier estimate of 9%, while maintaining an optimistic long-term outlook, projecting substantial growth for EVs by 2040.

Impact of the Trump Administration on EVs

A significant portion of the discussion centers on the potential policies of the incoming Trump administration and their ramifications for the EV sector. Jonas notes that investor sentiment has shifted towards internal combustion engine (ICE) stocks, driven by expectations that the administration might:

Relax U.S. emission standards
Reduce EV incentives
Increase tariffs on essential EV components like batteries and semiconductors, which are predominantly manufactured in Asia.

However, Jonas emphasizes the complexity of this scenario:

"The real story is more nuanced" ([01:30]).

He underscores the pivotal role of Elon Musk, who is anticipated to lead Trump's Department of Government Efficiency. This partnership raises concerns about the administration’s stance on key industrial transitions, particularly electrification and embodied AI.

The Role of Elon Musk and Industrial Transitions

Jonas explores the implications of Elon Musk’s leadership within the government framework:

"We struggle with the idea that the incoming Trump administration, working in close partnership with Musk, would structurally impede U.S. participation in two of the most important industrial transitions in over a century, electrification and embodied AI" ([02:10]).

He argues that for the U.S. to lead in autonomy, embracing EVs is essential as they serve as the foundation for autonomous technologies. Furthermore, expanding EV infrastructure is crucial to support this transition.

Onshoring Manufacturing and Competitive Disadvantages

The conversation shifts to the broader theme of onshoring manufacturing. Jonas highlights the current U.S. light vehicle market’s heavy reliance on ICE vehicles, accounting for 92% of total sales. He points out that the primary challenge is not the presence of ICE vehicles themselves but the lack of advanced onshore EV production capabilities.

"This puts the US at a disadvantage compared to its global competitors and raises questions the Trump administration will need to address" ([03:00]).

Jonas questions the administration’s priorities regarding manufacturing:

Maintain ICE Status Quo: Continuing to support traditional combustion engine technologies.
Advance EV Technology: Investing in and promoting EV innovation and infrastructure.

He posits that these decisions will critically shape the U.S. automotive industry's future and its role in the global market.

Long-Term Outlook and Investment Implications

Despite the short-term challenges posed by potential policy shifts and market uncertainties, Jonas remains optimistic about the long-term prospects for EVs in the U.S.:

"We view this mainly as a temporary action to help support a more capable and sustainable crop of domestic champions that takes us to a resurgence in US Onshoring" ([03:45]).

He suggests that the temporary rollback of incentives could pave the way for stronger domestic EV manufacturers, enhancing the U.S.'s competitive edge in the global automotive landscape. For investors, this environment presents both challenges and opportunities, requiring a nuanced understanding of policy impacts and market dynamics.

Conclusion

Adam Jonas concludes by reiterating the critical crossroads at which the U.S. auto industry stands—between preserving traditional ICE technologies and embracing disruptive advancements in EV and autonomous vehicle (AV) sectors. The forthcoming decisions by the Trump administration will play a pivotal role in determining the pace and direction of this transition.

"The decisions made in the next few years will likely dictate the pace and direction of the U.S.'s role in the global automotive landscape" ([04:00]).

Jonas encourages investors to stay informed and adaptable as the market evolves, highlighting the importance of strategic investment in the burgeoning EV sector.

Notable Quotes:

"We think the trajectory will be first a dip, then a RIP scenario." — Adam Jonas ([00:45])
"The real story is more nuanced." — Adam Jonas ([01:30])
"We struggle with the idea that the incoming Trump administration, working in close partnership with Musk, would structurally impede U.S. participation in two of the most important industrial transitions in over a century, electrification and embodied AI." — Adam Jonas ([02:10])
"This puts the US at a disadvantage compared to its global competitors and raises questions the Trump administration will need to address." — Adam Jonas ([03:00])
"We view this mainly as a temporary action to help support a more capable and sustainable crop of domestic champions that takes us to a resurgence in US Onshoring." — Adam Jonas ([03:45])
"The decisions made in the next few years will likely dictate the pace and direction of the U.S.'s role in the global automotive landscape." — Adam Jonas ([04:00])

This comprehensive summary encapsulates Adam Jonas's insights on the current state and future prospects of the U.S. automotive and EV markets, highlighting the interplay between policy, market dynamics, and technological advancements.

Transcript

A (0:00)

Welcome to Thoughts on the Market. I'm Adam Jonas, Morgan Stanley's head of global autos and shared mobility. Today I'll be talking about the outlook for U.S. automakers and electric vehicles. It's Thursday, January 2nd at 1pm in New York. With Trump's inauguration just around the corner, we've seen a resurgence in many auto stocks tied to internal combustion engines, also known as ice. While questions swirl around the outlook for electric vehicles in the near term, we do think it'll be a bumpy ride for the US EV market. But looking toward the second half of this year and beyond, we think there's hidden value in the EV sector for a number of reasons. First, let's look at the big picture. In our 2025 outlook for U.S. auto sales, we anticipate demand of 16.3 million units, a modest increase from the previous year, underpinned by projected US GDP growth of around 1.9% and lower policy interest rates for auto loans. Looking specifically at EVs, we think the trajectory will be first a dip, then a RIP scenario. That is, we're lowering our 2025 forecasts for US EV penetration to 8.5%, down slightly from 9% previously. However, our long term outlook remains unchanged and we continue to forecast significant growth for EVs by 2040. Now for the big question. What does the Trump administration mean for EVs? Following the US election, investors hopped on the ice is nice trade, based on the expectation that a Trump administration will bring more relaxed U.S. emission standards, reduced EV incentives, and finally increased tariffs, which would drive up the costs of key EV components such as batteries and semiconductors, predominantly manufactured in Asia. But the real story is more nuanced. You can't talk about EVs without talking about Elon Musk, who will be leading Trump's Department of Government Efficiency. And we struggle with the idea that the incoming Trump administration, working in close partnership with Musk, would structurally impede U.S. participation in two of the most important industrial transitions in over a century, electrification and embodied AI. If the US Wants to be a leader in autonomy, it must ultimately embrace EVs, which are the sockets of autonomous capability, and expand its EV infrastructure. How long will the US cling to the soothing vibrations of its internal combustion fleet, while its rivals in China solidify their dominance in software defined electric mobility? Not for very long, in our opinion. While a rolling back of incentives under Trump may make 2025 a reset year for EV adoption, we view this mainly as a temporary action to help support a more capable and sustainable crop of domestic champions that takes us to a resurgence in US Onshoring. Bringing manufacturing back to American soil has gained significant momentum and is another factor influencing the long term outlook not just for EV makers, but the entire supply chain. With the US light vehicle market predominantly ICE based at 92% of total sales, the real issue isn't the presence of gas powered combustion engines, but the glaring lack of advanced onshore EV production capabilities. Again, this puts the US At A disadvantage compared to its global competitors and raises questions the Trump administration will need to address. Just what type of manufacturing does the US Want to prioritize? Are we looking to maintain the status quo with ice, or are we aiming to be at the forefront of EV technology? No doubt the US Auto industry stands at a crossroads between maintaining traditional technologies and embracing new, potentially disruptive advancements in EV and AV sectors. The decisions made in the next few years will likely dictate the pace and direction of the U.S. s role in the global automotive landscape, and for investors, this brings new challenges as well as opportunities. Thanks for listening and if you enjoy the show, leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.