California Governor Gavin Newsom has announced a plan to reinstate state electric vehicle (EV) subsidies if former President Donald Trump eliminates federal EV purchase tax credits. This announcement has added complexity to the competition around zero-emission vehicles, impacting Tesla's (TSLA, Financial) stock price.
Trump is expected to cancel the federal EV purchase tax credit, which currently offers eligible buyers up to $7,500 in purchase incentives. In response, Newsom stated that California would initiate its own EV tax incentive policy. However, this announcement led to a 4% drop in Tesla's (TSLA, Financial) stock, while its competitor Rivian (RIVN) saw a surge of over 13%.
Two main reasons for the market reaction include Tesla's market advantage and the potential exclusion from California's subsidy. Investors believe Tesla, with its global scale and cost structure, can maintain profitability even without federal subsidies. Rivian and other competitors might face greater challenges, potentially allowing Tesla to strengthen its market position. However, there is a possibility that California's subsidy policy could exclude Tesla, which would be detrimental to the company.
California's subsidies may be funded through the state's greenhouse gas reduction fund and could set limits to promote innovation and competition. This could disadvantage Tesla, which accounts for about half of U.S. EV sales. In the first quarter of 2024, Tesla sold approximately 471,000 electric vehicles in the U.S., compared to Rivian's 43,000 units.
Analysts believe that despite political tensions, Tesla and its CEO Elon Musk have a strong chance of prevailing in this situation. Zero-emission vehicle (ZEV) credits are crucial for Tesla's profitability, having generated nearly $10 billion in revenue since late 2018. If both federal and state subsidies are canceled, it could create uncertainty for the entire EV industry.
