A Bumpy Road Ahead for Onshoring EVs

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Jan 2, 2025

Exploring the future of U.S. automakers, the discussion highlights a potential reset in the electric vehicle market by 2025. There's a prediction of a short-term dip in EV adoption due to economic factors, followed by significant long-term growth. The conversation also touches on the impact of policy changes and how they might revive traditional auto stocks linked to internal combustion engines. Overall, it emphasizes the hidden value in the EV sector despite immediate challenges.

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INSIGHT

EV Market Outlook

The US EV market anticipates a dip in 2025, followed by a significant rise, with a projected 8.5% penetration.
Despite potential setbacks under the Trump administration, long-term growth remains strong, aiming for substantial EV growth by 2040.

INSIGHT

Trump Administration and EVs

The incoming Trump administration, in partnership with Elon Musk, is unlikely to hinder US progress in electrification and AI.
The US must embrace EVs and expand its infrastructure to lead in autonomous technology.

INSIGHT

Onshoring and EV Production

Onshoring is gaining momentum and impacting the entire EV supply chain.
The key concern for the US auto industry is not ICE vehicles, but the lack of advanced onshore EV production.

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Our Head of Global Autos & Shared Mobility Adam Jonas discusses why the electric vehicle market may see a small reset in 2025, but ultimately accelerate under a Trump Administration.

----- Transcript -----

Adam Jonas: 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 U.S. 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 U.S. GDP growth of around 1.9 percent 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 U.S. EV penetration to 8.5 percent, down slightly from 9 percent 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 a Trump administration mean for EVs? Following the U.S. 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 U.S. 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 U.S. 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 U.S. 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 U.S. light vehicle market predominantly ICE-based at 92 percent 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 U.S. 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 U.S. 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 U.S. 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.