At the Israel business conference of Globes, held last week, Ilya Katz, the deputy in charge of the budget division at the Ministry of Finance, explained why the state must double the purchase tax on electric vehicles this January from 10% to 20%. The main reasoning was that electric vehicles are significantly cheaper for regular operation compared to gasoline vehicles (on which the purchase tax is 83%, DBG), and therefore they encourage excessive driving. According to him, “Our goal is not to fill up the roads, but to encourage travel by public transportation.”
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These things left us quite confused. Not because of the well-worn reasoning that “electric vehicles cause traffic jams”, which we have already heard many from the finance people, but because only a month ago the Accountant General’s Division announced that the finance representatives committed to transfer the government vehicle fleet to an electric vehicle. The announcement stated: “The government fleet has about 15,000 vehicles, among them the vehicles of the Israel Police, the prison service, the fire authority, and the various government ministries. Already today, the government vehicle administration is committed to purchasing only electric passenger vehicles for the government fleet from 2025.”
The accountant general is quoted in the announcement as saying “the move received and receives international echoes”, and the head of the property division in the wing added: “We are proud to stand in one line together with leading government bodies and our counterparts in the fight against the climate crisis in the field of government vehicles”.
So what can be understood from this? That a privately owned electric vehicle contributes to congestion, but an adjacent government vehicle does not? Or was the government’s goal from 2018 to transfer the entire Israeli car market to electricity by 2030 a serious mistake?
But the excuses for collecting electric vehicle taxes are not what really upsets the whole story, but rather the fact that the treasury’s taxation policy regarding electric vehicles is a socio-economic distortion. In other words, the government turns the “right” to own an economical electric vehicle or a modern vehicle in general into a privilege of the upper strata of the population and of the owners of compact cars. All this while the masses are required to pay dearly for fuel-wasting and polluting vehicles – or travel by public transport.
“Market forces will push the market towards an electric vehicle even after the tax increase,” added the representative of the budget department at the Israel Business Conference. This is no longer an excuse, but simply a disconnection from what is happening in the world, an attitude that is quite disconnected from what is happening on the ground. In practice, market forces have mainly made electric vehicles and new vehicles more expensive in the last two years and kept them away from the masses.
The energy crisis hits
The cost of energy is an inseparable component of the cost of vehicle production in the world, starting from the production phase of raw materials such as aluminum and steel, to the production and transportation phase. In previous years, the relative weight of this component in the cost of vehicle production is negligible. However, in the past year energy prices in Europe soared dramatically – the wholesale price of gas for industry became 13 times more expensive in the past year – and together with them the weight of the energy component in the cost of vehicle production soared.
According to a report by the research company S&P Global published at the beginning of the month, the price of the energy required to produce a car has risen from about 50 euros on average to more than 700 euros today, and this may be just the beginning. The report also stated that this coming winter, which is expected to be particularly cold, the energy crisis in Europe will worsen and lead to a loss of production of almost one and a half million vehicles compared to the planned.
The situation may lead to a severe disruption in the car supply capacity of the European industry, which has not yet recovered from the many disruptions that have befallen it in the past two years, chief among them the lack of chips and the Corona crisis. It should be noted that the European automobile industry also includes leading manufacturers from Japan and Korea, such as Toyota Hyundai and Kia, which supply Israel with tens of thousands of vehicles from European production plants.
Bottom line, fewer cars and higher prices – especially for electric vehicles.
Lithium breaks records
Last week the prices of lithium, the main raw material for the production of batteries for electric vehicles, continued to break records in the world markets. The price per ton of lithium carbonate for batteries is currently at $77,000 per ton, an increase of 188% in the last 12 months and an increase of almost six times compared to the beginning of 2021.
The main reason is the rising demand for electric vehicles and the frantic race of all the giants of the automobile industry and governments in the world to reserve full tanks for themselves. The good news is that analysts estimate that in the next two quarters the volume of lithium production in the world will grow significantly, reducing the price towards $50,000. On the other hand, the bad news is that due to the high demand for electric cars, even the drop in the production price, if it happens at all, will not be able to stop further increases in the price of lithium batteries, whose price makes up almost 50% of the total cost of an electric vehicle.
This process is already underway. Only in the last few days, popular Chinese models in Israel and new European models such as Volkswagen’s ID4 have become more expensive. All this before the purchase tax increase planned in January.
Chip market war
At the beginning of the summer, it seemed that the chip shortage that severely affected the global production of vehicles was coming to an end. The expectation was that in 2023 the scale of production would begin to return to itself and together with the recession, the gap between demand and supply would decrease. But then the two most powerful powers in the world, the United States and China, entered into a new trade war and the cards were once again dealt. At the beginning of October, the American government published a series of export restrictions to China on technologies for the production of essential chips, some of which are also used by the automotive industry.
The restrictions, which in the first phase mainly concerned areas such as artificial intelligence, encryption and data centers, are now also focused on equipment for the production of chips, which are also used by the automotive industry. They include logic chips in 16nm technology and below, DRAM chips below 18nm and larger 28nm chips except for those allowed for export.
Now, the major chip manufacturers and suppliers around the world are rushing to align with the American guidelines, and this process is expected to be felt on two levels: in the short term, the Chinese government and industry in the country are expected to try to obtain very significant stocks of chips from every possible source. In the long term, there may be a new shortage of chips in the Chinese automobile industry, especially in the electric vehicle segment in which the Asian powerhouse leads. Both of these processes may push up chip prices and create supply difficulties again.
Bottom line, the market situation completely refutes the premise that led in 2018 to the formulation of the multi-year tax outline to increase the tax on electric vehicles in Israel in the coming years. That is, the assumption that “market forces” will lead to a dramatic drop in electric vehicle prices in the world and the need for a tax benefit will decrease. The upcoming tax increase in January will only give electric vehicle prices another significant push in the wrong direction.