Charging Ahead with Electrification—A Conversation About the Auto Industry

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Leslie McGranahan: --to our Project Hometown event, Charging ahead with electrification-- a conversation about the auto industry. I am Leslie McGranahan, Vice President and Director of Regional Research at the Federal Reserve Bank of Chicago. On behalf of the Federal Reserve Bank of Chicago and especially our Detroit branch, I want to welcome everyone today.

Project Hometown is our forum for bringing together diverse perspectives to examine how our hometowns can recover from the pandemic, overcome longstanding inequities, grow stronger, and provide all people with the opportunity to thrive. Over the past year and a half, we've held about 20 events highlighting the challenges and opportunities of communities within our district. Our topics have ranged from learning loss to access to capital. And we've held events focused on all five of our seven district states.

Today, we turn to the topic of vehicle electrification. The Chicago Feds District has historically been, and continues to be, the home of the domestic auto industry. We have followed the industry through good times and bad. We are now at an inflection point as the technological transformation of the vehicle drive train will profoundly impact industry supply chains and labor inputs. The EV transformation will affect workers and communities, and as a result, our hometowns, and brings forth many questions about the future of the industry and the communities that support it.

What are the opportunities and challenges for auto communities? How can the labor and skills of current auto workers be employed in electric vehicle production? How do we fund roads as gasoline tax revenues fall due to the increase in the electric fleet? How will infrastructure respond to the needs for charging?

This is an area that the Chicago Fed is committed to understanding through research, outreach, and conversations, such as the one that is occurring today. I'm going to turn the program over to my colleague Thomas Klier, Senior Economist and Research Advisor, who has extensively researched the auto industry with a particular focus on the geography of auto production. Thomas.

THOMAS KLIER: Thank you very much, Leslie, for framing today's event. Welcome, everybody. I'm Thomas Klier as Leslie said, a Senior Economist at the Federal Reserve Bank of Chicago. And I'd like to extend a special welcome to our two guests today, Kristin Dziczek and John Graham. And thanks to all of you for attending our event.

Kristin is a senior vice president of-- Vice President of Research at the Center for Automotive Research at the Center of-- and she joined there in 2005 and has more than 25 years of experience as a researcher and policy analyst. John is a professor of risk analysis and decision science at the Paul H. O'Neill School of Public and Environmental Affairs at Indiana University. And he recently wrote a book called The Global Rise of the Modern Plug-in Electric Vehicle, which is published by Elgar Publishing.

Before we get started with our conversation, one brief housekeeping item. I know many of you took the opportunity to submit questions when registering for the event. We incorporated those in the questions that are put together to our experts. You will have the opportunity to submit questions live during the event in the chat box. We are monitoring that, and we'll incorporate those questions as we can.

So without further ado, a conversation about the auto industry in the context of pending electrification. So let's jump right in. It's a timely topic. It's of great interest to many of you, especially in the Midwest, which, of course, has been the heartland of the US auto industry for many decades.

If there was any doubt about the relevance of this topic, last week Tuesday, the announcement by Ford sort of brought the point home that this is looking very real-- $7 billion-plus investment in a brand-new assembly plant and three battery plants to be built together with their partner, their South Korean battery partner. So let me start, Kristin, with you, on the challenges in this possible transformation for the Midwest, the traditional auto region.

In the Ford announcement, none of these four new plants are going to the heartland of the industry. Detroit has been the center of North America's auto industry for many decades. Michigan, Indiana, and Ohio have been the center of sort of the key parts production that go into internal combustion engine vehicles, such as engines and transmissions. And of course, that's all a specialized function.

Is that role at risk as the industry moves toward electrification? How worried should we be in the heartland about that?

KRISTIN DZICZEK: Well, there's certainly a lot on the line, Thomas. I totalled up all of the employees in making engines and transmissions-- traditional internal combustion engine parts. And the Region 7, Chicago Fed region, has 44% of the employment in the United States that is making engines and transmissions. If we add in Ohio, we're going to be well over 60%. And it's a huge investment here.

And the automakers have invested in their plants. They are putting electric transmissions and motors into existing powertrain plants. And the concern I have is about the smaller suppliers. The large Tier 1's are heavily invested in this electric transformation as well, some more than others, and they are prepared to go to the scale we need to go to, to support electric vehicle manufacturing.

Not all small manufacturers will be able to make this leap. And there are hundreds of them in this region. And that's my real concern, is the, what are we doing about the small manufacturers?

THOMAS KLIER: Right. So continuing along this a little bit further, are there parts of the market where, maybe, the vehicle producers and then the supply chain are better positioned than others-- so for example, thinking cars versus pickup trucks? Are we-- are there things that communities should be paying attention to in particular if they're very, very exposed to this industry? I mean, we can-- there's lots of places that have been strongly tied to this industry for better or for worse. And for many years, it's been for better.

And is there something that one should focus on sort of from the economic development realm?

KRISTIN DZICZEK: Yeah. So the first question was about cars versus trucks and the strength in this region. So this region is SUVs and pickup trucks. There's the Chicago Ford plant making large SUVs. We have a lot of pickup truck production here, even in Northern Indiana with Fort Wayne plant for GM. This is a heavy truck/SUV region.

And the good news is, there's-- I think people, consumers, think about EVs as they want to have price parity. They want to have something that doesn't cost more. They want to have something that has what I call utility parity.

So the first hybrid vehicles that came out were small. And the first EVs, too-- the Nissan Leaf or the Chevy Bolt were small vehicles that not everybody's life fits into. And when you look at the product plans, the automakers across the board have plans to electrify everything from the small vehicles to the pickup trucks, cargo vehicles, and, most importantly, the cross-utility vehicle, which is two out of every five vehicles sold in the United States is a cross-utility.

So that electrification is coming across all of the segments. So I think our truck heaviness doesn't put us at a disadvantage necessarily. The Ford investment in Tennessee to build the F-150 Lightning there-- that's 250,00-300,000 units of capacity. And there may be an upper limit to how many trucks Americans will buy. So there may be some consolidation.

And I think for communities, that's really what they need to be thinking about is, there's a lot of money on the Street, investments to be made. And I know that a lot of communities and states in this region are bidding on really big projects right now. But they also have to think about, on the way down, consolidation. And is it a win to win these last internal combustion engine plants standing? Or will that work, maybe, migrate even further to lower-cost regions like Mexico?

Take example the CAMI plant in Ontario. So that was a plant that was a joint venture plant. It's a GM plant now. It was making the Chevy Equinox-- very popular vehicle, 250,000-300,000 vehicles a year. And they got a new investment in their last contract with Unifor to become the BrightDrop plant. BrightDrop is GM's division for electric commercial vehicles.

And that's a toehold on the future, an electric vehicle investment in that plant, and will secure a future for that plant. But the units are 20,000, 25,000, a tenth of the output of what you had before. So I think we're going to go through this period where internal combustion engines are ramping down, EVs are not quite at scale. And those two lines are going to cross, and it's going to be-- going to be low productivity and very ugly for a while. And in that period, we'll have a lot of consolidation.

So I think communities need to think about consolidation and what they might be willing to do to keep the investments that they have, and win on the consolidation and win the new business.

THOMAS KLIER: OK, yeah. That's quite interesting. So I want to pick up that point and a little bit, the one about transition and consolidation. Now I want to bring in John. And so the first question for you, John, is about-- so the issue of, where does this electrification come from?

I mean, electric vehicles aren't new as a technical way of propelling individuals and goods. They've been around. They were around over 100 years ago when the industry sort of sorted out which is the best way to move people and goods around. So let's talk a bit about this space of automotive regulation. That's an area you have a lot of expertise in.

And so I understand-- I just got a message from our host that John has potentially video issues. But I think audio is working. John, can you confirm that you can hear us?

KRISTIN DZICZEK: I can hear you. I'm fine.

THOMAS KLIER: OK. No worries, then. Let's just go ahead. So talk a bit about what's behind this drive, what's behind the move towards electrification? There are policy goals about reducing greenhouse gas emissions. And it seems that the impetus comes primarily from a regulatory side.

What do we know about which policies work? You've looked at this at countries around the world and reported out on this expertly in your book that was recently published. So could you share some insights on that question with the audience, please?

JOHN GRAHAM: Sure, Tom. When I talk about electric vehicles with my students, they often think of the environment as the motivation. But if you look at the largest car market in the world, which is China, the motivation is really not environment. The motivation has been, number one, to leapfrog the internal combustion engine and put China's auto industry in a globally competitive position. China's economic planners, they are so jealous of what Toyota did for Japan, what GM did for the United States, and of course, what Volkswagen did for Germany. They would like to see their industry as in a leadership position.

The second reason China is so interested is that they are importing the vast majority of their oil, mostly from the Middle East. And while they have a very improved modernized navy, the security planners in China don't feel they can defend the sea lanes from the Persian Gulf to the South China Sea. So you have much more powerful influences in the Chinese government-- the economic planners and the security planners who are really interested in connecting electric vehicles with coal-fired electricity. And coal-fired electricity remains a very important part of the Chinese economy.

So it's very different in Europe and the US, where the talk is predominantly about carbon dioxide control, climate change, and greenhouse gases. But these lead to electric vehicles for different reasons that they are in China.

THOMAS KLIER: OK. So thanks, John. So that's the-- so it's not just the environment. What about Europe? There is quite a few countries that potentially we could learn something from. What's your conclusion there?

JOHN GRAHAM: Well, in Europe as a whole, there was relatively limited interest in electric vehicles until 2015, when the Volkswagen emissions cheating scandal was disclosed. And that damaged the credibility of both the German government and the diesel engine technology in Europe. And that led ultimately to European Union's very stringent carbon dioxide standards, which is moving the European industry rapidly toward electric vehicles.

But in terms of individual country, you'd have to go to Norway and find the country with the largest penetration of electric vehicles in the world, now in the 70% to 80% range. And they have done this primarily through tax policy. They tax internal combustion engines so heavily that it's cheaper for a consumer in the showroom to choose an electric car than it is to choose an internal combustion engine car.

THOMAS KLIER: Right. So it's-- as usual, when you have such a big transition, there's not a single way you can plan it all, explain it all. And so that's quite remarkable, to lay out the different origins that ultimately lead to policy decisions.

So I have one more question for you before I go back to Kristin. And that sort of goes to a bit of nomenclature. Because that's potentially confusing when we talk about electrification. So in some classifications, EVs include hybrids and plug-in hybrids, as well as the purely battery-operated vehicles.

So in terms of the policies, when we talk about Norway and China, and sort of the push that we're observing in the United States as well, the effort-- if you want to get away from greenhouse gases, it seems like you're pushing towards battery-operated vehicles. So in that space, how should we think about the role of hybrids, then? Is that a transitional technology? Or is there a straight line to battery electric vehicles? Or should we think this technology story is still open?

I mean, there are alternatives out there. And as economists, one always has to be careful to focus in on incentivizing specific technologies as opposed to specific characteristics, right? So I wonder if you have any thoughts about that, John?

JOHN GRAHAM: Yes, indeed. It's a great question. And of course, Toyota and hybrid have had tremendous success in commercializing the conventional hybrid electric vehicle, exemplified by the Toyota Prius. If you look closely at the marketing data, the sales data in Europe and in California, you're finding that the conventional hybrid electric vehicle is actually holding up pretty well in the marketplace, even though it doesn't have all the subsidies. It doesn't have all of the access to the carpool lanes like on the freeways of California. So Toyota has been tremendously successful.

And now the real question is, can they persuade governments around the world to allow them to continue to offer their hybrid electric vehicles? Because they do have a gasoline engine. Early signals are the Japanese government is going to allow hybrid electric vehicles as well as plug-in electric vehicles. The United Kingdom issued a proposal to eliminate any vehicle that has a gasoline or a diesel engine.

Then, because of concerns raised by some of the workers affiliated with plants in the UK that make hybrid electric vehicles, they've announced a delay in the phase-out of eight hybrid electric vehicles. So they could be commercialized somewhat longer. I think it's too early to tell what's going to happen in the United States. But this is a major issue for the Japanese government and for these Japanese producers who've been very successful with hybrids.

THOMAS KLIER: Yes, right. So--

KRISTIN DZICZEK: To jump a little bit, Thomas, there is--

THOMAS KLIER: Yes, please.

KRISTIN DZICZEK: [INAUDIBLE] research group at the University of Toronto that has done some modeling on this, looking at what's the optimum mix of battery, electric, plug-in hybrid, hybrid, and internal combustion engines to get the lowest-- get carbon out of the transportation sector. And depending on where you are in the country, the grid may not be as clean if you have a plug-in or battery electric vehicle.

So the way to get to the lowest carbon, the solution for the United States is a mix of hybrids, plug-in hybrids, battery electric vehicles, depending on what part of the country you're in.

THOMAS KLIER: Right, right. So I think it's important to sort of lay this out, because it's not-- there are margins along which not only the consumer can make a decision, but also the policy has margins to operate on. And we'll switch over to the consumer discussion, the consumer perspective, a little bit later in the conversation.

Kristin, I wanted to come back to you sort of rounding out sort of the question of challenges for the labor side. So my first set of questions to you address the questions of geography of the industry. There's another element that I'd like your thoughts on. And that goes sort of, if you want to use a technical term, the production technology that is being utilized to produce vehicles, and then the parts that are needed to finish them.

And for purely battery-operated vehicles, they require far fewer parts, and subsequently, far less time and person-hours to put them together. So that is a major challenge, even if-- you know, so in the ideal situation where there is no bump in growth for the industry, production volumes stay the same. So all of a sudden, if the transition were to happen quickly, you would need far fewer people to produce vehicles and then parts to satisfy the demand for mobility or transportation.

What's the thinking about that? What are. Some ideas of trying to address that particular challenge about being threatened under the required labor input here?

KRISTIN DZICZEK: Well, you're right that there are fewer parts. There's also a different level of scale of manufacturing. So when Stellantis did their EV Day in July, they talked about having four platforms with 2 million vehicles per platform globally. And that's a step-up. That's a scale that not every supplier can play at.

And I think, especially for those vehicles that are clean sheet of paper, brand-new platform, not just taking an existing platform and making it electric but starting from scratch, there is a whole rethinking of how manufacturing works, and how commonality of parts works, how scale is going to impact this. Because EVs are not profitable. Pickup trucks are very profitable.

But the way to get to profitability is to reach scale and commonality. An example of this I think I've shared with you before is there's a supplier that is making a motor for a vehicle that's a sporty electric vehicle. And that same manufacturer makes cargo vehicle. And that motor is in the same-- it's the same motor in the-- I'll just say, in the Mach-E as they're going to put on the transit, the electric transit.

So in what world is a propulsion component for a sports car and a cargo vehicle potentially the same part or the same component? So that scale issue is going to have an impact on labor as well-- fewer jobs and fewer companies, potentially, as the supply base consolidates and ramps up to that kind of scale. The unions have negotiated with their employers to get that new technology.

The Canadian Union just did that at the end of last year/beginning of this year, and won a whole lot of electric vehicle investment in Canada. I suspect 2023 is going to be a very interesting year for the UAW and Unifor to come to the table with a lot more investment on the table. Some of those investments are going to be pulled ahead, though.

I mean, we saw the announcement for Ford, as you mentioned, last week. Those four plants, three battery plants and a new assembly plant, are going into Kentucky and Tennessee, not thought of as labor hotbeds. But they are-- the assembly plant, at least, is a Ford-- is a Ford plant, only Ford. And there is a language in their contract that they have to have neutrality, and the workers will vote whether they're going to be part of the union.

The joint ventures, however-- in the joint ventures that GM has with their battery supplier-- are not necessarily under that same provision. So those joint venture plans, the new entrants into this space, you're going to have a very big change in the unionization of the workforce and potentially the wages that are paid in those new entrants and new plants and new components. The engines and transmissions, even at the international firms, are largely paid at the higher wage, the assembly wage.

But if battery cells come in, and there's a new standard for battery cell wages-- the Tesla Gigafactory in Nevada has a lower wage than an engine plant, say, in Anna, Ohio-- then there's a more different competitive stance for work in that sector. So I think we're going to see a lot of transition in who's supplying who, and then the unionization front there, and yeah, fewer parts, fewer workers.

THOMAS KLIER: Right. So that's fascinating, because you lay out-- you know, when you look at the aggregate numbers, that's even too simple. Even if that's somewhat scary, that's too simple of a picture, because it kind of masks the undergoing changes to the structure of the industry that's-- just because you, for example, need fewer people to put together an electric vehicle and fewer parts, does not mean that every plant will shrink in size. Scale can, in fact, expand. And that means at the individual supplier level or at the individual part level, it could go either way depending on where you are in this process.

One element I wanted to follow up with you on, Kristin, is the question of skills. Is there-- I mean, we have some early evidence on this now. Certainly from the assembly side, so there are some carmakers who make-- I think the Chevy Bolt is produced in Hamtramck, on the same line as, what do we call them, the ICE vehicles, the Internal Combustion Engine vehicles, just because--

KRISTIN DZICZEK: They, yeah. That's a different plant now, though.

THOMAS KLIER: It's not-- it's a different plant, right. But at some point, they were on the same line. So what do we know about transformation of skill requirements? Is there a big change coming as well?

KRISTIN DZICZEK: You know, there is. And I think we have to think about the skills in different buckets. So you're talking about the skills of the production workers or the skilled trades workers in the plants. And quite frankly, that stuff doesn't change dramatically. There are some safety standards that they have to learn about for working with high voltage electricity on the line. Their jobs will be somewhat different.

But that augment, that skills augment, is not-- go back to community college for weeks or months. And it's very doable. We at the Center for Automotive Research recently did a study for a client. And we were talking about something completely different. We were talking about the technology side of things. And every interview we did, they brought up skills.

We weren't asking about skills. We were asking about workers. And the skill need and the concern that they had was for technical skills and engineering. And they cannot get enough of the folks who know batteries, who know electricity. We're really shifting from a world where mechanical engineering was dominant, to where electrical and computer engineering is dominant. And there is a gulf to cross there.

And having those skills in the Midwest is an issue. That's why you do see some of the car companies have a little outpost out in California, or maybe around Austin, Texas. Some have them down in Atlanta for some of those software and related technologies.

And the software is not just related to electrical vehicles but to the connectivity, to the automated driving, and to just about everything that's going to be in our car. GM announced this week a whole new software platform, and going to a sort of a subscription service. Ford is doing that with their commercial vehicles with Ford Pro.

So there's a lot more software, and electrical, and electronic engineering that we need. And I think that's really our crisis, not the production worker skill trades transformation.

THOMAS KLIER: OK, yeah. So it's software engineering. So the vehicle is, what, a phone with wheels. And you can update your characteristics--

KRISTIN DZICZEK: [INAUDIBLE] going to make them, right?

[LAUGHTER]

THOMAS KLIER: You can up-- yeah, right. Right, there's that. But let's hope people keep cars longer than they keep their phones. But anyway. So it's another fascinating way of thinking about how profound of a transformation we're looking at here, right? So, so far, every subject that we touched on, or every facet of this discussion we touched on, the answers I heard from you and John suggest that it's actually more complicated than we even started thinking or that the question suggested.

And with that, I have a very simple question for John, because I want to round it out. I want to go on the environmental issue. So to the extent that environmental policy is driving the policy making that sort of pushes us towards electrification, is that-- is the comparison of on the environmental impact or the environmental benefits, is that a done deal? Is that a clear-cut answer?

Can one signal as a policy maker to consumers that that's a net gain, if you switch from internal combustion engine to battery electric vehicles? John, I wonder if you have any thoughts on that.

JOHN GRAHAM: Sure. The life cycle studies are being done around the world on this question. And what's happening, as the dependence on coal declines, and as natural gas and renewables grow, all of these trends are favorable toward the electric vehicle. It is life cycle greenhouse gas emissions.

But there are still certain parts of the world, highly coal-dependent parts, whether they be in the US, Europe, or China, where it really is not an environmental-- it's not a big advantage to be going to electric vehicles. And this is where hybrid electric vehicles have a significant advantage. They don't rely on the grid for their electricity. They do provide significant greenhouse gas control.

There may be a transition period where hybrid electric vehicles are a better investment than plug-in vehicles. And the Japanese government has been taking that position. And as you may know, Japan is heavily dependent on fossil fuels for its electricity.

THOMAS KLIER: Right, right. So one question that just came into the chat was about-- specifically about the CAFE rules. Of course, that's a somewhat moving target, because I understand that discussions of refashioning the CAFE rules and-- in the past, there have been margins for vehicle producers to get extra credit. And I noticed that Tesla advantage of selling [INAUDIBLE] EVs only to sell CAFE credits to other producers who are short on that.

To what extent are the CAFE rules pushing towards electric vehicles as opposed to-- I mean, BEVs as opposed to hybrids, specifically in the US market? I wonder if either Kristin or John has a thought on that.

JOHN GRAHAM: Well, just one quick thought is the structure of both EPA regulations and NHTSA regulations. Though for different reasons, they both strongly encourage manufacturers to do electrification. So hybrids are not really given the same kind of compliance incentive, if you will, that plug-in vehicles are. So that's definitely the situation in the US.

It's even more true in China. If you look at their CAFE system, their fuel economy system. Japan, however, has a more evenhanded approach where hybrid electric vehicles still have a significant compliance incentive like plug-ins do.

THOMAS KLIER: Right. Kristin, did you want to comment on that?

KRISTIN DZICZEK: Well, I think you need to think about where we've gone on this regulatory journey. So we had the Obama rules and the One National Program that was reversed under Trump kind of in the last year. And then Biden came in and reversed it again, but didn't go all the way back to where we were before in the Obama rules.

And then those are through 2026. And it's almost a moot point, because the vehicles that are going to be made in 2026 are in the pipeline, in the channels. And we're moving forward with complying with where we thought regulations were going to go.

But at the same time, Biden announced that-- he announced that there is rule making for beyond 2026 and this target of 50% battery, electric, and plug-in hybrid vehicles sales in the US by 2030. Most forecasts before Biden took office were putting us around 20% of the market by 2030. So that soft target is not anything that's going to incur fines or anything if nobody gets there. But it was a signal to the industry and to progressives in Congress that the next set of rules are going to be much more stringent and looking at getting a lot of carbon out of personal transportation.

You know, personal transportation, and transportation in general, overtook power generation as the largest carbon emitter in the United States just a few years ago. So this is-- we're now this sore thumb sticking out and need to be addressed. So that's why, I think, you're seeing a lot of focus on EVs and this transformation.

THOMAS KLIER: Right, right. And that's what the debate is about in the policy space, the incentives towards EVs and then, of course, all of the accompanying parts as well. That sort of gets to the infrastructure question. It's going to take a whole bunch of stuff to make this happen.

So we have-- nobody has to worry about gassing up a car, because there are gas stations everywhere. Of course, they weren't there when gasoline first emerged as a way to propel vehicles. This is something we tend to forget. I mean, none of us were around then. But still, I would imagine if gas stations came about in a process, originally it wasn't quite simple to gas up your car. And the original gas station probably was just a corner store with a bucket or a can of whatever, kerosene or something.

So what are the risks for electrification? Are we ready. if this thing takes off? I mean, where are the pressure points that we need to get right to make sure this holds up? Are we putting the grid at risk if you have enough charging stations for 30% of vehicle sales in 2030? That's just one question.

What about other risks? I don't know who wants to go first. I'm going to ask both of you.

JOHN GRAHAM: Let me take a crack at that and start by saying that Kristin is right that the national target of, say, 40% or 50% electric cars is a soft target. But if you go to the State of California and the states that are affiliated with California, they are requiring zero-emission vehicle mandates. So they're requiring a certain percentage of sales in each of those states-- I believe higher rates for their electricity-- to pay for people who are buying electric vehicles to have access to charging stations.

But reminder-- 50% of those electric vehicles are sold by Tesla. And a lot of those are very premium products. So here you have ordinary ratepayers in a state like California helping subsidize Tesla buyers get their charging stations. Now, in fact, Tesla has their own proprietary charging system. But they are, in fact, dominating the overall market for electric vehicles.

An alternative approach that some states are using is to actually tax the registration of electric vehicle, collect revenue from electric vehicle buyers, and then use that to help finance the early development of the infrastructure. So different things are happening in different states. But we need to watch what's happening in those zero-emission vehicle mandating states, because that's where it's all going to happen first.

KRISTIN DZICZEK: Well, and if I could jump in, there is $7.5 billion for DC Fast Charging in the bipartisan infrastructure bill that is all stuck in Congress with the Build Back Better, and the debt ceiling, and everything else that has to be solved in Washington that we don't need to talk about. But the $7.5 billion for DC Fast Charging goes straight at the convenience parity that consumers want.

They want-- you can get in your car, you know there's a gas station between Detroit and Chicago, a couple of them maybe. And you know that you're not going to be sitting on the side of the road for an hour while you fill up with gas. So that convenience of time for recharging and knowing that there's charging along your path is critical to consumers thinking about this.

Now, it's funny, because gasoline engine vehicle, the gas tanks are getting smaller and smaller so the vehicle weighs less. So your range on a gasoline vehicle might be 250, 200 miles. But in an electric vehicle, consumers seem to want 300 miles plus. The reality is, most of them are going to be charging at home. You have to have a home in order to charge at home or have a multi-unit dwelling that has charging in its parking area.

But a large share of charging is going to be done at home on a level 2 charger. So this DC Fast Charge Network is critical for people to think about their longer trips. But most of their short trips are going to be going to be close.

I do want to point-- John mentions that some states are taxing EVs to pay for infrastructure. It's also to get backfill for gas taxes and the road infrastructure, which we have a problem with gas tax anyway due to inflation, due to increasing fuel economy of the internal combustion engine vehicle base. And then add electrification to that, and we've got a crisis coming for road funding right around the corner. And I don't know what we're going to do about that. There's nothing in the federal legislation to address that at this point.

THOMAS KLIER: Yeah. No, I'm glad you brought that up, Kristin. That's an important addition, right? So because you could have the majority of people driving on roads without using gasoline, and that channel for raising funds for infrastructure would then disappear. So obviously, it requires a rethink even if it's not popular. But you're going to have to do something about infrastructure, because for starters, the battery electric vehicles are not lightweight. Batteries are heavy.

KRISTIN DZICZEK: That's not as much of an issue, Thomas. The marginal difference in a light vehicle, whether it's an internal combustion engine or a battery, is not the wear and tear on the roads. It's trucks, it's trucking. And once you electrify medium-duty trucks and the box trucks, and those get heavy-- and semis are a long way from being electrified. But when we do that, we're going to have some more road wear. But I don't think it's an issue with the light vehicles.

THOMAS KLIER: Right. OK, good. Yeah. No, I was hung up on the consumer side, but there's clearly-- there's a lot of freight transportation going on as well using the same road infrastructure. So thanks for the reminder.

So I want to move on to the consumer sphere for a little bit. So, so far, we've talked about the community aspect, the industry structure, the environmental aspect of policy regulation. But there's one important piece of the equation we haven't talked about. And that's people that buy cars-- or trucks, for that matter.

So at the moment, the share of new vehicle sales in the US that are purely battery electric vehicles is less than 3%. And we're talking about goals of 50% of sales by 2030. That's less than 10 years away. Some companies have set aspirations to stop producing internal combustion engine vehicles just a few years after that.

So it seems to be a bit of a-- I don't want to call it a non sequitur, but there is-- this thing is going to have to take off sort of radically. And so the it seems like on balance, it's a little bit more driven by sort of strategic decisions on the policy and the regulatory side.

So what is it going to take for the consumer to fall in line here? What's holding consumers back? Is it range anxiety? Is it the interrelated availability of charging stations? Is it affordability? Is it. Concerns about technology?

KRISTIN DZICZEK: I think all of those things, Thomas, the parities that I talk about are price parity, utility parity, and convenience parity. You need to have it not cost a lot more, have the vehicle that fits your lifestyle, and it's not more difficult to fit into your life. And that's really what consumers are looking for here, I think.

I want to point out, last year it was 2.1% of the market. This year it's 3% so far. That's a huge jump. And in a pandemic year, when we had such widespread economic anxiety and auto sales were strong but still down 15%, the electrified component of vehicle sales were up 5% last year. So all of the hybrid, plug-in hybrid, battery electric, all of those are up massive amounts so far this year. The year-over-year changes, even over a gain year last year, are showing that consumers have really made the switch.

And I think some of it is just availability in the showrooms, what's there, and getting that experience of driving them, and a broader concern about the environment. The pandemic really did some things for people. You know, we saw rewilding. I saw coyotes walking down Michigan Avenue in Chicago.

But that, stop everything and think about what we have been doing, I think it's turned a lot of folks to being on board with addressing climate change as one of the major crises of our time. So this is as there's more availability. So like, I think in North America there were about 60 electrified vehicles produced in North America last year. In just two years, it's going to be over 200.

So we're quickly ramping up the availability, the choice, the models that will be in the showroom. And when you go in to buy a vehicle, that's going to be part of your consideration or part of your shopping, is which powertrain do I want? And is this going to fit my lifestyle?

I do think range anxiety is a huge barrier. And I think the media reports and problems that we've had with car fires, both Teslas and Bolts, don't instill great confidence in the buying public that this is their time to get in. Maybe we'll wait a little while till they work all this stuff out. But I think consumers are coming around really fast.

JOHN GRAHAM: That's certainly the experience in both Europe and in China, where you have market shares for electric vehicles now. Depending on the region, they're running in the 15% to 25% range, which is well past where California is, which is just over 10%.

So what's the difference, you might say? What's the difference about China and Europe versus the United States? Well, one of the big differences is, is that the affordable electric vehicles are selling in Europe and China. And in China, there are all kinds of price points where you can get an electric vehicle. In the United States, even with a lot of the additional offerings that Kristin just described, most of the action is in the premium market where people are trying to compete with Tesla and demonstrate that they can take part in Tesla's market.

So the key question is going to be, how do you get the mainstream American consumer-- a new car buyer on average will pay like $40,000 for a new vehicle. How about people in that range? And you won't see, really, goals that are being set in the United States be met by 2030 unless we get offerings from automakers that consumers want in the middle of the price range for new vehicles.

KRISTIN DZICZEK: That's a great point, John. And I think it's important to point out, too, when you're talk about making electric vehicles affordable to average Americans, average American household income is around $68,000. The average new vehicle transaction price is $40,000. The average new vehicle buyer is in a household income range usually around $100,000.

So this is already a luxury product, a new car is. There are in the House version of the consumer incentive rewrite, there's incentives for used EVs to try to make it more affordable and get more people driving EVs, and making that sort of a pull system to proliferate electrification through all segments of the population.

But I think that it's an excellent point that these are expensive. And they need to make money on them. And they haven't been making money off electric vehicles till now. Getting to those scale stuff we talked about earlier, getting commonality, is going to help bring those prices down-- or cost down, at least. Prices may stay where they are.

THOMAS KLIER: So it is-- at the end of the day, it does come down to economics, like so many times. And so to me, that sort of points to two items. I mean, John spoke to that earlier when you reported on European countries, in particular Norway's experience. So that points up-- so you have this transition from a policymaker perspective. It will take substantial policies in place to make-- to get over that hurdle, the cost hurdle, to make electric vehicles more affordable. And that's what's being discussed right now in terms of subsidies.

The other question, of course, that's-- I think that's a more vexing one. How come in the Chinese, and especially in the European market, more affordable battery electric vehicles are being offered? I mean, in a-- it just reminded me of something that played out in the industry many years ago. And that was the arrival of the small cars. The VW Beetle sort of stole the show. I mean, is that-- that's sort of a remote possibility, but presumably it's not.

So if you leave that up to somebody else to walk into that space and the consumers are ready to wait for a product like that, that's an opportunity in terms of competitiveness, isn't it?

KRISTIN DZICZEK: Well, I think it's a threat that is considered strongly by this administration by the current Congress. The consumer incentive bill that's in Build Back Better now that came through the House has US content rules, has a UAW plus up, has a lot of thumb on the scale for making them in the US. And that, I think, is going to keep out the small vehicles.

There's a lot of Chinese manufacturers that would love to sell EVs in the US and get a $7,500 credit. We would-- some of the European producers might want to bring their smaller cars here and pick up that credit as well. But I think our policy is tipping toward Made in North America, at least or Made in the US. And that, we haven't made small cars in a very, very long time. And the US market has not embraced small cars in a long time.

So I think that would cause consumers to have to really shift their preferences to the smaller and less expensive cars. There is one available, by the way. There's a Chinese vehicle-- well, I don't know if it's available. Yeah, they're pushing to have it available-- the Kandi K27. It looks like a really interesting golf cart. And it's $17,000 once you get the $7,500 credit that they think that they're going to qualify for.

But that's what's knocking at the door, I think, is an influx of low-cost electric vehicles from around the world to this market. And that's-- the policy is lining up to block that and to put more on the scale of making things in the US.

THOMAS KLIER: Right, right. So John, did you have any thoughts on that particular point?

JOHN GRAHAM: Yes, I agree with Kristin's basic point. And I also want to remind people that most of the automakers in government forecasts around sales of electric vehicles in the last decade have been too optimistic. The Chevrolet Volt, the Chevrolet Bolt, the Nissan Leaf-- there was a Mitsubishi product. All of these products had corporate production plans and government forecasts that were way in excess of what was actually sold.

The only electric vehicles in the US market that have actually met forecasts or exceeded them have been in the premium market. Tesla products, the BMW i3 product, these are products that have really sold very nicely. So the real question is, when are we going to see a product that's offered that's reasonably a price, that a manufacturer can make money on?

And it looks to me like Volkswagen may be the first company to actually try to do this on scale. But they don't actually have a tremendous experience in the US compared to what they have in Europe or in China, where they're a very powerful player. So it's going to be very fascinating to watch what happens with the competition around offering affordable electric vehicles. And as Kristin says, how much incentive is the government the US going to give people to buy these vehicles? Because in China and Europe, the incentives are very large.

KRISTIN DZICZEK: There's not a market in the world that doesn't get to higher EVs with incentives. And I meant to point out earlier, these incentives are often not just at the point of purchase. There's-- in Norway, there's toll roads everywhere. And you get either-- well, for a while it was you didn't pay at all, but now it's, I think, it's a discount, discounted rate if you're driving an electric vehicle on the toll roads.

There's discounted parking, discounted charging, discounted annual VAT that you would pay. There's a stream of benefits from an EV, money in your pocketbook, basically, from owning, not just at the point of purchase. And you know, Norway's an interesting case. I always say their real population is in an area that's about the size of Detroit to Chicago.

So if all we had to do is build out a really robust electric vehicle infrastructure from Detroit to Chicago, I think we could do that. We're a really big country with a lot of open space. There's a Tesla supercharging network all the way to the Arctic Circle and the Lofoten islands in Norway. But there's a lot of areas in this country that we would have to electrify in order to get to that 50%, or even get above 50%.

It's going to be tough based on our urban-rural concentration, and especially if this becomes a political football that this is Biden's thing. 50% of Americans can't agree on anything. So they may not go along with this if it becomes too political.

JOHN GRAHAM: There'll be a transition period, where most households have-- 75% of Americans who own a new vehicle have at least two vehicles. So you're going to have a transition period where people are going to have one vehicle which is an internal combustion engine vehicle and one vehicle which is a plug-in vehicle. And then people will experience that. They'll see how they feel about it. And the market will play itself out.

THOMAS KLIER: Yes.

KRISTIN DZICZEK: Lately in my household. My 16-year-old's about to get my old car, and I might buy a new one. So that's going to be us.

THOMAS KLIER: So maybe we know we have reached a transition point when people have single-- single-car households will have only an EV, right? So at that point, you're not playing off of that margin.

But we're approaching the end of our time. And I do want to Pose one common question for both of you. And I'm going to start with you, Kristin. So if anything, we have been able to lay out the complexity of this subject matter, potentially an enormous transformation.

So in your opinion, what's the takeaway from this discussion? Where are we? Are we at the inflection point? And what would you look for to see if we are? I mean, what's the characteristic that you're looking for to tell you, yep, we're there?

KRISTIN DZICZEK: I think we are absolutely at the inflection point. And the characteristic that I would be looking-- or the metric I'm looking for is where companies are putting their money. And there is a flood of billions of dollars, not just from the automakers, but from suppliers, from new entrants, from battery companies, semiconductor companies that we're going to need a heck of a lot more semiconductors for electric vehicles, and that's going to be a challenge.

The amount of money on the Street, deals in the site selection pipeline right now, is enormous. And if the money is going there, then I think we are at that point. It is going to change.

THOMAS KLIER: All right, thanks for--

JOHN GRAHAM: The other piece of good-- yeah, the other piece of good news is the money is also flowing into the raw materials that are necessary to make lithium-ion batteries-- the lithium, the cobalt, the manganese, and the nickel. And the prices for these commodities are surging right now because of these expectation. But the good news is we are starting to develop some diversified suppliers around the world.

And that needs to happen in order to make sure that our electric vehicle population in the United States is both affordable and is secure to cut-off its supply of materials.

KRISTIN DZICZEK: That's a very good point, John.

THOMAS KLIER: Yes. So we didn't have a chance to talk about that element much, so I'm glad you brought this up. There is that whole-- there's that whole chain. There's the minerals, the mining, the supply chain, as the industry is trying to ramp up into that space. So it's not just the product offerings can you deliver.

And that's in addition to things we did talk about, like expanding the capabilities of the grid, a new charging station network, and so on and so forth. Just Kristin mentioned the supply chain issues. We've heard a lot about microchips. But that's primarily in the context of ICE vehicles, right?

So roll time forward by 10 years, and the discussion may change, and we may face different constraints, because it's a more complex vehicle in that dimension-- not mechanically, but from an electronics standpoint, one would think. What else did I want to mention in closing?

I guess, if anybody had any doubt in the audience about the complexity of the subject matter, I think this discussion probably helped to dispel that. And that was the intent. I think-- and I do want to get into my closing remarks. I do want to thank both of you very much for making yourselves available and your expertise in this space.

I think that's the benefit of having a small group of experts talk about a very complicated question, is we can touch on-- may not be able to get very deep in particular subject matters. But at certain points in time, it's hopefully helpful. And that was the intent behind this event. It's hopefully helpful to sort try to go broad as opposed to go deep.

Because this is complex, and it's powerful. It's transformative. And when this thing takes off, it's going to affect a lot of dimensions of what we're currently being used to, especially in the Midwest, and the Midwest economies, and in the Midwest communities. So lots of people are thinking very hard about how to deal with this thing that's coming our way.

And so I'm hoping the audience was able to get some sense of perspective, and maybe to help you all think this through a little bit better. So Thanks, John and thanks, Kristin, very much. I hope the audience enjoyed this discussion as much as I did.

And a big thank you also to my colleagues at the Chicago Fed, from both the events and the web teams, for their support and putting this on today. I did mention, yes, of course, we could only scratch the surface of this big, hairy topic. And there are many other issues associated with this transition. So look for more discussion and analysis in this space. We will soon post a recording as well as a summary of today's event. So look for an email alerting you to when it's ready.

So what remains to say for me is, in closing, I'm thanking-- want to thank all of you for being here and attending this event and submitting your questions. That is very much appreciated. So until next time, so long. Thank you. Goodbye.

JOHN GRAHAM: Thank you.

KRISTIN DZICZEK: Thanks.