Chicago Fed Insights

Charging Ahead: Midwest Autos Face an Electric Future

October 6, 2021

In a virtual event on October 6, 2021, an expert panel discussed the auto industry’s technological transformation to electric vehicles (EVs), shared ideas about what firms and workers will likely face during the transition by 2030 and beyond, and identified obstacles to achieving policy goals of reducing greenhouse gas emissions through electrification of transport. This blog post summarizes the discussions. This event was the latest in the Chicago Fed’s Project Hometown series, designed to address the needs and challenges facing our region and our communities.

“We are now at an inflection point” with the technological transition underway toward EVs, explained Leslie McGranahan, vice president and director of regional research at the Chicago Fed, in opening the event. The impetus for the shift to electrification of autos in the U.S. and worldwide is policy-driven to reduce greenhouse gas emissions, said Thomas Klier, senior economist and economic advisor with the Chicago Fed and the event’s moderator. There is also a strong push for EVs in China for other reasons, added John Graham, professor in the O’Neill School of Public and Environmental Affairs at Indiana University. China has the largest car market globally and a strategic interest in securing a leadership position in the EV industry, he said, with the added benefit of reducing their oil dependence.

Klier stressed the growing commitment toward electrification of the U.S. auto industry, noting the recent announcement by Ford (September 27, 2021) of its plan to invest billions in four new plants (three battery plants joint with a South Korean battery partner and one assembly plant), all of which will be located in Kentucky and Tennessee. The Chicago Fed’s region is currently home to 44% of the country’s jobs in the manufacturing of engines and transmissions; add in Ohio and that figure jumps to over 60%, reported Kristin Dziczek, senior vice president of research at the Center for Automotive Research (CAR). In particular, Detroit “has been the center of North America’s auto industry for many decades,” Klier noted. As the industry moves toward EVs, the region’s auto industry will face challenges, as EVs have far fewer mechanical parts and take about 30% less time to assemble; this means that noticeably fewer people and parts will be needed to satisfy demand, Dziczek said. Despite the different manufacturing requirements, she noted that expanding the production scale may work to counteract a decline for specific companies. EVs are not profitable at low production levels, so the way to reach profitability, she explained, is to expand the scale of production. This will likely be easier for large automakers to achieve, Dziczek said.

The large tier 1 auto manufacturers are currently investing in EV technology by placing electric transmissions and motor production into their existing powertrain plants, Dziczek reported. Tesla, the largest player in the EV market, is already positioned in this market space, Graham added. Dziczek shared her concerns about the hundreds of small auto suppliers in the Midwest region as EVs become more dominant because “not all small manufacturers will be able to make this leap.”

Dziczek said she expects the transition period to be characterized by a scale down of internal combustion engine (ICE) production and an expansion of EVs, but the scale up of EVs will be slow, as has been the recent experience of a large Ontario plant currently undergoing the transformation. During the transition period of low productivity, Dziczek also expects some consolidation in the industry. As new firms enter the EV market space, she said, new plants are being built. And as the share of internal combustion vehicles declines, the last standing ICE plants are likely to migrate to lower-cost locations like Mexico, she noted.

With the industry shift to EVs, there could also be changes in the union status of auto workers and their terms of employment. The Tesla battery gigafactory in Nevada pays lower wages than an engine plant in Anna, Ohio, Dziczek said. On a positive note, she explained that current auto production and skilled trades workers will require only limited additional training and no new formal education credentials to prepare for the transformation to EVs. The auto industry is already experiencing a shortage of engineers specializing in battery manufacture and electricity, Dziczek said, and there will likely be increased demand for these specialties in the years ahead.

The Biden administration has announced the goal of a 50% EV share in new vehicle sales by 2030. Because of its large geographical size, getting the U.S. electric grid strengthened to achieve the 50% goal “is going to be tough,” Dziczek remarked. Klier added that it will also be necessary to expand the number of battery charging stations. “The good news is that the money is also flowing into the raw materials that are necessary to make lithium-ion batteries,” Graham said, and “we are starting to develop some diversified suppliers around the world.”

It is too soon to tell what role there will be for hybrid vehicles, which can be powered by either gasoline or battery, Graham remarked. A study by the University of Toronto suggests that given the energy sources of electricity generation in the U.S., the lowest transportation carbon footprint will be represented by a mix of hybrid and electric vehicles, Dziczek said, because in some locations in the U.S. (and abroad) there is less of an advantage for EVs due to the reliance on fossil fuels for electricity. Graham agreed that hybrid electric vehicles have some important advantages by not having to rely on the electric grid yet providing significant greenhouse gas control.

U.S. EV sales as a share of total vehicles sales are currently less than 3%, Klier reported. He asked the panel, What is holding back growth? Consumers want price, utility, and convenience parity when compared to ICE vehicles, explained Dziczek. Currently, “range anxiety” is a particularly large barrier, she said, with consumers demanding convenience for charging along their driving route. Also, media reports of some fires in Teslas and Chevrolet Bolts do not instill confidence, and some consumers are waiting for safety improvements before transitioning, she added. There are plans for electrification across industry segments, but for now most EV sales in the U.S. are in premium markets, Graham noted. In contrast, EVs in Europe are more affordable, with various price points. In Europe and China, the market share for EVs is currently 15–25%, well past California’s 10%, he added.

In Europe, the auto industry transformation is also being supported by government subsidies for EVs, Klier noted. President Biden’s goals for the expansion of electric and hybrid vehicles are a signal to the industry and Congress that U.S. rules are going to become increasingly stringent to get carbon out of personal transportation, Dziczek said, especially because the transportation sector recently overtook power generation as the largest U.S. carbon emitter. Substantial policy hurdles need to be overcome to make EVs more affordable, and government subsidy options, including those being used successfully in Europe, are being considered right now, Klier said. Another area requiring attention is to identify a new revenue source for infrastructure funding to replace our reliance on gasoline sales, he added.

To sum up, Klier reiterated that the U.S. auto industry is facing an enormous transition. We know this by observing where companies are putting their money, and “there is a flood of billions of dollars” being allocated to electrification, Dziczek said. It remains to be seen which U.S. companies will be successful in introducing affordable electric vehicles and how much incentive the U.S. government is going to give people to buy them, Graham remarked. Auto producers, workers, and suppliers will have to make changes in order to meet demand for EVs. With effective policies in place to support EV infrastructure and buyers, the outcome for the Midwest region might depend on how fast and effectively firms and workers can reorient their production and ramp up scale, Klier concluded.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

Subscribe to NFCI

To sign up for updates or to access your subscriber preferences, please enter your contact information below.

Find Publications By:
Find Publications By:
Publication Date

Find or Reset
Having trouble accessing something on this page? Please send us an email and we will get back to you as quickly as we can.

Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, Illinois 60604-1413, USA. Tel. (312) 322-5322

Copyright © 2024. All rights reserved.

Please review our Privacy Policy | Legal Notices