ZEV Mandates

The Zero Emission Vehicle (ZEV) program is a California state regulation that requires automakers to sell electric cars and trucks in California and 9 states on the east coast.  The exact number of vehicles is linked to the automaker’s overall sales within the state.

While the ZEV regulations include plug-in hybrids and hydrogen fuel cell vehicles, the program’s objective is to ensure that automakers research, develop, and market electric vehicles.

The regulatory details are complex and allow for the purchase and sale of “ZEV credits”, the net effect is, if you want to sell vehicles in California and the other 9 states, you have to sell ZEVs.  This requirement escalates over time.  For 2018, the target is 4.5% of sales, and increases to 22% in 2025.

Investors should consider that the ZEV mandate, while representing a major effort to advance electric vehicle technology and usage, does not appear to address the issues of electric generating capacity or the questionable environmental benefit of increasing the use of fossil fuel generated electricity.

Perhaps more important, the ZEV program does not appear to consider consumer preferences.  To the extent that consumers continue to prefer conventional drive trains, manufacturers of ZEV qualifying vehicles may have to pursue aggressive marketing strategies, which are likely to include increasingly competitive pricing.

Many commentators have suggested that the major auto companies’ substantial investment in developing electric vehicles validates Tesla’s all electric strategy and also gives Tesla an important lead.  This may well be the case, or it might simply mean that the major auto companies are responding to a mandate that, if followed, will allow them to continue to sell high margin trucks and SUVs in California and the other nine states.

Investors may be able to gain some insight as to the competitive status and consumer appeal of electric cars by analyzing the success of these vehicles in the 40 non-mandate states.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®