Beware of Government Subsidies
Investors would be well advised to be cautious when evaluating investment opportunities based on government efforts to artificially, and often temporarily, affect consumer behavior.
Consider the causes and implications of falling electric vehicles (EV) sales in China, the world’s largest market, accounting for approximately 60% of global output last year.
- China has been reducing subsidies on EV sales and is expected to eliminate them next year. China has also told cities that had imposed limits on gasoline-powered vehicle purchases, to loosen regulations in a bid to spur more auto sales.
- After more than doubling from 2016 to 2018, prices for two of the key raw materials used in EV batteries, lithium and cobalt, are now down more than 50% from last year’s peaks. Earlier estimates of supply shortages have been supplanted by concerns over increased capacity and falling EV sales in China.
- Softening demand for EVs in China has offset some of the optimism surrounding commitments to increase EV output by auto makers, including GM and VW.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA