What Will It Take to Electrify the Auto Industry

Why government subsidies may fail to get more electric vehicles on the road

Automakers may still be reluctant to abandon GV production, even when their EV production costs are low and the efficiency of charging infrastructure construction is high."

The future of the auto industry may be electric, but for auto manufacturers, it's no longer a race to the finish. Despite the increasing popularity of hybrids and electric vehicles (EVs) with consumers, the auto business in the United States still sells millions of traditional, gasoline-powered vehicles (GVs) each year. Top manufacturers, such as Mazda, Mercedes-Benz and Audi, have announced their plans to fully shift to electrified vehicle production over the next decade. But according to the Institute for Energy Research, as of 2023, fewer than 4 percent of operational vehicles in the United States are either fully electric or hybrid.

What will it take to get manufacturers to transition to EVs? This is the vital question being researched by Zhimin Huang, PhD, professor and chair of Adelphi's Department of Decision Sciences and Marketing.

Examining the Variables of EV Production

In his latest paper, "Transitioning from gasoline to electric vehicles: Electrification decision of automakers under purchase and station subsidies" (Transportation Research Part E: Why government subsidies may fail to get more electric vehicles on the road Logistics and Transportation Review, August 2024),¹ Dr. Huang and his colleagues examine some of the many factors affecting producers' decisions to switch partially or entirely from GVs to EVs.

The team speculated that government subsidies for the purchase of EVs and the construction of charging stations-two notoriously costly barriers for manufacturers-would encourage the transition. They created a hypothetical model to understand how the introduction of those subsidies could lead to certain production strategies on the part of traditional GV manufacturers: deciding to directly enter the EV market and simultaneously exit the GV market, deciding to enter the EV market and then exit the GV market, or deciding to enter the EV market while continuing to produce and sell GVs.

The model's output confirmed the correlation. "The results show that EV production costs, charging infrastructure efficiency and the intensity of product competition are key factors influencing the automaker's production decisions," Dr. Huang said.

"Substitutability" Drives Competition

Fierce product competition between GVs and EVs stems, in part, from an economic concept called "substitutability." Essentially, how similar are EV products to GV ones on the market? "The higher the degree of substitutability, the more intense the competition," Dr. Huang said. More intense competition, in turn, means lower profit margins, since manufacturers are competing for the same customers and therefore incentivized to lower prices.

When it comes to producing EVs, substitutability can be a roadblock for traditional car manufacturers. Without high profits to offset the costs of building expensive charging stations, the model predicts these manufacturers will be less likely to enter the EV market.

The hypothetical model developed by Dr. Huang's team does not use real-world data. Instead, it extrapolates from existing economic theorems and derivations to produce its predictions. This allows researchers to distill infinitely complex consumer behaviors into data that can actually be leveraged by industry leaders, who can anticipate the consequences of business decisions before they're implemented.

In this case, the decision to go fully electric may not be an economically sound one, even when the government is helping foot the bill. "Under certain conditions, both types of subsidies [purchase and station] may fail to effectively drive, or could even hinder, full electrification," Dr. Huang said. "Automakers may still be reluctant to abandon GV production, even when their EV production costs are low and the efficiency of charging infrastructure construction is high."

Dr. Huang points to his findings as proof that new strategies are needed to encourage the transition to full electrification among manufacturers. Innovative governmental policies, he said, in addition to traditional ones like subsidies, could begin to effectively move the needle for both consumers and manufacturers-and electrify an industry that's struggling to keep up.

¹Pi, Z., Wang, K., Wei, Y.-M., & Huang, Z. (2024). Transitioning from gasoline to electric vehicles: Electrification decision of automakers under purchase and station subsidies. Transportation Research Part E: Logistics and Transportation Review, 188, 103640. https://doi.org/10.1016/j. tre.2024.103640

About Our Faculty

Zhimin Huang, PhD, is professor and chair of decision sciences and marketing. His research interests include supply chain management and distribution channels, productivity benchmark analysis, data envelopment and financial portfolio analyses, multi-criteria decision-making and game theory.