Why Tesla (TSLA) Will Benefit From Biden's Executive Order on Electric Vehicles

Last week, President Joe Biden signed an executive order putting the electric vehicle (EV) industry into high gear. The order sets a target for electric vehicles, hydrogen fuel cell, and plug-in hybrid vehicles to make up 50% of US sales by 2030.

To reach that figure, the government is using a mix of policy initiatives and funding. It plans to raise auto fuel efficiency standards for 2026 models manufactured by big U.S. car companies and has already earmarked $7.5 billion on charging stations for electric vehicles in the $1 trillion infrastructure bill currently wending its way through the House.

The 50% sales figure is a "voluntary" target arrived at in consultation with three major car companies—Ford Motor Company (F), General Motors Company (GM), and Stellantis N.V (STLA). "They (EVs) are a vision of the future that is now beginning to happen, a future of the automobile industry that is now electric," said President Biden, while announcing the order.

Tesla, Inc. (TSLA), the biggest electric car company by sales in the United States, was notably absent from the signing. But it might be the biggest beneficiary of the order.

Why Tesla Will Benefit from the Executive Order

While they report profits and deliveries that are far greater than those for Tesla, legacy car manufacturers are saddled with a pipeline consisting of gasoline-powered vehicles. Raising of the auto fuel efficiency standards from 43.3 miles per gallon for 2020 models to 52 miles per gallon for 2026 models will bump up manufacturing costs for such vehicles and make them more expensive for consumers. Electric vehicles, which cost an average of $19,000 more than a gasoline vehicle, will become an attractive alternative for consumers.

Tesla has the strongest brand recognition of all EV manufacturers and dominates the market for such vehicles in the United States. The Palo Alto, California-based company had a 74% market share for all EVs sold in the three years prior to 2020, and its Model 3 and Model Y cars are the current top sellers in the US market. The company achieved this feat even after the federal tax credit available to owners of Tesla cars expired in July 2018.

While the overall cost of an EV vehicle is still substantially higher than that of a gasoline vehicle, Tesla is banking on scale and new battery chemistry to reduce that gap. It plans to start production of Model Y at its Austin, Texas, manufacturing facility before the end of this year.

To overcome supply chain bottlenecks, the company is developing custom batteries for its vehicles. The battery will be part of a new "structural battery pack" architecture that will help Tesla produce a $25,000 car within the next three years, according to Tesla CEO Elon Musk. Its battery manufacturing facility in Nevada should also further bolster economies of scale for the company.It also has an arsenal of patents, 580 at last count, relating to the functionalities available in its electric vehicles, that should help maintain its lead over competitors.

One of the reasons for low EV sales in the United States is the absence of charging infrastructure on the road. Electric car owners are said to suffer "range anxiety"—the fear that their vehicles might run out of charge mid-journey—when they drive electric vehicles. A multiplication in the number of electric vehicle charging stations in the country will offset this anxiety. Tesla already owns the country's biggest EV charging network, one that is interoperable with other networks.  

Caution: Bumps Ahead

But it might be an idea for Tesla investors to wait before they pop open that bottle for bubbly.

Given the power they wield over the auto market, legacy car manufacturers can still delay, or even derail, that future. The trio of car manufacturers who attended the Biden's order signing last week emphasized the importance of policy in making the future happen. Voluntary targets for EV sales "can be achieved only with the timely deployment of the full suite of electrification policies committed to by the current administration," they stated. The statement can be construed as an oblique reference to the missing elements in last week's order.

For example, there was no mention of tax credits for EV purchases in the order. The credits, which range from $3,500 to $7,500, can boost sales of electric vehicles by bringing down their overall sale costs for consumers. The Senate is currently debating legislation relating to EV tax credits.

The competitive arena for electric vehicles has also multiplied in recent years. Established players and startups have entered the industry. Some, like German car giant Volkswagen AG (VWAGY), are poised to become the biggest manufacturers of electric vehicles as soon as next year.

Tesla will have to step up its game and manufacturing capabilities to compete with these companies. Its extensive and well-documented history of missed deadlines and promises does not help matters. The company's investors are well aware of Musk's history of overstating the case for his company's future, only to backtrack later.