Battery prices are soaring. So why are electric vehicles doing record sales?

April 23, 2022, 12:00 PM UTC

Electric cars are big sellers right now, countering skepticism in the industry’s early days that battery-powered cars could ever become cost-efficient for buyers. With battery costs rising and essential materials in short supply, can the electric vehicle market sustain its growth?

Based on the most recent sales numbers, it would appear that it can.

Companies that manufacture EVs had a blockbuster first quarter in 2022, with car sales exceeding even the most optimistic expectations despite price hikes. 

Tesla posted a record $3.3 billion profit in the first three months of 2022, with sales of its vehicles up 81% from last year. Other carmakers with fledgling EV divisions also saw big sales boosts. Volkswagen Group saw a 65% bump for all of its electric models, while sales of Mercedes EVs were up 37%

The surge in EV sales comes despite a crunched supply for lithium-ion batteries, essential for many electric cars. And although carmakers like Tesla have raised their prices, consumers still appear to want electric vehicles.

Interest stays alive

The potential for thousands of dollars in tax breaks and incentives are a major benefit of buying an electric car. And for many consumers, a slightly higher sticker price may not be a dealbreaker.

“[EV buyers] are a different part of the demographic,” ​​Venkat Srinivasan, director of the Collaborative Center for Energy Storage Science at the Argonne National Laboratory, told Fortune. “EV buyers generally are not so price sensitive that small price changes will have a big impact on the decision to buy or not to buy.”

The average price for electric cars at the end of 2021 was $56,000, too expensive for most car shoppers. But some companies manufacture EVs that can appeal to more types of buyers.

Japanese carmaker Nissan, for instance, sells the fully-electric Nissan Leaf for as little as $27,400. The Leaf has been very successful for Nissan this year, accounting for 5.8% of all the company’s passenger car sales. Leaf sales in the first three months of 2022 were also 49% higher than during the same period last year.

“[Nissan Leaf] sales have been the best they’ve ever been in the last few years,” Aditya Jairaj, U.S. director of EV marketing and sales at Nissan, told Fortune. “Online inquiries and website activity and all of that has also gone up in the past year.”

Jairaj says that with more EV models on the market, better infrastructure, and word of mouth, demand is slowly rising among a broader segment of the public. 

“Consumers are being prompted to take a little bit more of a risk now,” he said.

Rising gasoline costs may also be pushing more consumers to make the jump. Inflation and the war in Ukraine’s impact on the global energy market have sent U.S. gas prices soaring to a national average of $4.12 a gallon, up from $2.88 a year ago.

“When gas prices are $5, $6, or $7 a gallon, consumers start evaluating the options that they have,” Jairaj said, adding that the recent rise in EV demand may have an even greater knock-on effect on sales for the rest of the year.

“This market is very sticky,” he said. “The more people buy EVs, the more they talk about it, the more other people want to buy them.”

Demand is still outpacing supply

But there is no guarantee that the good times will last. The industry, for example, faces a supply crunch of key materials like lithium that could create huge problems if they become too severe.

“Put very simply, all the world’s cell production combined represents well under 10% of what we will need in 10 years,” RJ Scaringe, CEO of electric car company Rivian Automotive, told reporters last week. “Meaning that 90% to 95% of the supply chain does not exist.”

Even Tesla founder Elon Musk has spoken about the recent surge in the price of lithium for EV batteries, joking in a tweet this month that the company Tesla “might actually have to get into the mining & refining directly at scale.”

Diversifying supply, so companies are not exclusively reliant on lithium, would be a crucial step, as other metals such as iron can also be used in EV batteries. But companies are still a long way from feeling secure.

“These things take time,” Argonne’s Srinivasan said. “Everything is years in the making, right? Nothing is months in the making.”

If supply prices rise even more, automakers may raise car prices higher, and even the most faithful EV buyers may balk.

Other factors, such as lower gas prices or governments eliminating incentives to buy electric vehicles, could also cut into the industry’s projected growth. 

“EV incentives will continue to be scaled down between 2022 and 2025,” Joshua Cobb, a senior analyst of the auto industry at credit rating and consultancy agency Fitch Solutions, told Fortune. “As these policies expire it will give us a clear image of how sustainable EV demand is.”

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