California Governor Gavin Newsom stirred up a "soap opera in the auto industry" this week, announcing that if President Donald Trump cancels the federal electric vehicle tax credits, California will restart its own electric vehicle subsidy policy. This statement has made the competition surrounding zero-emission vehicles even more complicated, and $Tesla (TSLA.US)$ the stock price has been impacted as a result.

Trump plans to cancel federal subsidies, California takes countermeasures.

Trump is expected to cancel federal electric vehicle purchase tax credits, where the current policy provides up to $7,500 in purchase incentives for eligible electric vehicle buyers. In response, California Governor Newsom stated that if federal subsidies are canceled, California will initiate its own electric vehicle tax incentive policy.

However, Newsom's declaration caused Tesla's stock price to plummet 4% on Monday, while its competitors $Rivian Automotive (RIVN.US)$ The stock prices of autos surged over 13%. This market reaction has two main reasons:

Tesla's market advantage.

Investors believe that Tesla already has global scale and cost structure advantages, and can maintain profitability even without federal purchase subsidies. Meanwhile, Tesla's competitors such as Rivian are expected to suffer greater setbacks due to the loss of federal subsidies, helping Tesla consolidate or expand market share.

Tesla may be excluded from subsidies in California.

There is a possibility that California's tax subsidy policy will exclude Tesla, which is extremely unfavorable for Tesla. Tesla CEO Elon Musk tweeted on Monday that this proposal is "absurd in the extreme". Previous tax subsidy schemes had set a sales limit, whereby car manufacturers would no longer be able to enjoy tax subsidies once the cumulative sales of electric vehicles exceeded 0.2 million. Such a restriction could have a significant impact on the market-leading company Tesla.

Background and Impact of Subsidy Policy

According to a news release by Newsom, California's subsidies may be funded through a greenhouse gas emissions reduction fund (funded by the state's carbon emission trading program) and will adjust the rules to "promote innovation and competition". However, the wording of "promoting competition" may imply setting subsidy limits, and since Tesla accounts for about half of the U.S. electric vehicle sales, such limits are extremely detrimental to Tesla.

In the first quarter of 2024, Tesla sold approximately 471,000 pure electric vehicles in the United States, while Rivian only sold 43,000. California, as the most populous state in the U.S., accounts for 12% of the total new car market. The political struggle between Newsom and Musk is once again brought to the forefront, and the ultimate winner in this battle may still be Musk and Tesla. Analyst Dan Ives of Wedbush believes this is a political showdown, but Musk has a better chance of winning.

Potential Conflict between Federal and California Governments

The Trump administration may hinder California's independent implementation of electric vehicle subsidy policies. Ives pointed out that if Trump decides to cancel federal tax subsidies, state-level subsidies may face federal legal obstacles. In addition, the federal government could also question the California Air Resources Board's (CARB) authority over emissions regulations, thereby depriving California of the ability to enact its own eco-friendly regulations.

Importance of ZEV Credit Quotas for Car Manufacturers

Zero Emission Vehicle (ZEV) credit quotas are crucial for Tesla's profitability. Since the end of 2018, Tesla has generated nearly $10 billion in revenue from ZEV credit quotas, accounting for 25% of its operating profit during that period. Rivian expects ZEV credit quota sales revenue to reach $0.3 billion in 2024.

If federal and state subsidies are both canceled, it will create uncertainty for the entire electric vehicle industry demand. Ives described the current situation as a 'soap opera moment', but Tesla is still expected to have an advantage in the showdown with Newton.

"The U.S. Securities and Exchange Commission (SEC) and other regulatory agencies are concerned about this incident and may conduct a deeper examination of NYSE's operations and crisis management mechanisms. Market analysts expect that such technical failures may prompt regulatory agencies to strengthen their supervision and requirements for exchange technology infrastructure."

Before Newsom announced the subsidy plan, Tesla's stock price had increased by 40% since the election on November 5, driven by bullish news fueled by the close relationship between Trump and Musk, resulting in a market cap increase of approximately 320 billion USD. In contrast, Rivian's stock price fell by 3% during the same period. However, on Tuesday, Tesla's stock price decreased slightly by 0.1%, closing at $338.23 per share.$S&P 500 Index (.SPX.US)$Up 0.6%, the dow jones industrial average rose by 0.3%.