When the plug gets pulled: Policy, demand drag EVs

The electric vehicle (EV) market is facing increased uncertainty as we approach 2026. Changes in regulations and a slowdown in demand are challenging EV strategies across the globe. While the move toward electrification remains important, the speed, nature, and profitability of this shift are now uncertain in different regions. EVs are increasingly caught between political agendas and consumer economics, from policy reversals in Europe and the U.S. to subsidy reductions in China and affordability issues in India.

The global automotive industry saw significant EV investment in the early 2020s, fueled by ambitious climate goals, substantial subsidies, and optimistic demand projections. Automakers committed billions of dollars to the EV transition. That said, the reality is a bit more complicated. by late 2025, this momentum appears to be waning. Governments are re-evaluating green policies due to industrial pressures and concerns from voters, while consumers are becoming more cautious about purchasing EVs due to cost-of-living pressures.

This situation isn't causing a rejection of electrification altogether, but rather a shift in approach. Car manufacturers are extending their timelines for EV production, reducing their pure battery-electric vehicle offerings, and increasing their reliance on hybrid, plug-in hybrid, and range-extended electric vehicles. These technologies allow for emissions reductions without completely abandoning combustion engines, aligning better with changing policies and fluctuating demand.

Europe's Regulatory Retreat

Europe's EV push has been heavily reliant on regulations, particularly the planned 2035 ban on new internal combustion engine (ICE) vehicles, which provided automakers with a clear timeline for investments. That said, the reality is a bit more complicated. the European Commission's recent proposal to soften this ban marks a significant turning point.

The European Commission revealed plans on Tuesday to roll back the EU's de facto ban on new combustion-engine cars starting in 2035. This decision, made after pressure from the region's automotive sector, represents the bloc's most significant departure from its green policies in recent years. The proposal, which still requires approval from EU governments and the European Parliament, would permit the continued sale of some non-electric vehicles. Automakers in Germany and Italy had been pushing for a relaxation of the rules. The EU executive seems to have conceded to automakers' requests to continue selling plug-in hybrids and range extenders that burn fuel as they struggle to compete with Tesla and Chinese electric vehicle manufacturers. Under the new proposal, EU targets would shift to a 90% reduction in CO2 emissions from 2021 levels, instead of the current mandate for zero emissions from all new cars and vans by 2035. Brussels has indicated a willingness to compromise by allowing some non-electric vehicles beyond 2035 and adjusting targets to a 90% CO₂ reduction rather than zero emissions.

This retreat is a result of growing pressure from the European auto industry, especially in Germany and Italy. Manufacturers in these countries face challenges competing with Tesla and rapidly growing Chinese EV companies. High production costs, slower-than-anticipated consumer adoption, and increased global competition have weakened the business case for a fully battery-electric strategy. Allowing plug-in hybrids and range extenders provides automakers with flexibility, enabling them to meet emissions targets while maintaining profit margins and manufacturing adaptability.

That said, the reality is a bit more complicated. this policy shift introduces uncertainty for EVs. The weakening of long-term mandates could slow down infrastructure investment and decrease consumer confidence, especially in markets where EV adoption is heavily dependent on regulatory support rather than cost competitiveness.

A Trump Reversal in the US

In the United States, EVs are experiencing a more pronounced and immediate reversal. The Trump administration's rollback of federal support has significantly impacted the economics of electric vehicles. The expiration of the $7,500 consumer tax credit and the easing of tailpipe emissions regulations have eliminated key incentives almost overnight. The freeze on fuel-economy fines has further reduced the regulatory pressure on automakers to prioritize EVs.

This policy shift has dramatically affected sales, with U.S. EV volumes declining sharply towards the end of 2025. Automakers that increased production in anticipation of continued growth are now competing for a smaller pool of buyers.

Ford Motor recently announced a $19.5 billion writedown as it cuts several EV models, following the EU move. This is the most significant example to date of the auto industry's retreat from battery-powered models in response to the Trump administration's policies and weakening EV demand. Ford will replace the fully electric F-150 Lightning with a new extended-range electric model that uses a gas-powered engine to recharge the battery. The company is also abandoning a next-generation electric truck, codenamed the T3, and planned electric commercial vans.

Ford’s shift reflects the auto industry’s reaction to decreasing demand for battery-powered models, after significant investments in EV technology earlier this decade. The outlook for EVs has worsened this year as Trump's policies removed federal support and eased tailpipe-emissions rules, potentially encouraging carmakers to sell more gas-powered vehicles. U.S. sales of electric vehicles fell about 40% in November, following the expiration of a $7,500 consumer tax credit that had been in place for over 15 years.

The Trump administration also included a freeze on fines for violating fuel-economy regulations in the tax and spending bill passed in July. The recent decline in U.S. EV sales has left automakers competing over a shrinking pool of buyers. Like Ford, many traditional automakers are shifting back to gas and hybrid models, while reducing their EV offerings to mitigate losses.

General Motors took a $1.6 billion charge in October as it adjusted its EV factory plans, and warned of potential future charges. Stellantis has also scaled back some of its EV plans, canceling a scheduled electric Ram pickup truck and focusing on hybrids. Some traditional automakers are following Toyota Motor's lead, which has long emphasized hybrid technology.

Policy Fatigue in China

China remains the largest EV market globally, but it is also entering a more challenging period. Years of substantial subsidies, tax breaks, and industrial policy support led to rapid growth, but also intense competition and overcapacity. As Beijing gradually reduces financial incentives, the market is showing signs of strain.

The expected reduction in trade-in subsidies and the reintroduction of purchase taxes for EVs from January 2026 are likely to dampen demand after a year-end surge. Forecasts already indicate a potential decline in EV sales next year, marking a turning point after five years of continuous growth. Consumers rushing to buy before incentives expire may create a demand vacuum in early 2026.

According to a JPMorgan Chase forecast, mainland China EV sales are likely to decrease in 2026 if Beijing stops providing cash subsidies and tax incentives to buyers, marking the first decline since 2020. The Economist Intelligence Unit (EIU) will cut its full-year forecasts for 2026 and 2027 to 14% and 3%, respectively, from previously expected levels of 16% and 5%, given an anticipated surge in EV sales before the end of 2025 and reduced government support. Based on these revisions, the five-year compound annual growth rate for EV sales in China will fall from 12% to 8%.

The government’s crackdown on aggressive discounting highlights deeper structural issues. Price wars, driven by weak demand and excess capacity, have reduced profitability across the sector. While new rules aim to curb below-cost pricing, they do little to address the underlying imbalance between supply and demand. For many Chinese EV makers, especially smaller companies, the focus will shift to survival rather than expansion.

Indian EV Growth on Fragile Foundation

India is a relative bright spot, with EV registrations continuing to increase and surpassing previous annual records in 2025. That said, the reality is a bit more complicated. despite this growth, penetration remains low and highly sensitive to pricing. The Indian EV market is still heavily reliant on policy support and a favorable cost comparison with internal combustion engine vehicles.

The September GST cut on petrol and diesel cars has disrupted this balance. By lowering ICE vehicle prices, the government inadvertently increased the affordability gap with EVs, undermining the total cost of ownership argument. In a price-sensitive market like India, even small changes in upfront cost can significantly affect consumer behavior.

The response from automakers, which are now offering deep discounts on EV models, highlights the fragility of demand. While long-term prospects remain strong due to urban pollution concerns and energy security goals, India’s EV transition is proving vulnerable to short-term policy changes and competitive pricing dynamics.

A Slower, Uneven Road Ahead

A common pattern is emerging across key global markets. EVs are no longer progressing on a straightforward, policy-driven path. Instead, the transition is becoming slower, more uneven, and more closely tied to economic realities. Governments are re-evaluating support, automakers are hedging their bets with hybrids and range extenders, and consumers are weighing costs more carefully in an uncertain global economy.

Electric vehicles remain essential to the future of the automotive industry, but the events of 2025 indicate that the path forward will be more pragmatic and uneven. Success in the next phase will depend less on ambitious targets and policy support, and more on affordability, infrastructure, supply-chain resilience, and technologies that bridge the gap between combustion engines and full electrification.