Incentives in the US and EU Call for Specific Percentages of US-Made or EU-Made Components for Electric Vehicles. How Long Will That Take?
The future of the electric vehicle (EV) industry is at stake as the US and EU implement strict rules regarding the percentage of domestically produced components in these vehicles. This move aims to promote local manufacturing and reduce reliance on imports, particularly from China. However, the feasibility of meeting these requirements is questionable, and it raises concerns about the global competitiveness of the US and EU EV markets.
Currently, both the US and EU face challenges in meeting the demanded percentages of domestic content in electric cars. The car industry heavily relies on Asian-made batteries, constituting around 40% of the car’s value-added. The introduction of customs duties in the absence of meeting these requirements could lead to a significant decline in production and sales, with a subsequent increase in car prices.
The extension request by the German economics ministry reflects the industry’s struggle to achieve the desired domestic content requirement. The letter highlights the difficulty of meeting the 45% domestic content requirement and proposes a three-year extension. However, France opposes this extension, emphasizing the importance of the EU’s efforts to reduce dependence on China. The differing perspectives reveal the complex reality of an industry that lacks control over its supply chains.
The issue of domestic content requirements is not exclusive to the EU but also prevalent in the US. The Inflation Reduction Act (IRA) introduced stricter rules for the electric vehicle tax credit, incentivizing automakers to shift production operations to North America. However, the US currently accounts for only a small fraction of global EV assembly, battery production, and critical mineral processing.
To qualify for the full $7,500 tax credit in the US, vehicles must meet certain standards related to battery components and critical minerals. In 2023, 50% of the battery components’ value must be produced in North America, along with an increasing minimum percentage annually. Additionally, 40% of the value of critical minerals used in the vehicle must be extracted, processed, and recycled domestically or in countries with which the US has a free trade agreement. These requirements aim to boost local production and reduce dependence on foreign sources.
However, the US is far from meeting these percentages, highlighting the existence of a loophole in the IRA. Leasing allows EVs that do not meet the strict requirements to still qualify for the tax credit. This leasing gap facilitates the accessibility of the credit for high-income households and buyers of expensive EVs. Lenders can buy an EV, benefit from the tax credit, and pass on the savings to the lessee through lower lease payments. Consequently, leased EVs disengage from the origin and component requirements outlined in the IRA.
The battle between Ford and GM exemplifies the complexity surrounding battery components in the US. The eligibility for tax credits, worth $7,500, depends on the interpretation of the “foreign entity of concern” rule. Ford plans to license Chinese technology to manufacture iron-based batteries in Michigan, leading the company to advocate for a more flexible interpretation of the rule. If Ford’s planned batteries do not qualify for the tax credit, the company may scale back its investment. On the other hand, GM seeks clarity and adherence to the intent of the Inflation Reduction Act, focusing on reducing US reliance on Chinese batteries and materials.
China emerges as a significant player in the EV market, dominating battery production and supplying critical minerals. Its influence is felt across the industry, from licensing technology in the US to producing leased EV batteries in China. This situation presents a conundrum where the US and EU either lose by failing to meet domestic content requirements or China wins by maintaining its dominance in the EV supply chain.
Moreover, the increasing pressure to adopt EVs does not necessarily reflect consumer preferences. Hybrid vehicles continue to outsell EVs, indicating that consumers still favor this technology. The supply of early adopters for EVs has diminished, leading to falling prices and financial losses for manufacturers like Ford and GM. The push for EV adoption may not yield significant environmental benefits, questioning the effectiveness of the policies and incentives introduced.
In conclusion, the US and EU face challenges in meeting the minimum percentages of domestic content in electric vehicles. The reliance on Asian-made batteries and the dominance of China in the EV supply chain hinder the achievement of these requirements. The introduction of customs duties without meeting the demands could detrimentally impact production, sales, and car prices. The leasing loophole in the US and the conflicting perspectives in the EU further complicate the implementation of domestic content rules. Furthermore, the preference for hybrid vehicles over EVs highlights the gap between policy incentives and consumer preferences. Ultimately, the future of the electric vehicle industry requires a delicate balance between local manufacturing, global competitiveness, and genuine environmental impact.