The Federal Government announced the Inflation Reduction Act, IRA, in August and its enforcement next year. The bill adds a few requirements for qualification for the $7,500 federal EV tax incentive effective until the end of 2032.
- Electric passenger cars priced under 55,000 USD.
- Assembled in North America.
- The legislation stipulates that by 2024, at least 50% components of EV batteries are manufactured or assembled in NA, gradually rising to 100% in 2029.
- EV manufacturers must source at least 40% of critical battery minerals in NA or with free trade partners by 2024, with the percentage gradually rising to 80% in 2027.
Additionally, a total ban on Chinese-made battery components will be effective from 2024, and critical battery minerals from China are also blocked from 2025.
The bill’s enactment will exclude more than 70% of EV models sold in NA from the $7,500 federal EV tax incentive program, of which European, Japanese, and Korean automakers will suffer the most impact. Moreover, the possibility of achieving 2030 objective of more than 50% EVs (BEV or PHEV) announced by US government before is now very slim. In other words, when the US self-pride auto industry faces a threat by market competition, environmental protection issues take a back seat. European, Japanese, and Korean governments also had many discussions recently on the IRA, seeking for a solution altogether. Of course, when the government can’t give a satisfying answer due to various political considerations, these companies will find their way out by either analyzing the ROI of business in the US market or shifting their focus to other global markets. For instance, although Korean carmakers’ performance in the Chinese car market began to dwindle due to the THAAD deployment controversy, their global market share still shines, especially in the NA market, where their EV sales are second to Tesla. For all the Korean carmakers who worked hard and assisted in establishing the local EV supply chain in NA, the IRA undoubtedly rains on their parade despite their years of effort. On the other hand, the VAG Group has been speeding up the deployment of operations in the Chinese market in recent years, with its MEB factory in Anhui to be completed and starting production next year. Additionally, the VAG Group auto software company CARIAD is reportedly setting up its first international subsidiary in China and fully cooperating with local R&D company to boost its parent company’s lagging research progress. Meanwhile, VW and Mercedes teamed up with Canada government at the end of August (the IRA treats Canada and the US equally) to develop EVs, especially on raw material extraction.
No global auto giant would easily give up the NA market, yet under such strict protectionism, international automakers have various plans for their future…
- Japanese automakers have the most extended history and deepest roots in the NA market, yet their EV tech progression is even slower than their US counterparts. As the new bill does not immediately affect their operations, we haven’t seen Japanese automakers and their government bumping heads with the US government. On the other hand, although recent profits in the Chinese market might propel Japanese carmakers to expand their investments, I think they will still view the NA region as their prime target across the globe.
- German automakers’ performance in NA has always lagged behind their US, Japanese, and Korean counterparts, except for those premium brands remaining competitive. However, their deep roots in the Chinese market have surpassed that of Japanese carmakers in the NA market, resulting in China claiming most of the German brands’ overseas resources. Still, the rules have changed in the EV era, and budget German EVs will somehow deliver their sales performance in the NA market, which definitely will impact Japanese automakers first.
- Korean automakers’ EV development progress is ahead of others, which makes them the biggest victim in the wake of the IRA. Despite the South Korean government’s active communication with the US federal government and its attempts to unite Europe and Japan to pressure the US economically, there would only be a limited effect. In the end, Korean carmakers will have to make a decision anyways, and honestly speaking, Korean EVs may have more room to grow their business in the Chinese market.
With the enactment of the IRA, the US auto market after five years will be a whole lot changing: Tesla, GM, Ford, and other US automakers will stand their ground while Japanese brands’ market share slide and German brands bounce back. As for Korean carmakers, their future resides in how they currently adjust and adapt to their global strategies.