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?
Either We Lose, or China Wins
This EV story comes from the Eurointelligence regarding the EU, but it equally applies to the US.
It became a standing joke during the Brexit years that German industry would intervene and soften the EU’s position in its negotiations with the UK.
Now, we are happy to report, this is finally happening. The German economics ministry has written a letter to the European Commission asking for a three-year extension for the introduction of the EU strict rule-of-origin requirements in the trade with electric cars. The transitory arrangements with the UK are due to expire in 2024, after which a 10% customs duty would be imposed on the mutual trade in electric cars. The reason is that nobody is yet capable of meeting the 45% domestic content requirement.
The standards are impossible to meet right now because the car industry is still reliant on Asian-made batteries, which constitute some 40% of the value-added of the car. One industry study shows that the introduction of the customs duty would lead to a fall in EU production by 500,000 during 2024-2026. The UK car industry would suffer correspondingly similar falls in sales. The cost of cars would increase by some €4000.
The country most opposed to an extension is France. The argument is that this would kill the efforts by the EU to become more independent of China. Without the tariff, the UK market in particular would be flooded by Chinese batteries. That position is also defended by Thierry Breton in the European Commission. Valdis Dombrovskis, meanwhile, argues that the EU would damage itself by imposing the tariffs. It would only benefit China.
In other words, China wins one way or the other. This reflects the reality of an industry that no longer owns the majority of its supply chains. Giga-factories for batteries are not going to solve the problem either, since the raw material for those batteries will still comes from China, along with other technological components.
The differences of views will come out in the open again next year when the EU decides whether to impose punitive tariffs on Chinese e-cars directly. The e-car trade war is starting. The UK would, in our view, be better keeping a liberal trading regime, and enjoy lower consumer prices, and not follow the EU’s protectionist course in this area.
Minimum Percentages of Battery Components
On February 24, 2023 the Bipartisan Policy Center commented on the IRA EV Tax Credits: Requirements for Domestic Manufacturing
The Inflation Reduction Act changed the rules for the electric vehicle tax credit. It set strict requirements on which vehicles are eligible to encourage automakers to shift manufacturing operations to North America.
Currently, the U.S. accounts for only 10% of global EV assembly and 7% of battery production—and a tiny fraction of critical mineral mining and processing. China, on the other hand is responsible for more than 75% of lithium-ion battery production and supplies over half of the world’s processing and refining capacities for lithium, cobalt, and graphite.
- Assembly in North America:
As part of the IRA, final assembly of electric vehicle models must occur in North America to be eligible, effective immediately after the enactment of the legislation. - Critical minerals and battery components:
To qualify for the full $7,500 credit, vehicles must meet two sets of standards related to their vehicle components. If a vehicle only meets one of these two requirements, it qualifies for a $3,750 tax credit.- 50% of the value of battery components must be produced or manufactured in North America in fiscal year 2023, with the minimum percentage increasing annually.
- 40% of the value of critical minerals used for the vehicle must be extracted, processed, and/or recycled domestically or in a country the U.S. has a free trade agreement with, with the minimum percentage increasing annually. EV manufacturing requires a range of minerals, including cobalt, copper, nickel, graphite, and lithium.
The IRA Loophole
The US is nowhere near those percentages. Thus the IRA loophole as explained by Stanford University in The New Industrial Policy and its Impact in August of 2023.
Sen. Joe Manchin (D-WV) drove a last-minute bargain to add requirements that would force the development of not only North American EV production, but also a secure North American or allied supply chain to avoid dependence on China for essential inputs.
The IRA’s immediate effect was to reduce the number of vehicles eligible for the tax credit, in addition to restricting household eligibility by income. [But the IRA made exception for leasing. Leased EVs do not have to meet the strict requirements outlined above.]
Leasing is a gap in the friendshoring requirements of the consumer EV tax credit, as well as a backdoor to the credit for high-income households and buyers of expensive EVs.
Lenders buy an EV, get the commercial EV tax credit of $7,500, and can pass some of the credit to the lessee in terms of a lower lease payment; leases are often made by captive finance companies like Ford Credit and GM Financial. Lenders can access the commercial EV tax credit for vehicles and buyers that would not qualify for the consumer EV tax credit: that is, EVs that are not assembled in the North America or do not meet the origin requirements on battery content and critical minerals; EVs with prices above caps; and borrowers with household incomes above the caps.
An Epic Battle: Ford to Use China’s Battery Technology, GM Wants it Blocked
Ford and GM are feuding over battery components.
On September 30, I discussed An Epic Battle: Ford to Use China’s Battery Technology, GM Wants it Blocked
In a battle between GM and Ford, $7,500 in tax credits are at stake depending on Biden’s definition of “foreign entity of concern.” The exclusion aims to reduce US reliance on Chinese batteries and materials to make them.
From the WSJ
Ford, with its plans to license Chinese technology to make cheaper, iron-based batteries in Michigan, has lobbied for a more flexible interpretation of the “foreign entity” rule. If its planned batteries aren’t eligible for the car-buyer subsidy, Ford executives have indicated they could scale back the investment; on Monday, the company paused construction of the new battery plant.
“This is not about GM vs. Ford,” a GM spokeswoman said. She said GM wants clarity and for the rules to follow the intent of the Inflation Reduction Act, which created the new tax-credit requirements.
Robbie Orvis, a senior director at Energy Innovation, a think tank on climate issues, said the tax credit—and the “foreign entity of concern” rule—will shape how many electric cars are sold in the U.S. in the next 10 years.
Once Again, We Lose or China Wins
China wins either by licensing Chinese technology in Michigan or by having leased EV batteries built in China.
Of course that assumes customers don’t continue to shun EVs totally.
Wake Up Mr. President, Consumers Don’t Want EVs
On October 16, I commented Wake Up Mr. President, Consumers Want Hybrids, Not EVs
EVs are stacking up while hybrids are hot sellers. Prius hybrids have a 1-week supply. The Mustang Mach-E SUV has a 3 1/2 month supply.
In the US and EU, a mad scramble is on to get around around price and component restrictions. In the US we have a lease loophole. In the EU, a battle is underway to push back critical dates.
Meanwhile, EV prices are falling as the supply of early adopters petered out. Ford and GM are scaling back EV production because they are losing money on every EV they sell.
And none of it does a damn bit of good for the environment.
This is what’s become of the ridiculously named Inflation Reduction Act.
EVs are a fad. Too much cheap oil for a couple hundred years at least. EVs don’t solve any problems. Only creates more of them. Glad to see this era fading away. It was fun seeing people rave about them and then seeing them cry about it a few years later I will confess. Go get a gas car now. Thanks for playing.
And the corruption continues
I have trouble understanding the emphasis being placed on EVs by those who are pro EV and those who are con. Particularly if the pro crowd is trying to reduce ghg emissions.
Transportation accounts for just 20% of worldwide ghg emissions. Road transportation (cars, busses, trucks) is 70% of that total, or 14% of all emissions.
So even if we could magically replace every ICE vehicle in the entire world with an EV today, that would only reduce global emissions by 14% at best. And of course, that assumes we can get all the electricity to run them from renewables. Which is currently impossible. So we are gaining very little by pushing EVs.
In the last few decades, the world has spent 5 trillion on renewables and built scads of wind farms, solar installations etc. This huge investment has reduced the amount of fossil fuels in our energy mix by just 1%, from 82% to 81% in that time frame. Though the absolute amount of fossil fuels used every year is still increasing as overall energy demand keeps growing every year.
In other words, the world is running as fast as it can on the renewable energy treadmill and we are still going backwards.
Now, I understand that it is better to do “something” to slow global warming, as opposed to doing nothing at all. And that the current number of EVs (assuming that they are all charged with renewable energy) could replace 1.4 mbpd of oil being refined into gasoline.
However, the overall demand for oil is still increasing. 2023 saw an increase from 100 to 102 mbpd, and 2024 is expected to see another 1 mbpd increase to 103 mbpd. And 108 mbpd by 2030.
Which is why I remain heavily invested in oil stocks.
The Green advocates know all about this. If there are not enough EVs or other vehicles for demand, they will advocate for public mass transit and for bicycles and 15 minute cities where all needs can be obtained by a walking person.
The Cubans might be willing to teach us about how the people can live without or by their own garden production during a ‘Special Period in a Time of Peace’.
Once followed some discussion in EU about how to face the fact that all battery production is based in Asia. It was between bureaucrats and academics, since there’s not industry representation. The conclusion was that the battle is almost lost, but maybe Europe can focus on basic chemicals for batteries.
Well, that was before some known unknown entity blew up Nordstream, and all chemicals and energy production just became so much more expensive.
That known unknown entity is still better off.
First of all EVs are not the “must have thing now or everything collapses”. If needed, production or new supply chains can be put off until they become more economically or politically possible. Europe has a lot on its plate with the war in Ukraine, the war in Gaza and major unrest of immigrant populations so if it has to put off EV and battery production so be it. It will not be a major setback since European countries as long as they still have the means to fill their gas tanks Europe will get through.
Personally I believe EVs will take over and we will all be electric because it makes economic sense but a few years here or there are not important. Europe will protect its car makers but I must add that the US, Japan and others will have to protect theirs too because the transition is going to be very rough.
The main bottleneck is battery production and that is dominated by the Chinese for now but they do not have a monopoly. The second bottleneck is electricity generation and that has to double and it will cost a lot but so did the building of the railroads and every other infrastructure we have built. A fallacy is to believe that EVs are somehow dependent on green technology and that their fates are entwined. EV adoption has nothing to do with being green and everything to do with superior technology and economic performance.
I get what Mish is saying but I see it as a speed bump and not a wall.
Nicely stated Doug, with a few points of mine thrown in.
– EV’s are not the “must have thing” > Not by a long shot!
– Production or new supply chains can be put off until they become more economically or politically possible > U.S. Manufacturers lose money on every car sold, and Customers can’t afford them already. We are nowhere near ready economically, as Buyers or Manufacturers.
– Personally I believe EV’s will take over and we will all be electric > it’s inevitable, but I think it will be far longer than most anticipate, due to cost and infrastructure (who’s paying?).
– The transition is going to be very rough > Oh Yeah!
– The main bottleneck is battery production > And we don’t want to have to rely on China.
– The second bottleneck is electricity generation > Probably the Largest and Most Expensive Item
My clean Green electricity already costs me $0.52/kWh
Thanks Stu for your much appreciated input.
Panasonic used to be the goto name for electric batteries. Now, it’s a niche player. Tells you how hard you need to row against the tide, i.e. how much subsidies you need to kickstart and mantain domestic production.
Ford partnering with Chinese battery maker to at new battery mfg plant in Marshall, MI. Ford letting the Chinese in the back door of America to steel American secrets. Ford clueless.
The very fact that the administration needs to apply incentives is proof positive that the EV story is a lie. As you have stated, there is no benefit for the environment or the economy, it is merely preening to the ecoterrorists of the left.
Incentives that are exclusive based on country of origin, are just a nice name for sanctions. Creating these non-inclusive incentives punishes every other country for trying to do what’s important with the environment. The Biden Admin is proving to everyone that hurting countries like China for wanting to go green is far more important than ESG. In other words, it was never about the environment. Just control.