Recently, I attended a dinner outside of Detroit hosted by QAD, the Korean Battery Industry Association and NAATBatt (an organization dedicated to the development and commercialization of advanced battery manufacturing in North America). Discussions of new plants and regionalizing supply chains in North America were at a level I have never heard before in any industry. The speed of this shift in the supply chain will have an outsized impact on the winners and losers among North American battery manufacturers and their suppliers in the years ahead.
The North American Battery Supply Chain is Accelerating – Why Now?
My favorite question is “Why Now?” At the core this change is being driven by strong incentives created by the Inflation Reduction Act (IRA). Before we discuss the details of the bill, it’s worth looking at three catalysts that contributed to the passing of the IRA:
- The limiting factor in EV production is batteries and their constituent materials: EV adoption is reaching a tipping point constrained by supply, not demand. EVs selling at tens of thousands of dollars above MSRP and wait times exceeding six months are proof points that EVs are resonating with the pragmatic buyers of the mass market as the total cost of ownership of EVs is now below that of internal combustion engine vehicles. Leadership in the EV industry will require control of the battery supply chain.
- Strained energy infrastructure and the transition to renewable energy: Stationary storage plays a critical role in stabilizing the grid and aligning demand and supply with intermittent renewable sources such as wind and solar. Batteries can reduce the use of dirty peaker plants and the need to overbuild intermittent (solar and wind) renewable sources to meet peak demand. The use of a virtual power plant leveraging home-based stationary storage to stabilize the California energy grid this summer is an example that batteries are solving the problem now.
- National security concerns: The energy crisis in Europe, driven by the reliance on Russian gas, has shined a light on risks posed in the energy supply chain. Over half of EV battery production is in China. Beyond the batteries themselves, China currently controls the processing of nearly 60% of the world’s lithium, 35% of nickel and 65% of cobalt. The majority of the U.S. annual graphite requirements are sourced in China. Energy independence in the future will require a domestic battery supply chain.
What Incentives Does the Inflation Reduction Act Provide to Battery Manufacturers?
The Inflation Reduction Act (IRA) provides significant customer and manufacturer incentives for buying and manufacturing batteries and their core materials produced in North America. The size of these incentives is having an immediate impact on the industry as battery manufacturers look to expand and accelerate their plans for plants in the U.S. to capture these credits. Recently, Tesla discussed diverting battery manufacturing equipment meant for Berlin, to Austin. They also released details on a lithium hydroxide refining plant they want to build in Texas or Louisiana. The incentives are disproportionately large to the point where cars built without local battery assembly or materials will struggle to be cost competitive.
On the consumer EV front, the IRA provides up to $7,500 in federal tax credits for the purchase of an EV. It removes caps on automakers such as Tesla and GM that have produced more than 200,000 EVs. The incentives are tied in part to the assembly and sourcing of materials from North America.
The Advanced Manufacturing Production Credit offers manufacturers up to $35 per kWh for each battery cell and $10 per kWh for each battery module produced in North America. The credit is contingent on the source of materials. Notably China is excluded while North America and countries which have a free trade agreement with the United States are included. Battery materials recycled in North America are eligible for the credit regardless of where the materials were originally sourced.
The IRA restores the 30% federal investment tax credit (ITC) for clean energy projects and expands it to include energy storage. Additionally, a 10% bonus to the ITC is available for batteries meeting threshold amounts of domestic content.
The Inflation Reduction Act is yet another change in a long, never-ending wave of disruption in and around the EV industry. Battery manufacturers and their suppliers who make adaptive planning and operations a core part of their game plan will be in the best position to win no matter what’s next. If you’d like to talk with a QAD expert about best-practice manufacturing and supply chain processes and technologies, please contact us.
It’s a very exciting time as the automotive industry transitions to EV and the critical battery industry ramps up in North America. With 93 of the top selling cars in the world produced using parts created by companies using QAD Manufacturing and Supply Chain Solutions, QAD is excited to welcome and support the growing North American EV and Battery supply chain.
