The automotive industry is undergoing a massive technological transformation toward vehicle electrification and the shift presents huge opportunities for manufacturers that do business in the US, especially since the passage of the Inflation Reduction Act in August 2022. The trend also stands to shake up the global electric vehicle (EV) and battery supply chain, and companies that act decisively now will be more likely to come out on top.
Companies have funneled more than $45 billion into EV production and battery supply chains in the US since the bill was signed into law, and that figure is only expected to grow as the Treasury Department and Internal Revenue Service (IRS) release additional guidance on qualifying for related tax credits.
As was discussed in a recent blog post, one of those is the Section 30D New Clean Vehicle Credit. A new proposed rulemaking was published in the Federal Register on April 17, 2023, and it contains new critical mineral and battery component requirements that could change how manufacturers and suppliers that market their EV products in the US do business.
What’s in the Inflation Reduction Act’s New Clean Vehicle Credit?
The Inflation Reduction Act contains different tax credits for EVs depending on whether they’re new, used or designed for commercial use. The New Clean Vehicle Credit will be the most significant for the automotive industry because it will influence how new EV components and batteries are manufactured and distributed in the US.
With the credit, consumers could save up to $7,500 on a new clean vehicle if it meets Inflation Reduction Act-mandated requirements for critical minerals and battery components. Those sourcing requirements are scheduled to increase by 10% every year beginning in 2023. Vehicles that meet one of the two requirements will be eligible for half of the $7,500 credit – but you can bet consumers are going to want the full amount, and that’s why it’s important for automotive manufacturers to begin preparing for supply chain and production changes now.
It’s also important to know that for a clean vehicle to be eligible for the tax credit, final assembly must take place in North America and it may not exceed a Manufacturers Suggested Retail Price (MSRP) of $55,000 unless it’s a sport utility vehicle, van or pickup truck. The maximum MSRP for those products is $80,000.
Critical Mineral Requirement
Lithium, cobalt and many other critical minerals are critical for clean vehicle batteries, yet they’re already in short supply due to geopolitical issues, cost inflation, supply chain disruption and forced and child labor concerns. The Inflation Reduction Act aims to ensure critical minerals are sourced ethically and sustainably, as well as in a manner that helps stimulate US manufacturing growth.
Under the New Clean Vehicle Credit, a certain percentage of critical minerals in the vehicle’s battery must be extracted or processed in the US or another nation with a free trade agreement (FTA). The applicable percentage for 2023 is 40% and it will increase by 10% every year until reaching 80% in 2027.
The proposed rulemaking also contains a three-step process for verifying batteries meet those critical mineral thresholds. The approach calls for a deeper look at procurement chains, critical mineral qualification and the calculation of mineral content.
Battery Component Requirement
As I mentioned earlier, companies have already earmarked more than $45 million for clean vehicle and battery supply chain investments in the US, and that makes a lot of sense when this requirement is broken down. Qualifying clean vehicles must use a certain percentage of battery components that are manufactured or assembled in North America – and it’s steeper than the Critical Mineral Requirement.
The applicable percentage is 50% for 2023 and increases by 10% every year until reaching the 100% threshold in 2029. That’s right. By 2029, all clean vehicle battery components must be produced or assembled in North America to qualify for 50% of the Inflation Reduction Act’s New Clean Vehicle Credit.
Another area to watch is the Clean Vehicle Tax Credit’s “foreign entity of concern” (FEOC) provision. This yet-to-be-defined provision will begin applying to battery components in 2024 and critical minerals the following year.
The Inflation Reduction Act does not directly define FEOCs, but it does allude to China, Russia, North Korea and Iran falling within that category. The Treasury Department is expected to release additional guidance later this year.
Other Nations Want to Maximize Clean Vehicle and Battery Opportunities, Too
The Inflation Reduction Act clearly contains some powerful provisions to attract automotive manufacturers and suppliers to the US, but some critics – and perhaps rightfully so – are concerned that the US’ tax credits could damage their domestic industries and make it tough to compete. The EU and other nations are advancing legislation or working on free trade agreements to keep a coveted spot in the evolving clean vehicle and battery supply chain.
- EU Net Zero Industry Act: This package proposed in March 2022 sets a 40% by 2030 domestic production target for batteries, solar panels and several other clean energy technologies for use in the EU. This means that by 2030, 40% of all batteries and other eligible clean energy products installed in the EU should also be produced there.
- The US and EU are also negotiating a critical mineral-specific trade agreement that could help EU companies qualify for Inflation Reduction Act incentives
- US-Japan Critical Minerals Agreement: In March 2023, officials in the US and Japan updated the US-Japan Trade Agreement to help build a resilient supply chain for EV battery critical minerals.
- US-Indonesia Critical Minerals Agreement: Indonesia is also seeking a free trade agreement with the US for clean vehicle battery critical minerals that would help domestic companies qualify for Inflation Reduction Act tax credits.
These are just a few examples of how governments are moving to build robust supply chains for clean vehicle components and batteries and many more are sure to follow. One clear takeaway, however, is that the global automotive supply chain is changing and companies need to act now to minimize disruption and set up new lines of trade or production that will help them turn vehicle electrification into a massive opportunity for growth.
Envisioning the Automotive Supply Chain of Tomorrow
As co-host of the Auto Supply Chain Prophets podcast alongside Cathy Fisher of Quistem and Gravitas Detroit’s Jan Griffiths, you can bet this is one of my favorite topics. As we always say though, we can’t truly predict the future of the automotive supply chain, but we can give relevant insights and best practices from industry leaders to help you stay ahead of the changes in our industry.
We all know that the EV battery supply chain has a foothold in just about every country. In fact, battery minerals travel about 50,000 miles, on average, from the time they’re extracted until being produced into a battery cell. At the same time, critical mineral extraction and processing are highly consolidated in just a few countries.
China is the world’s largest extractor of rare earths and has a strong lead on processing for rare earths, lithium, cobalt, nickel and copper. Chile, Argentina, Indonesia, Australia and the Democratic Republic of the Congo are also major markets for critical mineral extraction.
The idea of sourcing most of the critical minerals used in a clean vehicle battery from the US or one of its trade partners might seem a little radical at first glance, but the Biden administration and other governments are leveraging incentives and policies like the Inflation Reduction Act to make it happen – and it appears to be working.
The global automotive industry plans to invest $1.2 trillion in vehicle electrification by 2030, potentially bringing tens of millions of new clean vehicles to market. The Inflation Reduction Act is less than one year old and already companies are directing billions of dollars toward US projects.
EV Battery Supply Chains are Moving to the US
More than 25 huge EV supply chain projects have been announced in the US in recent months, representing an investment of $32 billion that could power the creation of 20,000 jobs. What’s more, the US is expected to have 950 gigawatt-hours worth of battery manufacturing capacity by 2030. Research indicates that’s enough capacity to support 12 million new EVs every year.
One of the biggest challenges for companies right now is determining whether they’re eligible for Inflation Reduction Act tax credits and which ones to apply for. RMI has developed a comprehensive list of tax credits that can be filtered and sorted to help companies find the right ones for their unique operations.
QAD Supplier Management is another great solution for end-to-end supply chain visibility and supplier communication. There’s a good chance your suppliers are already taking steps to meet the critical mineral and battery component requirements in the Inflation Reduction Act’s New Clean Vehicle Credit. QAD can help validate those claims, while modules like Supplier Data Management and Demand and Delivery can help you connect with new suppliers faster and monitor the flow of goods in real time.
I also suggest, of course, tuning into the Auto Supply Chain Prophets podcast on a regular basis to stay up to date on the latest industry trends and insights. We regularly hear from leaders in the EV supply chain and charging space. In particular, listen to Episode 30 where we interview Rosemary Coates, Founder and Executive Director at the Reshoring Institute, about the impact of Reshoring, the Value Chain and the Power of Automation. I look forward to seeing you there!
