One of the biggest hurdles to the electrification of the auto industry has been public adoption. Some consumers are unsure about trading their internal combustion engine (ICE) for a battery electric vehicle (BEV). At the same time, most simply cannot justify the more significant price tag with BEV models.
With the Inflation Reduction Act of 2022, the US Internal Revenue Service (IRS) is issuing significant tax rebates for consumers, corporations, and government entities who hop into something battery-powered—incentivizing more consumers to trade their ICE vehicle in for a BEV over the next decade.
This new tax credit could help to drive EV prices down, increase EV adoption, and give automakers the demand they need to transition to a BEV-heavy vehicle lineup—but that’s only if they can quickly regionalize their supply chains to meet the new “manufactured in North America” clause.
How Does the Clean Vehicle Tax Credit Work?
The Inflation Reduction Act of 2022 includes various tax credit options for consumers and entities purchasing electric vehicles. Individual consumers who buy a new qualifying EV from now until 2032 can receive a tax credit of up to $7,500.
Commercial entities and government agencies can also cash in on the incentive, receiving a tax break of up to 30% of the vehicle sale price or $40,000. This will entice many businesses and government organizations to upgrade their fleet to new, battery-powered vehicles. Finally, specific organizations, such as public schools and local transportation services, could receive a tax rebate equaling 100% of the vehicle cost.
These credits come with specific stipulations, though. The purchased vehicle(s) must meet two specific criteria to be eligible for the entire tax credit:
- Battery Manufactured in North America. A certain percentage of the vehicle’s battery components must be manufactured or assembled in North America. The required portion starts at 50% in 2023, increasing another 10% each year until it reaches 100% in 2029.
- Meets Battery Mineral Sourcing Requirements. Essential minerals necessary for the battery vehicle—such as aluminum, cobalt, lithium, nickel, and graphite—must be extracted, processed, manufactured, and assembled in the U.S. (or a country under a free trade agreement with the U.S.). The percentage of localized mineral sourcing starts at 40% in 2023 and rises by 10% each year, reaching 80% after 2026.
There are also additional requirements, such as income caps, that consumers must meet to remain eligible for the tax credit.
What Does This Mean for Battery Production in North America?
The Inflation Reduction Act tax credit is designed to accelerate battery electric vehicles and plug-in hybrid vehicle sales while strengthening the U.S. economy and positioning the U.S. as a significant competitor to China for battery manufacturing.
Not only will local automakers need to source battery components closer to home, but foreign auto brands that depend heavily on U.S. based sales, such as VW, Mercedes, Toyota, and Hyundai, will also need to shift their supply chain from Europe and Asia to North America to remain competitive on the market and gain the benefits of the tax break incentive.
With nearly 100% of battery supply chains currently routing through China and a minimal production capacity in North America, this shift creates a significant opportunity for players who can position themselves quickly in the North American supply chain.
This is the environment where automotive companies with the right strategy can take advantage of the changing tides and rise to a massive, global name seemingly overnight.
Is your business ready to start planning for mass production and supply chain management? Find out how QAD can support you in your journey and own the EV fast lane.
