Uncle Sam has revealed the fine print on his EV sale prices, and the reaction is rippling through the auto supply chain.
After a 15-month wait, the U.S. Treasury Department finally revealed how it will decide which EV purchases qualify for up to US$7,500 in tax credits in 2024 under the Inflation Reduction Act.
The auto industry got some key definitions on Friday that will likely whittle how many EVs qualify for the full incentives. The credit will exclude vehicle content from China-based firms, including U.S. subsidiaries, and companies that count Chinese state entities or senior officials as at least a quarter of their backers.
It marks the most formal push yet for automakers to buy battery parts outside China. That could benefit Canada as it tries to build out smaller “midstream” firms that turn critical minerals into battery parts.
“Established global manufacturing companies—whether they be [auto manufacturers], or Korean or Japanese battery makers—they, by and large, are taking the lion’s share of the US$369 billion worth of benefits of the IRA,” Electra Battery Materials CEO Trent Mell told me.
The rules limiting handouts to companies in countries of concern “are going to force these very players to go invest in their own supply chain before they can continue to benefit,” Mell said.
Here’s what you need to know.
The backdrop: It’s easier to sell a cheaper car, especially when the U.S. government is funding the fire sale. So EV makers—particularly those worried about demand for expensive electric vehicles—want to make sure they qualify for these IRA incentives.
The IRA awards US$3,750 to buyers of vehicles that meet critical-minerals requirements and another US$3,750 on vehicles that meet key battery rules.
Come January, the full US$7,500 price break will be exclusive to vehicles without battery parts from foreign entities of concern (FEOC), a list of countries picked by the U.S. government that currently includes China, Russia, North Korea, and Iran. Starting in 2025, FEOC-sourced critical minerals are also out of bounds.
There was a key piece of information missing from that original legislation though: What was considered a Chinese company and what was considered a Chinese part?
How it will work: Quebec-based First Phosphate CEO John Passalacqua said in a release that the policy successfully closed loopholes that Chinese firms exploited, and has an achievable timeline.
While constricting EV sales might seem counterintuitive, the government also said it won’t make automakers track down suppliers of “trace materials.” That’s calming fears that a vehicle model would be unexpectedly disqualified over one ingredient in the coating on a fastener, wrote John Bozzella, CEO of the U.S.-based Alliance for Automotive Innovation. Companies with other types of technology-sharing programs with Chinese firms might be able to prove that the firms outside China have sufficient oversight by submitting licensing contracts to the DOE, The Information reported.
Why it matters: China is the world’s top producer—by a long shot—of battery cathodes, anodes, electrolytes, separators, cells, lithium and cobalt, which have made it harder for Canadian firms to gain market share.
Canada Nickel CEO Mark Selby said the new rules help clarify whether automakers can rely on inputs like Indonesian nickel, where many of the companies are actually funded by Chinese firms and have low labour and environmental standards.
“It’s been a game changer,” Selby told me. “We were getting very significant inbound interest for automotive companies, even without the legislation. The legislation makes it very clear.”
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