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 (F) 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 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.

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