Fasten Your Seatbelts!

Fasten Your Seatbelts!

Fasten your seatbelts -  as the US accelerates its move into the electric vehicle industry


In August, President Biden signed the Inflation Reduction Act into law − the biggest incentive package to promote clean energy in US history. It covers many facets of clean energy and renewables, including electric vehicles. So will this legislation usher in a bonanza for electric vehicle (EV) suppliers in the US?


The Act promises about $386 billion of energy and climate spending over the next decade, made up of various tax credits and incentives to encourage companies to invest in renewable technologies and consumers to purchase energy efficient products. And as the fine print reveals, it also strongly promotes the onshoring of clean energy technology within the United States.


Buyers of electric vehicles can qualify for up to $7,500 of credit per car as long as the vehicle had its final assembly in North America. Additionally, a proportion of the value of certain critical minerals contained in its battery must have been extracted or processed in the US or in a country with which the US has a free trade agreement, or must have been recycled in North America. That proportion starts at 40% and will rise thereafter. A proportion of the value of the battery components must have been manufactured or assembled in North America, starting at half and increasing over time. A car which otherwise qualifies will be disqualified if it contains any critical minerals or battery components processed or manufactured by a ‘foreign entity of concern’, of which China is one example. And as it relates to EV battery production, generous subsidies are available to manufacturers for building EV battery plants in the United States.


How many electric vehicles will actually meet these criteria? Currently the answer is not many, given China’s pivotal role in the manufacture and supply chain of EV batteries.


The EV battery industry is dominated by Chinese companies. CATL is the leader with about one third share of the market, and compatriot BYD has an additional single digit market share. Korean and Japanese companies such as LG Energy and Panasonic make up most of the rest of the industry. There are other smaller players, and in Europe there are plans to ramp up capacity substantially, but the established makers with a healthy technology and capacity lead are Asian, and especially Chinese.


China’s presence also extends to the supply chain for electric vehicle batteries. According to the International Energy Agency (IEA), about 70% of cathodes (negative electrodes) and 85% of anodes (positive electrodes) for EV batteries are produced in China. And over half of the world’s processing and refining capacity for the critical metals from which batteries are made – lithium, cobalt and graphite – is located in China. Chinese companies have done a fantastic job of establishing themselves as pivotal to the manufacture of this critical piece of equipment.


The United States, in contrast, has been a laggard in the adoption of electric vehicles by consumers, and also in establishing its position in the EV battery industry, despite the prominence of Tesla. Again from the IEA, the US had 57 gigawatt hours of electric vehicle battery capacity in 2021, or 7% of the global total, and had a negligible position in the EV battery supply chain.


The US is clearly using its subsidy dollars not just to encourage the take-up of EVs but also to stake its industrial claim to the EV battery business. Over the next couple of years, we can speculate that the application of the restrictions on battery parts mentioned in the Act may end up being watered down or applied only to certain parts of the supply chain, given the practical constraints of China’s position today. In any case, as battery costs fall and performance improves, and as charging networks are built out, we don’t believe that subsidies are necessary for EV adoption, although they would certainly speed it up. But in the medium term, significant additional capacity is needed at every stage of the electric vehicle supply chain. The US is trying to ensure that new capacity is on its own shores, or at least in those of countries with which it trades freely.


We believe the car industry in the US will ally with established Korean and Japanese battery makers, parts makers, and materials producers to build its position in EV batteries. In our view this presents a great opportunity for those companies; we highlight Samsung SDI - a Korea-based technological leader in electric vehicle batteries, which already has plans to build an EV battery facility in the United States in conjunction with Stellantis, the Fiat Chrysler Peugeot car group, as one potentially underappreciated beneficiary.

More about the authors

Claire Marwick, CFA Investment Manager

Claire Marwick, investment manager, is a member of the global equities team, with responsibility for co-managing our Global, International and US Sustainable Equity strategies.

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