“We must ensure that the future is built in America.” US President Biden has discovered electromobility and is bringing out the heavy artillery: billions in subsidies are intended to reindustrialize the domestic economy. China, on the other hand, is to be left out. And the German car manufacturers?
It is well known that man is the architect of his own fortune, but sometimes he has to be forced into his happiness. The situation in the German auto industry can be described in a similar way if one wants to break down the consequences of the legislative proposal by the US government under President Joe Biden – the so-called Inflation Reduction Act (IRA) – on local manufacturers and suppliers. With this “inflation reduction law”, the US government wants to launch a 738 billion dollar investment and subsidy program that is not only intended to fight inflation and protect the climate.
The law also aims at the green conversion of the US economy and thus also of the automobile market. In addition, it is intended to put China and Russia in their place geopolitically. “IRA” is the practical implementation of Trump’s motto “MAGA!” – “Make America Great Again!”
What does Biden want? By 2030, 50 percent of the new cars sold in the country should have an alternative drive – this includes not only pure electric cars but also hybrids and fuel cell vehicles: “The future of the car industry is electric and there is no turning back. The question is whether we are going ahead or not falling behind,” said the US President. This will make the USA a game changer in the climate-friendly orientation of mobility policy in favor of electric cars.
Beginning in 2023, the US administration will provide tiered subsidies of $7,500 base subsidy when purchasing an electric car, plus $2,500 for vehicles with final assembly taking place in North America. There is another $2,500 if the electric cars are produced in US unionized plants. Electric cars are subsidized up to a price limit of $50,000 for passenger cars and $80,000 for the SUV/pick-ups that are so popular in the USA. Batteries must be greater than seven kilowatt hours and grant recipients must have no more than $150,000 in annual income. Tesla vehicles, like most German brands, do not meet these requirements, but GM and Ford do.
But the Biden government not only promotes it, it also demands it. Attached to the purchase subsidies for e-cars is a solution to the strategic dependence of the USA on raw material and battery imports from China, which have been indispensable up to now. The aim is to reindustrialize the USA by replacing imports with production in the USA itself. Specifically, from 2023, for tax eligibility, 40 percent of the critical resources in a traction battery, such as lithium, must come from the United States or a country that has a free trade agreement with the United States. For example from Canada (USMCA). This value increases by 10 percentage points every year to 80 percent for 2027. For materials that are not rated as critical – steel, for example – the minimum share increases from 50 percent for 2023 to 100 percent for 2029. Germany would be left out.
From 2025, US electric cars may no longer contain raw materials from China or Russia – a knockout criterion for the cell production of storage batteries. From then on, critical metals that come from a “country of particular concern” are taboo if you want to claim the tax credit. And that’s what all manufacturers want, because nowhere is the margin so high that a car manufacturer could pay such a sum out of its own pocket if it wants to compete with IRA-compliant suppliers.
The list of “countries of particular concern” includes Russia and China. China is not only the country that is home to two of the three largest battery producers in the world, CATL and BYD, whose batteries are in every electric car of German origin. (Tesla, on the other hand, works with Panasonic.) A large proportion of the graphite, which is used as the anode material in virtually all of today’s cells, also comes from China. In addition, China refines lithium from countries of origin such as Australia in large quantities into lithium hydroxide. The dependency on China in the supply chain is enormous – for almost all European and Asian car manufacturers.
The President’s order will enable the United States to “drive the future of the electric car, overtake China and tackle the climate crisis,” the White House said. “We must ensure that the future is built in America.” This completely changes the market access requirements in the USA: For Chinese providers, they are completely eliminated. The plans of young Chinese car manufacturers to first conquer the US market and then Europe from there were wasted overnight. For European car manufacturers, the plans require a complete changeover in production, logistics and distribution. And for German car manufacturers? Your current logistics flows in production and sales are hardly affected quantitatively. For the future, however, serious changes must be made to all factory, production and sales plans.
“IRA” has the following consequences for the German car industry: No German model is currently eligible because the VW ID.4 also exceeds the upper price limit. At the same time, competitive pressure from below is likely to increase significantly. And the future effects will be even more serious: All e-production sites and supplier networks worldwide will have to be reorganized. This means a correction of the previous plant structure plans and a total restructuring of the supplier pool, the halt of all previous plans outside the “IRA” region and new construction of plants in North America. VW has already called off the construction of a new plant for e-cars in Wolfsburg or the Giga battery factory in Braunschweig and announced the relocation to North America. In the future, Volkswagen will no longer supply the ID.4 from Zwickau, but will have to build it for the US market at a new production site in Tennessee.
If the German car manufacturers want to participate in the future growth of the global electric car market, they must be independently represented in all three main sales regions of the world. Around 98 percent of today’s global sales of electric cars are achieved in China, the USA and Europe.
With “IRA”, the Biden administration has taken the initiative to resolve dependencies, thereby relieving the other states and companies of the burden of making their own decisions. Bird, eat or die! Voluntarily doing what is necessary saves a lot of frustration. You don’t have to think that’s bad. For Europe, however, the fact that the TTIP free trade agreement has not yet come into force is taking its revenge. But that could change quickly – thanks to “IRA”.
