Many countries are putting EV supply chains at the forefront of their industrial policies.
Many countries are putting EV supply chains at the forefront of their industrial policies.
Companies should evaluate existing supply chain infrastructure to ensure adequate capacity.
The technology, manufacturing, energy, logistics and service sectors stand to benefit.
Despite recent slowdowns in manufacturing and construction, construction spending on new manufacturing plants has surged, doubling over the past year to reach $190 billion by April 2023, according to Bloomberg data. This upward trend reflects a renaissance in the manufacturing landscape in North America as new factories sprout across the country and the initial success of the onshoring objectives of U.S. industrial policies. Significant growth is coming from the rising investments in energy transition technologies, semiconductor manufacturing and the build-out of electric vehicle supply chains.
The automotive sector’s historic transition involves electrification in all segments of transportation, from passenger vehicles to public transportation and commercial fleets. EV sales worldwide are set to surge, rising from 10.5 million in 2022 to an anticipated 27 million by 2026, according to BloombergNEF. Actual EV production in the United States in 2022 landed just shy of projections and is on track through Q1 2023, doubling compared to just two years prior. EV sales are expected to represent 28% of all U.S. passenger vehicle sales by 2026.
This transition is unlocking vast economic opportunities across the entire value chain. In response to these prospects, as well as lessons learned from COVID-19 supply disruptions, many countries are putting EV supply chains at the forefront of their industrial policies. This has initiated a race to attract investments and expedite the build-out of the EV supply, which involves securing critical minerals; onshoring electric vehicle production, battery development, and production; and advancing charging infrastructure. The momentum is set to accelerate across North America as the mass adoption of EVs progresses and additional public funding becomes available through the Inflation Reduction Act (IRA) and other similar incentives.
To fuel investments from the private sector, the U.S. and Canadian governments have introduced a number of policy tools, including tax credits and incentives at the consumer and manufacturer levels, as well as subsidies, grants, and other government funding and loan programs.
The IRA is arguably the most significant development for the North American auto industry in recent history, setting aside over $370 billion to combat climate change, with a substantial portion earmarked for EV manufacturing and infrastructure. The IRA strategically ties consumer EV incentives to North American sourcing, incentivizing manufacturers to localize EV and battery production in North America and diversify critical minerals supply chains within U.S.-friendly countries.
In March, the U.S. Treasury Department released guidance on the eligibility for the $7,500 clean vehicle credit, for which consumers must meet income threshold criteria. From the automakers’ perspective, to be partially or fully eligible for the credit, vehicles must undergo final assembly in North America and meet stringent sourcing requirements for critical mineral and battery components.
Heavy tax savings for both consumers and automakers will undoubtedly drive demand in the EV market. Under the tax code section 45X credit—which incentivizes manufacturers’ domestic expansion efforts—eligible manufacturers can receive up to 10% of project cost reimbursements to produce renewable energy components like EV batteries domestically.
Most manufacturers are eligible to monetize many of the clean energy tax credits by transferring them to other taxpayers in exchange for cash. By understanding the requirements and processes for transferring these credits, manufacturers may benefit from them regardless of their tax profile.
In addition, battery cells can receive a $35 tax credit for every kilowatt-hour of energy the battery produces, while battery modules can receive $10 per kWh, or $45 in the case of a battery module that does not use battery cells. There are also several state-level incentive programs.
Apart from offering credit and incentives, the U.S. government is pouring billions of dollars in low-cost government loans into funding manufacturers’ expensive EV projects. Just last month, the U.S. Energy Department announced an unprecedented $9.2 billion loan to BlueOval SK, a joint venture between the Ford Motor Company and South Korean battery producer SK On to fund the construction of three battery manufacturing facilities in Kentucky and Tennessee. That follows a $2.5 billion loan granted to another joint venture project to finance the construction of new lithium-ion battery manufacturing facilities in Ohio, Tennessee and Michigan.
Canada is actively shaping its economic landscape to cater to the evolving EV industry. Governments at both the federal and provincial levels offer billions of dollars in incentives and support programs to attract investments from key automotive and battery manufacturers. These initiatives include investment tax credits for capital spending, subsidies and grants through various innovation funds and programs, government financing, and targeted support negotiated directly with original equipment manufacturers (OEMs), battery manufacturers, and suppliers. The 2023 federal budget amplified these measures, introducing a 30% refundable investment tax credit for capital investments in eligible property used in clean technology manufacturing and critical mineral extraction and processing.
Provinces (Ontario and Quebec, in particular) are also fully committed to building out the EV supply chains, luring OEMs and automotive suppliers with lower operating costs, a secure supply of minerals and materials, a developed industrial supply chain, province-funded infrastructure upgrades, effective environmental legislation, easy access to U.S. markets and a highly skilled workforce.
Canada's critical minerals mining and processing has also emerged as a priority sector, benefiting from the full spectrum of mineral deposits needed for energy transition technologies, proximity to the U.S. market and the ability to meet sourcing requirements under the IRA. In the 2022 global lithium-ion battery supply chain ranking by BloombergNEF, Canada rose from fifth to second place, surpassing the United States and closely trailing China—a testament to Canada's rich mineral resources, a well-developed mining sector and industrial infrastructure, and strong positioning on the environmental, sustainability and governance front.
Anticipated EV growth and unprecedented government support have already yielded historic investments into the sector. Over the past few years, the United States has seen announcements for more than 100 projects worth $200 billion of investments, according to Bloomberg, with all top automakers announcing new EV and EV battery production facilities.
At the end of 2022, Reuters estimated that by 2030, top automakers worldwide will have pumped $1.2 trillion into the EV sector, which includes batteries and raw material sourcing and processing. And since the IRA passed in August 2022, BloombergNEF estimates new investments of $57.6 billion in North American EV and battery production as of the end of March 2023, a figure that is continually increasing.
In Canada, Ontario is emerging as a powerhouse for the EV supply chain; the province aims to grow its automotive sector to produce at least 400,000 hybrid and electric vehicles by 2030. According to the government of Ontario, from October 2020 to June 2023, the province attracted a staggering $25 billion from car manufacturers and battery producers. This includes announced investments by Ford ($1.8 billion), Umicore ($1.5 billion), General Motors ($3 billion), Stellantis ($3.9 billion) and Volkswagen ($7 billion).
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To capitalize on this transition, companies should assess current resource capacity to meet the requirements of the respective tax credits. Companies will need to assess their existing supply chain infrastructure to ensure adequate capacity and availability of resources, and assess timelines to ensure component requirements are met in accordance with the transition pace. Collecting and assessing the data needed to meet the incentives requirements could make for a large hurdle in capitalizing on these opportunities.
Manufacturers that want to take advantage of the incentives and be a first-choice provider for EV consumers eager for tax savings should work with a third party to obtain and analyze data at a level precise enough to capture relevant criteria. That might include data on construction contract labor and battery composition data needed to ensure manufacturing facilities and EVs manufactured therein meet jurisdictional tax credit requirements.
The EV investment frenzy has significant implications for the broader economy and middle market businesses, including immense growth opportunities. The associated manufacturing growth will lead to broad economic benefits, fostering job creation and a circular economy with a widespread positive socioeconomic impact in communities. It will create spillover demand for new products and services across sectors, while also enhancing research and innovation.
For middle market businesses, this translates into new market opportunities, particularly in the technology, manufacturing, and energy sectors but also in the logistics and service sectors. Given these prospects, it's no surprise that nations are rushing to secure their position in the global EV supply chain.
Join RSM US Chief Economist Joe Brusuelas and U.S. Chamber of Commerce Executive Vice President Neil Bradley as they discuss the economic outlook and what middle market companies should anticipate in the coming months.