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.

Policy support

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.

United States

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. 

Opportunities for growth

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.