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America should look past the geopolitical haze for EV gains
Localizing car production isn’t as easy as it was back in the 1980s
In the 1980s, as Japanese cars flooded the US auto market, the Ronald Reagan administration found a way to limit them with tariffs and import quotas. It resulted in the likes of Toyota setting up factories in America. They churned out millions of vehicles that led to the proliferation of an efficient auto-supply chain and employed thousands of workers. If the US plays it right, this could happen again—sans the tariffs—as it tries to build its own electric-vehicle supply chain independent of the world’s big factory floor, China.
As the EV hype ramps up and a shortage of batteries emerges, industrial giants like SK Innovation, Honda Motor, LG Energy Solution, Panasonic Holdings and Toyota have announced billions of dollars of facilities across the US to make powerpacks. To ensure that much of it comes from North America, some are sourcing raw materials from Canada as the nation deepens its ties with South Korea. Since the beginning of 2021, more than 15 new facilities or expansions, concentrated around the Midwest and South, have been disclosed in the US, a potential investment of at least $40 billion. These firms are plugging a key technology gap that the US is trying to fill. State governments have welcomed them with open arms. With few US companies that can make EVs and batteries on the scale South Korea can or that are commercially viable, there’s a large market to tap.
To ensure the entire supply chain shows up in the US, the Joe Biden administration introduced the Inflation Reduction Act to attract more manufacturing. Now everyone seems to want to build a battery plant. Trouble is, it hits hard those that actually strengthen the US supply chain.
For South Korea, the primary concern is top-selling EVs made by Hyundai and Kia. EVs that are not made in the US will effectively be shut out under the US industrial policy. Meanwhile, the domestic component requirements hit South Korean battery makers because many critical and processed materials used to make powerpacks are sourced from China. Seoul is asking the US for a reprieve on tax credits that put it at a disadvantage.
If the idea is that these pressures will push the tech champions of South Korea and Japan to make a bigger effort to get into the US, much like in the 1980s, then that might be misguided. While the US is a huge market, it isn’t the single-largest like it was for Toyota and Honda decades ago. The cost advantage and efficiency that the Japanese were able to enjoy back then don’t exist today—especially in the current inflationary environment. They also have large facilities in China with a deep network of suppliers, paving the way for smoother operations and bigger markets where business is easier. If capital expenditure in the US comes with too many strings attached, then it may just not make sense.
Letting South Korea and others create the big manufacturing hub that the US has been vying for would be astute. But decades-old tactics don’t align with the new world. Creating hurdles for South Korean companies that were doing well will only delay American ambitions. How are they going to source enough minerals from somewhere in North America? Where will the equipment come from? And at what cost? Ask firms that have promising technology and are hoping to benefit from the EV policy credits, and they’ll tell you how lead times for machinery are too long.
Then, there’s scaling battery technology and volumes to break even or perhaps make a profit, and that takes years. In the industry, the larger only get bigger because of their capital-intensive nature (think China’s Contemporary Amperex Technology, the world’s largest EV-battery maker). That puts the likes of LG Energy and Panasonic at an advantage, but policy hurdles will serve as huge barriers. And they’re mostly just a waste of time.
The Biden administration could learn from China on how to get the right incentives and players. South Korean companies want to expand their battery recycling facilities in China, a key step to securing stable input supplies. China welcomed Tesla and ensured this EV-maker had just about everything to get hundreds of thousands of EVs rolling out. A vast supply chain grew around it and battery makers flourished. Tesla’s Model S and Model X are on a list of vehicles eligible for tax purchase exemptions; these aren’t made in China yet, like the Model 3 and Model Y.
Moves to keep others out and the latest chip ban only serve to set the US back, if just by creating uncertainty and tension globally. If the US is able to see past the geopolitical haze, then it has a chance at a massive and smooth supply chain that boasts the best technology. Without it, it will just remain on the verge of something big for long and we’ll have few made-in-America batteries and EVs.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia.
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First Published:16 Oct 2022, 10:32 PM IST
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