Joe Biden Is Botching the Dream of Made-in-America Electric Vehicles
The US has a chance to become a serious global player in the space. But it’s squandering it.
In the 1980s, as Japanese cars flooded the already-struggling US auto market, then-President Ronald Reagan's trade representative, William E. Brock, found a way to limit them with tariffs and import quotas. The measures eventually resulted in the likes of Toyota Motor Corp., now the world's largest car company, investing hundreds of millions of dollars to set up factories — or transplants, as they were known — across 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 the great American electric-vehicle supply chain independent of the world's factory floor (and largest battery and EV maker), China. This time, though, the South Koreans will be joining the Japanese.
As the EV hype ramps up and a shortage of batteries emerges, industrial giants like SK Innovation Co., Honda Motor Co., LG Energy Solution Ltd., Panasonic Holdings Corp. and Toyota have announced billions of dollars of facilities across the US to manufacture 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, according to an analysis by the Federal Reserve Bank of Dallas.
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 drive home the point — perhaps a little too hard — and ensure the entire supply chain shows up in the US, the Joe Biden administration introduced the Inflation Reduction Act to attract more manufacturing. As a result, everyone seems to want to build a battery plant. Trouble is, it hits the ones that actually strengthen the American supply chain the hardest.
For South Korea, the primary concern is top-selling EVs made by Hyundai Motor Co. and Kia Corp. EVs that are not made in the US will effectively be shut out under the US carrot-and-stick, Beijing-style industrial policy. Americans actually liked buying those. Meanwhile, the domestic component requirements hit South Korean battery manufacturers because many critical and processed materials used to make powerpacks are sourced from China. Now Seoul is asking the US for a reprieve on the tax credits that put it at a disadvantage.
If the idea is that these pressures will push the technology 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 represents 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 where supply-chain issues have become the norm. 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.
Allowing South Korea and others to 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 (especially post-Covid) world. Creating hurdles for South Korea's 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 manufacturing 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 now already outrageously 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 Co., 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. The South Korean companies are looking to expand their battery recycling facilities in China — a key next step to securing stable raw material supplies. China welcomed Tesla Inc. and ensured Elon Musk's EV maker had just about everything to get hundreds of thousands of EVs off production lines. A vast supply chain grew around it and powerpack manufacturers flourished. And, this week, Musk's Model S and Model X figured 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 a long time. And few Made-in-America batteries and EVs.