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Wednesday, November 30, 2022

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Joe Biden is ruining the dream of electric vehicles made in America

The US has a chance to become a serious global player in space. But it squanders 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 Toyota Motor Corp., now the world’s largest auto company, investing hundreds of millions of dollars to set up factories — or transplants, as they were known — across America. They produced millions of vehicles leading to the proliferation of an efficient automotive supply chain and employing thousands of workers.

If the US plays it right, this could happen again – without the tariffs – as it tries to build the major US electric vehicle supply chain independent of the factory floor (and largest battery and EV manufacturer), China. This time, however, the South Koreans are joining the Japanese.

As the EV hype mounts and battery shortages develop, industrial giants such as SK Innovation Co., Honda Motor Co., LG Energy Solution Ltd., Panasonic Holdings Corp. and Toyota announced that billions of dollars worth of facilities in the US will be produced in powerhouses. To ensure that much of it comes from North America, some source raw materials from Canada as the country deepens its ties with South Korea. More than 15 new facilities or expansions, centered around the Midwest and South, have been announced in the US since early 2021, representing a potential investment of at least $40 billion, according to an analysis by the Federal Reserve Bank of Dallas.

These companies are filling an important technology gap that the US is trying to fill. State governments have welcomed them with open arms. With few U.S. companies that can make EVs and batteries on the scale that South Korea can or are commercially viable, there’s a big market to tap into.

To get the point across – perhaps a little too hard – and make sure the entire supply chain appears in the US, the Joe Biden administration has introduced the Inflation Reduction Act to attract more production. As a result, everyone seems to want to build a battery factory. The problem is that it affects those who are strengthening the US supply chain the hardest.

For South Korea, the biggest concern is Hyundai Motor Co’s best-selling EVs. and Kia Corp. EVs not made in the US will be effectively excluded under the US Beijing-style carrot-and-stick industrial policy. Americans actually liked to buy them. Meanwhile, domestic component requirements hit South Korean battery manufacturers because many critical and processed materials used to make power packs come from China. Now Seoul is asking the US to defer tax cuts that have hurt the country.

If the idea is that this pressure will push the technology champions of South Korea and Japan to make a greater effort to enter the US, just as they did in the 1980s, then it might be misguided. While the US represents a huge market, it is not the largest as it was decades ago for Toyota and Honda. The cost advantage and efficiency that the Japanese could enjoy back then no longer exist today – especially in today’s 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 larger markets where business is easier. If capital expenditures in the US come with too many liabilities, it might just not make sense.

Allowing South Korea and others to create the major manufacturing hub the US is vying for would be smart. But decades-old tactics don’t align with the new (especially post-Covid) world. Creating hurdles for South Korean companies that did well will only slow down US ambitions. How are they going to get enough minerals from anywhere in North America? Where does the production equipment come from? And at what price? Ask companies that have promising technology and hope to take advantage of the EV policies, and they’ll tell you how long machine lead times are already insanely long.

Then there’s the scaling up of battery technology and volumes to break even or maybe make a profit, which takes years. In industry, the larger ones only get bigger because of their capital-intensive nature (think China’s Contemporary Amperex Technology Co., the world’s largest manufacturer of EV batteries). That puts LG Energy and Panasonic at an advantage, but policy hurdles will serve as huge barriers. And they are usually just a waste of time.

The Biden administration could learn from China how to get the right incentives and players. The South Korean companies are looking to expand their battery recycling facilities in China – an important next step to secure a stable raw material supply. China welcomed Tesla Inc. and made sure Elon Musk’s EV maker had just about everything to get hundreds of thousands of EVs off the production lines. A huge supply chain grew around it and power pack manufacturers prospered. And this week, Musk’s Model S and Model X were on a list of vehicles eligible for tax-exempt purchases. These are not yet made in China, like the Model 3 and Model Y.

Measures to keep others out and the latest chip ban only serve to push back the US, if only by creating uncertainty and tension worldwide. If the US can see past the geopolitical haze, it has a chance at a huge and smooth supply chain with the best technology. Without it, it just stays on the brink of something big – for a long time. And few Made-in-America batteries and EVs.

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