In August 2022, President Biden signed the Inflation Reduction Act (IRA) into law. This broad legislation impacts a wide number of industries and markets, including the potential supply and demand for electric transportation and renewable energy. The legislation will significantly accelerate transportation electrification in the U.S. However, there are some key challenges and changes ahead that manufacturers will need to be ready for.
One of the most pressing supply chain-related components is the upcoming restrictions on sourcing requirements for automotive makers. Going forward, procurement professionals need to understand and prepare to meet these new requirements when sourcing materials and assembling vehicles.
What is the Electric Vehicle (EV) Tax Credit
The IRA has overhauled consumer tax credits for EVs, extending and amending the previous $7,500 tax credit for plug-in electric and fuel-cell vehicles (FCEVs).
Beginning on January 1, 2023, the EV tax credit (also called the Clean Vehicle Credit):
- Removes manufacturer sales caps.
- Expands eligibility to include both EVs and FCEVs, including used EVs.
- Requires a traction battery with at least seven kilowatt-hours.
- Requires final assembly of the vehicle in North America.
- Imposes income caps for consumer eligibility.
- Sets MSRP limits on eligible vehicles.
- Establishes eligibility criteria based on sourcing requirements for critical minerals and battery component manufacturing.*
*While most updates go into effect in January, the sourcing requirements will take effect following further guidance from the IRS, which is expected in March.
The consumer EV tax credit ranges from $2,500 up to $7,500 at the point of sale. Vehicles that meet the critical mineral requirements are eligible for a $3,750 tax credit, and vehicles that meet the battery component requirements are eligible for a $3,750 tax credit.
The updated EV tax credits under the IRA are expected to boost sales of EVs (a welcome boon to the EV industry). But the new sourcing requirements and restrictions may be a challenge initially for manufacturers.
Sourcing Restrictions On Cars That Are Eligible for the EV Tax Credit
So what exactly are these sourcing requirements? More guidance will follow from the IRS (expected in March), but the basic restrictions are as follows:
At least 50% of the value of the components of the EV battery must be manufactured or assembled in North America. This threshold will rise incrementally each year up to 100% by 2029.
At least 40% of the value of the battery’s critical minerals must be extracted or processed in the U.S. or a U.S. free-trade agreement partner or recycled in North America. This threshold will rise incrementally each year up to 80% by 2027.
Additionally, starting in 2024, EV batteries cannot have any critical minerals sourced from a foreign entity of concern-including China. And in 2025, EVs with battery components sourced from foreign entities of concern will not be eligible for a tax credit.
Potential Roadblocks & Concerns
Reliance on Chinese Battery Supply Chains
Besides incentivizing consumers to convert to cleaner EVs in the coming decade, these requirements aim to wean the U.S. off of the Chinese battery supply chain. In the long term, the credits will encourage U.S. manufacturing of EVs and batteries. However, currently, there is a heavy reliance on China.
In fact, China produces 75% of all lithium-ion batteries and between 70%-85% of the production capacity for key battery components. The U.S. battery manufacturing industry does yet have the capacity to meet demand, with only 10% of global EV production and 7% of battery production capacity. This leaves EV battery suppliers reliant on China. So as it stands today, most EVs wouldn’t be eligible-representing a reduction in tax credit eligibility compared to 2022.
Disruption in Raw Materials Due to War in Ukraine
Battery supply chains have also been hit hard by Russia’s war in Ukraine. EV sales rose dramatically during the pandemic, but the war significantly inflated prices for raw materials. In May 2022, lithium prices were seven times higher than in early 2021 due to high demand and insufficient investment in new supply capacity.
Demand for EVs will continue to grow over the next decade as the industry expands to meet new benchmarks and climate ambitions. So U.S. manufacturers will need to invest in new suppliers and strategic sourcing processes to ensure access to affordable and eligible materials.
What the IRA Means for Sustainable, Renewable Technology Overall
The IRA is broad legislation focusing not only on EV tax credits but other strategic investments in clean and renewable energy in manufacturing and transportation. This includes $60 million for the Diesel Emission Reduction Act program, $2 billion for the Domestic Manufacturing Conversion Grant program, and $3 billion for the Advanced Technology Vehicle Manufacturing program.
With a massive boost in funding for renewable and clean technology, enterprises and state and federal government agencies will be under increased pressure to upgrade and utilize technology and transportation with zero or lower carbon emissions.
What this Means for Procurement & Supply Chain Leaders in Automotive & Manufacturing Sectors
Although the industry is already moving towards electric vehicles, demand will only increase in the coming years. Consumers will flock to the cars that are eligible for the EV tax credit based on the manufacturers’ compliance with sourcing requirements. That means strategic supplier sourcing will be a top priority. To stay competitive, automotive makers must understand their n-tier suppliers, source responsibly, and have full visibility into their manufacturing suppliers.
To do this, enterprises need to use supplier intelligence platforms that allow them to
- Understand corporate hierarchy structure (and subsequently foreign ownership structure)
- Identify and procure n-tier suppliers
- Access other real-time supplier data
EV supply chains are increasingly complex. And with these new requirements, comprehensive supplier intelligence will be essential to ensuring that your EVs are sourced in compliance with consumer tax credits and other pending legislation.