Worldwide: Will Washington's Decoupling Agenda Delay The EV Transition

For years, U.S. automakers pushed back against Asia's move towards Battery Electric Vehicles (BEV), allowing Chinese OEMs and suppliers to develop technologies and gain a firm foothold in electrification. And, then, in a flip of a switch, the Big 3 decided to jump in the game with both feet, but at a distinct disadvantage as the initiative was already years in development in Asia, and U.S. lawmakers were indifferent to supporting any transition away from oil. While the industry announced major investments, Washington was having more difficulty seeing the future. Then, in August 2021, President Biden took a historic step by calling for OEMs to produce 50% of their new U.S. vehicles with zero-emissions by 2030. As a result, 2022 was a remarkable year for transformation from internal combustion engines to battery-powered electric vehicles. With the Industry and now Washington firmly behind a transition to BEV, major automakers in the United States have unequivocally pledged to phase out their internal combustion passenger cars for zero-emission vehicle alternatives by the end of this or the next decade. Notable strategic blueprints of these OEMs include, Stellantis's Dare Forward 2030, Ford's New Battery Capacity Plan, and GM's All-Electric Future. Even major Japanese OEMs, who had been wading in the tide of BEV are questioning whether the hybrid play may not be the future.

As OEMs in the U.S. move towards transportation electrification, battery and related component suppliers from East Asia play an important and indispensable role in facilitating these lofty goals on the timetable promoted by the President. 2022 was a big year for these overseas battery manufacturers to shine on the U.S. auto market. With Ford's recent announcement to contractually align with Contemporary Amperex Technology Co. (CATL), for advanced LFP cells, it is clear that Washington's go-it-alone mentality is unrealistic in the short-term and unhealthy for an industry that has depended on a global supply chain for decades. The footprints of other well-known battery suppliers from Asia are also crossing the United States. In May 2022, Stellantis and Samsung announced its joint venture for an electric vehicle battery plant in Indiana. In October 2022, Honda and LG Energy Solution jointly announced a $3.5 billion investment to build a joint venture EV battery plant in Ohio. In November 2022, Panasonic Energy began construction on a new lithium battery manufacturing facility in Kansas with Tesla as its primary customer. In December 2022, SK Innovation announced the ground-breaking of a battery manufacturing campus with Ford in Kentucky. And, then there have been major commitments by GM to partner with LG Energy to develop the Ultium EV platform, which GM hopes will secure their place as a leading BEV manufacturer.

One inescapable fact that all of these announcements share is that OEMs recognize the importance of East Asia for these products, and it is an acknowledgement that the region, including China, remains key to the U.S. development of BEV. Washington, however, has had an ambivalent understanding of the importance of this dynamic; pushing forward an agenda that both incentivizes production of BEVs in the U.S., but frustrating trade with the region. President Biden's Executive Order 14037 marked the administration's moon shot to electrify, but Congress has also aggressively pushed the administration's agenda. The Infrastructure Investment and Jobs Act, signed into law by President Biden in November 2021, sets aside $7.5 billion for EV charging, including $5 billion for an EV charging formula grant program and a further $2.5 billion for fueling stations. Then, in August 2022, Congress passed the Inflation Reduction Act, which allocates around $374 billion towards climate and energy spending, including tax credits for EV purchases and manufacturing in North America. These tax credits are conditioned on hitting certain content percentages for critical minerals and components sourced from North America - the specifics and feasibility of such sourcing still to be determined.

OEMs understand that the rules around these credits must recognize the importance of these industry dynamics. Case in point, Japanese and South Korean OEMs have suggested that the rules adopt "flexible thinking" for the new EV tax credits, including how quickly the battery supply chain can be localized. Although U.S. OEMs are ramping up their vertical integration of battery supply chains from mineral exploration and mining to recycling, it will take time to supply a market quickly moving towards full BEVs. Until then, the industry understands that East Asia plays a vital role in battery cell production up and down the supply chain. In fact, the top 10 battery producers today are all from East Asia.

As U.S. OEMs partner with East Asian Suppliers to produce battery cells, packs and modules, they are actually fulfilling one of the goals of the prior (Trump) administration: To localize production and create U.S. jobs. Yet, some politicians continue to view these alignments with derision. In December 2022, Virginia's Governor refused to incentivize the Ford-CATL battery plant project in Virginia, because of his fear that Ford would be a front to the Chinese Communist Party (CCP). Eschewing the opportunity for over $3B of investment and 2500 jobs from Ford Motor Company, a U.S. company fully in control of the project, is certainly noteworthy but not isolated. In fact, other governors, members of congress, and state legislators continue to connect Chinese investment with the CCP - some states are even passing laws preventing foreign companies from owning real estate in their state. This bell-ringing is very similar to the fearful warnings launched in the 1980's about Japanese investment in the U.S. Citing national security concerns, Congress has also recently proposed and adopted laws negatively impacting foreign investment in the U.S., particularly for investment from China. Many are familiar with the active role that the Committee on Foreign Investment in the U.S. (CFIUS) has played in vetting foreign companies doing business in the U.S., but there is no shortage of proposed legislation sitting in Congress today aimed at investment from East Asia. For example, the proposed American Critical Mineral Independence Act of 2021 aims to reduce reliance on critical minerals sourced from East Asia. Although not definitive, the global list of "critical minerals" includes lithium, nickel, cobalt and other rare earth elements that are indispensable for EV battery production. Case in point, the U.S. and the Democratic Republic of Congo (DRC) and Zambia signed an MOU to develop jointly a supply chain for EV batteries. The DRC produces more than 70% of the world's cobalt and Zambia is the world's sixth largest copper producer and second largest cobalt producer in Africa.

Despite the calls for de-coupling from China and growing nationalism here and abroad, trade and industry continue to march on. After President Biden and President Xi's meeting in Indonesia in November 2022, the world's most important economic relationship finally returned to the negotiation table for global trade talks. On January 18, 2023, Secretary of Treasury Yellen met with the Chinese's top trade negotiator Liu He in Switzerland, where both agreed to enhance frank exchange with each other.

While the U.S.'s walk towards electrification independence is unmistakable, the industry realizes this is a marathon and not a sprint. Until that time that the U.S. shores up its exploration, mining, researching and manufacturing capabilities for batteries, East Asia will play an important role in the U.S.'s transition to BEV. As foreign suppliers continue to expand their operations in the U.S. with their investment and technology, they are bringing to the U.S. considerable manufacturing capacities and employment opportunities, which inevitably supports the U.S. auto industry's transition to battery electric vehicles.

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