Analyst: IRA China Rules Could Handcuff BEV Sales in U.S.

A senior analyst at S&P Global Ratings is raising a caution flag about the U.S. Treasury Dept.’s new, tighter China rules for implementing the Inflation Reduction Act.

Those rules went into effect April 18 and will disqualify automakers from receiving the full $7,500 tax credit in 2025 if they include battery minerals and components “from a foreign entity of concern” – mainly China.

Already, models such as the Ford Mustang Mach-E, Rivian R1T, Tesla Model 3 and Jeep Grand Cherokee 4xe have failed to make the full subsidy list.

“With updates to the IRA made in April, the tax credit part of the equation obviously depends on vehicle manufacturers having a mostly North American battery,” Nishit Madlani, S&P Global’s senior director in charge of autos, business and technology services points out.

“The way we are reading it, Chinese batteries will automatically disqualify a vehicle from those incentives starting next year. And if a large portion of the minerals are mined or processed in China, those will also not be eligible starting in 2025,” he adds.

“Because of that, the new framework has created enough uncertainty to discourage Chinese battery makers from investing in the U.S., while giving the Korean conglomerates such as LG, SK, Samsung and POSCO a clear opportunity. That is why we are seeing a lot of those Korean joint ventures starting up across the U.S.”

Despite that, Madlani is upbeat about the global BEV market in the coming two to three years but voices concerns for what comes after that. In its forecast last October, the credit-rating agency predicted BEVs and plug-in hybrids would grow to 22% of the global light-vehicle market by 2025, up from 10%-12% in 2022, with shares in China and Europe growing to nearly 40% and 30% respectively. In the U.S., the share is expected to hover between 18% and 23%.

“Right now,” Madlani tells Wards, “what we are seeing in developed markets is being determined by the level of government support to reduce CO2 emissions and how that would enhance each country’s energy security. We’re not looking much beyond 2025, because there are too many variables in that crystal ball. 

“We think that over the next two to three years growth will be fairly strong. Longer term, we’re taking a wait and see approach. There are a number of fundamental assumptions that are still dependent on the level of charging infrastructure, for instance.”

While declining to pick winners and losers, Madlani nevertheless provides a status report for several of the bigger players. They include:

Tesla

“We’re not going to see Tesla having the level of market share we’ve seen historically, simply because there are more players in the market,” Madlani says. “The bigger question is, what’s happening to the pie and is that pie is increasing?

“Nevertheless, we believe (Tesla) will continue to have a strong hold with the consumer. It has the wherewithal to take pricing actions to contend with market-share loss, because it is making a lot of money. Therefore, we’re not too worried about Tesla’s trajectory for at least the next couple of years.”

Madlani sees Tesla meeting its 2023 target of 2 million deliveries.

“We assume that their global market share will be around 2%-4% of overall vehicle sales by 2025. That number for 2022 was roughly 1.5%.”

General Motors

“If you look at the way GM has talked about and made investments towards electrifying its fleet with new launches, vertical integration and securing battery capacity, it has certainly taken the company in the right direction,” Madlani says.

“If it were to get the scale with three battery plants under construction and a fourth to be announced soon, we think there will be enough battery capacity in place and that (it has) secured the raw materials to ramp up to its target of 1 million vehicles annually in North America by 2025.”

He sees the flexibility of GM’s Ultium battery platform as a big plus, because if battery chemistries change, the platform would be able to keep pace with that change.

“It’s all about execution now, scaling up to hit their target,” he says. “We’ll have a better idea a year from now how their launches perform. But internally there will still be healthy cash-flow generation to support these investments from GM’s legacy truck business.”

Renault 

“In Europe, Renault is behind Volkswagen, Stellantis and Volvo. It speaks to the fact that we don’t have a positive view on Renault’s relative standing,” Madlani says. 

Lack of investment and profitability struggles at partner Nissan don’t help the matter, he adds.

“For Renault, the acceleration will come with some of the model launches like the R5, which is replacing the Zoe. It also has the R4 in the pipeline. I think Renault’s capacity to establish a solid position in the very competitive and regulated European EV market is going to be key. 

“Right now, it looks like a credible strategy, but it’s much too early for us to give it any benefit. At this point, we think there’s going to be an execution risk.”

Toyota 

Madlani points to Toyota’s strong financial position but says “time will tell” when it comes to the automaker’s BEV strategy.

“Today, Toyota’s share of BEVs is obviously low, while its hybrid and plug-in hybrid offerings, if you look at all the data, are still the most cost-efficient way to meet regulatory standards around the world,” he says.

“The big question is, if BEVs are indeed the future and if consumer demand (shifts) heavily towards them over the next couple of years, will it put Toyota further in a catch-up mode relative to the other large players? Our position is that, yes, it may come under pressure with the rapid increase in demand and automakers in Europe, China and U.S. shifting quicker than many had envisioned. 

“This means that those automakers will be able to also learn a lot faster in terms of their second and third-generation vehicles on how to manufacture BEVs more efficiently and how to make money. So yes, it is a pivotal challenge for Toyota.”

He notes that Toyota plans to launch 10 new BEVs by 2026, “so I’m not too worried about its management and strategy.”