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24 August 2022

Biden Act makes German car-makers rethink battery supply chain

The Inflation Reduction Agreement has already substantially changed the supply chain for making cars around the world – with this week hurriedly signed deals between both Volkswagen and Mercedes with Canadian interests, opening the way for battery factories on US soil backed up with raw materials from Canada.

The blanket refusal of the Biden administration to allow its new tax concessions to apply on either batteries or EV cars made outside of the US or its free trade partners (read Mexico and Canada) has overnight jeopardized battery factories in Europe.

Volkswagen has around 2.5% of US vehicle sales, but in years gone by it had considerably more, amounting to 375,000 cars a year at present in a down market. Mercedes has a similar absolute number and has been growing year on year.

But although both car makers make some models in the US with Mercedes employing 3,700 employees at its plant in Tuscaloosa, Alabama, and VW having manufacturing in Chattanooga, Tennessee, both usually organize their business around making some models in a country and importing the rest – that now has to change or risk a fall in market share as people cannot get their hands on the generous tax-breaks the Inflation Reduction Act introduces.  The IRA is almost certain to change the market share of EV’s sold in the US.

So these companies are working on two fronts – making plans for more US factory space, and working out how to supply batteries from either the US or those partners it has free trade agreements with – hence the Memorandum of Understanding with Canada. No detailed Canadian suppliers was named with the showcase signing.

The Inflation Reduction Act (IRA) excludes vehicles from tax concessions if its battery’s “critical minerals” on any vehicle were extracted, processed, or recycled by a foreign entity of concern (pretty much defined as China, Russia and a few other countries) and for this the Act supplies a list of applicable minerals as long as your arm – including all the likely cathode materials, and Lithium – so aluminum, beryllium, cerium, cesium

cobalt, graphite, manganese, nickel, tin and tungsten, to name but a few.

Initially 40% of these have to come from the US or its free trade partners, then 50%, rising to 100% post 2028. This is a savage blow to free trade everywhere and the German car makers would have been at the head of the queue to raise legal complaints with the WTO, but also to begin adjusting their supply change to comply, just in case they are not successful in court.

We have known for some time that Volkswagen was thinking about a new US production facility and will now be adding a cell plant to the list. Its popular ID. Buzz production will have to land on US soil at some point

In the past VW has said that it would build 6 battery factories to support European EV activities and now we would not be surprised to see this hacked back to 4 or 5, with jobs effectively exported to the US due to this Act.

The “Memorandum of Understanding” was signed in Toronto by Volkswagen CEO Herbert Diess and Canada’s Minister of Innovation, Science, and Industry, François-Philippe Champagne. It is possibly the last act of Diess who is due to leave office on September 1, having been pushed out by the board. Diess was accompanied by Olaf Scholz, the German Chancellor.

Volkswagen’s battery supply chain is run through PowerCo, a newly formed company within the Group which will immediately begin the search for fresh supplies in Canada, which is known to have strong deposits of cobalt and some early phased lithium mining, although much of this is not yet in an advanced state.

The current VW EV plan is to quickly build up highly standardized cell production capacities totaling 240 GWh in Europe alone. In addition, there are now plans to establish a dedicated gigafactory in North America.

The global Mercedes plan rests heavily on CATL of China, with the two just agreeing to set up a joint battery manufacturing plant in Hungary for much of its European battery supply. Mercedes was certain to need alternative suppliers to shift towards EVs in the US, but especially after the details of the IRA became clear, otherwise its customers would not have been able to benefit from any tax concessions for EVs.

Coincidentally the trading price of Cobalt peaked during the Russian-Ukraine war, but as more and more sources of cobalt have emerged such as Canada, its trading price has fallen back to its pre-war levels.