In the 1980s, as Japanese cars flooded the US auto market, the Ronald Reagan administration found a way to limit them with tariffs and import quotas. This resulted in Toyota setting up factories in the US. He churned out lakhs of vehicles, leading to an efficient auto-supply chain and employing thousands of workers. If the US plays it right, it could happen again — without tariffs — as it tries to build its own electric-vehicle supply chain independent of China, the world’s largest factory floor.
As EV hype grows and battery shortages emerge, industrial giants such as SK Innovation, Honda Motor, LG Energy Solutions, Panasonic Holdings and Toyota have announced billion-dollar facilities across the US to manufacture Powerpacks. To ensure that much of it comes from North America, some are sourcing raw materials from Canada as the nation deepens its ties with South Korea. Since the beginning of 2021, more than 15 new facilities or expansions centered around the Midwest and South in the US have been disclosed, with a potential investment of at least $40 billion. These firms are bridging a major technology gap that the US is trying to fill. The state governments have welcomed him with an open heart. The few US companies that can make EVs and batteries at the scale of South Korea or that are commercially viable are a huge market to tap.
To ensure that the entire supply chain is visible in the US, the Joe Biden administration introduced the Inflation Reduction Act to attract more manufacturing. Now everyone wants to build a battery plant. The trouble is, it hits hard at the people who actually bolster the American supply chain.
For South Korea, the primary concern is the best-selling EVs made by Hyundai and Kia. Electric vehicles not made in the US will be effectively discontinued under US industrial policy. Meanwhile, domestic component requirements hit South Korean battery makers as many of the critical and processed materials used to make the Powerpack are sourced from China. Seoul is asking the US to waive tax credits that put it at a disadvantage.
If the idea is that these pressures will prompt the tech champions of South Korea and Japan to make a bigger effort to enter the US, as it did in the 1980s, it may be misguided. While the US is a huge market, it is not the single largest market for Toyota and Honda from decades ago. The cost benefits and efficiencies that the Japanese were able to enjoy at the time do not exist today – especially in the current inflationary environment. They have large facilities with deep network of suppliers in China, which paves the way for smooth operations and bigger markets where business is easier. If the U.S. Capital expenditure in the U.S. comes with a lot of strings attached, so it may not make sense.
Letting South Korea and others become the big manufacturing hub the US is competing for would be astounding. But the decades-old strategy doesn’t align with the new world. Creating obstacles for South Korean companies that were doing well will only delay US ambitions. How are they going to get enough minerals from somewhere in North America? Where will the equipment come from? And at what cost? Ask firms that have promising technology and are hoping to profit from EV policy credits, and they’ll tell you how long the lead time is for the machinery.
Then again, there’s the scaling to break the battery technology and volume or maybe even make a profit, and that takes years. In industry, the big ones only get bigger because of their capital-intensive nature (think China’s contemporary Amperex Technology, the world’s largest EV-battery maker). It takes on the likes of LG Energy and Panasonic, but policy constraints will serve as big hurdles. And they are mostly just a waste of time.
The Biden administration can learn from China how to get the right incentives and players. South Korean companies are looking to expand their battery recycling facilities in China, an important step in securing a stable input supply. China welcomed Tesla and made sure this EV-maker has almost everything it takes to power hundreds of thousands of EVs. A huge supply chain developed around it and battery manufacturers flourished. Tesla’s Model S and Model X are on the list of vehicles eligible for the tax purchase exemption; These are not yet made in China, like the Model 3 and Model Y.
The move to keep others out and the latest chip ban only serves to set the US back, if only by creating uncertainty and tension on a global scale. If the US is able to overcome the geopolitical haze, it stands a chance for a vast and smooth supply chain that boasts of the best technology. Without it, it will be on the verge of becoming something big for a long time and we will have some batteries and electric vehicles made in America.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia.
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