New U.S. rules on EV sector set to backfire

Move to cut incentives for vehicles with Chinese batteries may hit own industry

The United States' move to cut a consumer incentive for electric vehicles that contain battery materials from China likely will make EVs less affordable, and is being criticized as a wrong approach to addressing supply chain issues.

Starting next year, EV buyers in the U.S. will not be able to claim the full $7,500 federal tax credit if they purchase autos containing battery parts from China and other countries considered a "foreign entity of concern".

The administration of President Joe Biden announced the new rules on Friday with the hope of encouraging development of local auto-supply chains.

But industry experts said self-sufficiency does not happen overnight, as China dominates the global market for EV batteries and materials. They warned the move will slow the nation's transition from gasoline-powered vehicles.

"If you block the Chinese supply chain from coming to the U.S., you're actually adding a cost penalty to the supply chain and then causing consumers to pay more for the products, which is not going to encourage people to adopt the technology," Bill Russo, founder and CEO of Automobility, a strategy and investment advisory firm, told China Daily.

The Biden administration has set a target for half of new passenger vehicles sold in the country to be electric by 2030. But experts are concerned the new rules are likely to slow consumer acceptance of EVs.

"It's the affordability that drives consumer acceptance; you can sell premium-price vehicles to the top 2 percent elites in California, but that's not going to scale nationally. You've got to get it to the point where the average person can afford it," Russo said.

The demand for EVs is growing at a fast pace in China, owing to its capacity to deliver affordable products at high volume, said Russo. He said the capability to vertically integrate key components with economies of scale makes it possible.

The new rules are required under the Inflation Reduction Act approved by Congress last year, which bars electric cars from qualifying for the full tax break if critical minerals or other battery components were made by a "foreign entity of concern".

Monumental task

Out of more than 100 EV models for sale in the U.S., only about 20 vehicles qualify now, and the new rules could eliminate all eligible EVs on the market, according to the Alliance for Automotive Innovation, which represents car and battery makers in the U.S..

"But the EV transition requires nothing short of a complete transformation of the U.S. industrial base. It's a monumental task that won't happen overnight," John Bozzella, president and CEO of the trade group, wrote in a post following Friday's announcement.

Russo raised the question in the gray area: "How do you do that without China?"

He added: "So the answer for me is: You cooperate to do that, as China did to build up its own capabilities. It relied on foreign investment. I think the way the U.S. has to get competitive now in this clean-energy economy is by encouraging cross-border investment to build up its own domestic supply chain with certain guidelines and certain rules."