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Tax credits for buying electric cars in the US are now much harder to score. The number of electric vehicle models that qualify for a deposit of up to $7,500 has fallen from 43 to 19 after new battery procurement rules came into effect on Monday. The impact will reach far beyond the newly excluded automakers.
Electric vehicles whose battery components are built or assembled by a country that is considered a “foreign enterprise of concern,” which includes China, will no longer be eligible for a tax credit. This leaves a long list of popular models excluded from the exclusion, including the Tesla Model 3 Rear-Wheel Drive, the BMW X5 xDrive50e, the Audi Q5 PHEV 55 and the Volkswagen ID. and the Nissan Leaf. Some automakers are still confirming eligibility.
Returning to the approved list will involve costs that are likely to increase in the near future. Chinese electric vehicle battery manufacturers account for more than two-thirds of global supply. The world's largest manufacturer, the Chinese Contemporary Amperex Technology Co (CATL), has a market share of 37 percent. Its capacity growth of over 50 percent over the last year means it is one of the few suppliers that can produce batteries at the scale and price needed to keep pace with the rapidly growing electric vehicle market.
The restrictions will become stricter as regulations on the origin of key battery materials such as refined lithium are set to be further tightened in 2025. China has about two-thirds of the world's lithium refining capacity.
But switching battery suppliers to South Korean and Japanese rivals that charge more could mean higher costs for automakers. These are likely to continue to rise due to capacity bottlenecks and higher demand.
The tax credits, which allow buyers to claim the credit at participating dealers at the point of sale, have succeeded in reducing the price of popular electric vehicles to levels comparable to gasoline models. For Nissan, for example, this was crucial. Net sales in the United States, its largest market, are more than twice as high as domestically.
In the longer term, more battery production should be relocated to the USA. However, building capacity is expensive and takes years. Automakers fighting a battle for share in the U.S. electric vehicle market are having to overhaul their supply chains at the expense of short-term margins.
CATL shares have fallen by a third in the last six months, underperforming their peers. Despite CATL's dominance in the sector, shares trade at 13 times forward earnings, less than a third of the value of South Korea's LG Energy Solution. This gap is likely to persist as long as tensions between the US and China remain high.
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