The US Treasury’s Foreign Entity of Concern requirement will affect battery supply chains.
The key design element, and some say the Achilles’ heel, of electric cars is the battery. Electric motors, power electronics, bodies and chassis are well developed, so much so that the performance characteristics of electric vehicles generally outpace internal combustion engine equivalents. But there are two critical attributes where electric vehicles lag gasoline and diesel powered equivalents: range, and cost.
Driving range is a crucial consideration since current EV battery technology requires an order of magnitude longer charging time compared to refilling a tank of gasoline. Rapid charging is possible, but decreases battery life, and most consumers demand the flexibility of vehicles whose operation doesn’t need advanced planning to accommodate recharging.
Current technology is approaching driving ranges long enough to eliminate charging as a day-to-day consideration but cost is a more difficult problem. Batteries are the primary reason why electric vehicles carry significantly higher MSRP is compared to their gasoline engine counterparts. Solving these problems are difficult, but not insurmountable.
Mass production of advanced technology lithium based batteries is challenging, but multiple factories are under construction in America right now. Demand is rising, and the supply chain for battery materials and subassemblies such as anodes is very much an issue in the quest to higher production rates.
A new rule from the US Treasury Department may add another complication to this difficult problem. The Department’s December 1 Notice of Proposed Rulemaking defines battery component and raw material suppliers that represent a “foreign entity of concern.” A foreign entity of concern is a non-American source for raw materials or battery components that has been identified by the Department of Energy as an entity engaged in crime or espionage, but also is subject to the jurisdiction of four specifically enumerated countries: North Korea, Russia, Iran, and critically, the People’s Republic of China.
China is the current global leader in electric vehicle and EV component production, and controls global supply of several critical rare-earth materials. The electric vehicle and EV component market has grown with almost $100 billion in announced private sector investment resulting from Pres. Biden’s Inflation Reduction Act, and the supply chain is racing to meet demand.
In addition to these controls on battery material sourcing, EV’s under the Act must be assembled in North America, and carry an MSRP not exceeding $80,000 for a van pickup truck or SUV, or $55,000 for any other vehicle.
It’s a classic engineering conundrum: regulation that drives up the cost of critical production inputs, while preventing the higher cost of those inputs to be passed through the production process into the final product price. Can the EV market grow as predicted without Chinese materials?
That’s unknown at this time, but there is an additional constraint: to qualify for an available tax credit, critical minerals must be extracted or processed in the US or a country with which the United States has a free-trade agreement, with this requirement ramping up from 40% this year to 80% in 2027. For parts and materials from a foreign entity of concern, battery components will be prohibited in 2024, and the minerals prohibited from 2025.
These rules affect eligibility for the considerable federal tax credits for the purchase of electric vehicle, so it is possible to circumvent these rules if the vendor has a customer willing to buy without the tax credits. This suggests that manufacturers will have to implement strict country of origin traceability to the lot traceability built into standard quality assurance procedures, adding additional costs.
How can EV makers escape this cost/price squeeze? Primarily through domestic parts and material sourcing, which will not meet demand before the next election. Will the next administration change these restrictions? Who wins in 2024 will be vitally important to the electric vehicle industry.
