Could carmaker Ford, while partnering Chinese firms, cash in on US electric vehicle policy ‘loophole’?
- US to clarify IRA provision that stipulates EVs benefiting from tax deductions cannot contain components made by ‘foreign entity of concern’
- Law does not say which countries are targeted, but observers say this restriction is explicitly aimed at combating Chinese dominance in the industry
The IRA offers tax credits worth US$7,500 to encourage companies to develop battery and EV supply chains in the US and countries with which it has free trade agreements (FTA).
To qualify, 40 per cent of critical battery minerals must be extracted or processed in the US or one of its FTA partners, and at least half of the battery components must be manufactured or assembled in North America. These requirements will rise each year.
US authorities are expected to soon release guidance on an IRA provision that stipulates EVs benefiting from tax deductions cannot contain battery components manufactured by “a foreign entity of concern”.
While the law does not say which countries are being targeted, observers say this restriction is explicitly aimed at combating Chinese dominance in the industry.
Chinese companies, who play a major role in processing nickel in Indonesia, could be affected.
On March 30, Michigan-based Ford announced a partnership with mining company Vale and China’s Zhejiang Huayou Cobalt to build a US$4.5 billion nickel processing plant in Indonesia, the latest major move by an industry player in the Southeast Asian country.
On the surface, the venture would not meet the current IRA conditions.
Indonesia not cutting China out in EV hub plan, Sandiaga Uno says
However, “where there’s a bill there’s a way”, said K. Venkatesh Prasad Ford’s senior technical leader for corporate strategy from 2018 to 2022.
This Week in Asia’s analysis of the IRA found that section 45W of the IRA extends the bill’s subsidies to commercial vehicles such as vans and trucks – without imposing any of the above restrictions.
The tax credits available are even more generous in some respects.
Vehicles weighing over 14,000 pounds (6,350kg) can qualify for subsidies of up to US$40,000. Leased, as well as purchased, vehicles are also eligible.
“If you ask anyone who knows, they’ll basically give you a one sentence answer. And that is that there are no sourcing requirements for commercial vehicles,” said Prasad, now a senior vice-president at the Center for Automotive Research.
02:30
Nickel boom in Indonesia threatens farmers’ livelihood and natural environment
Ford could – in theory – take advantage of this by channelling non-IRA compliant minerals into commercial vehicles.
These plans were explicitly laid out by Lisa Drake, Ford’s vice-president leading its EV push, at an investor meeting in October 2022.
Citing the special treatment of commercial vehicles, she said: “You wouldn’t want to pay a premium for nickel or lithium to be compliant when, at the end of the day, it’s not necessarily on a large part of the fleet.”
“So, our strategy is to have IRA compliance where it matters, and then have non-IRA-compliant material where it might not matter and where you can get much less expensive and be very competitive on battery cell price.”
According to Stephen Brown, an analyst at Fitch Ratings, Ford is already the market leader in commercial vehicles in the US. Keeping its edge in this “very lucrative” product through the switch to EVs is important for the company.
Having a steady supply will help alleviate some of Ford’s concerns around sourcing enough battery materials to meet production goals, Brown said.
Given the scale of investment in metals by various automotive companies Brown said it was “unclear” how much of an advantage the plant would give Ford over its rivals.
“That said, if Ford did not make these investments, it would be at risk of falling behind in the competition for critical EV materials.”
The Pomlaa plant will produce mixed hydroxide precipitate (MHP) – a green powdery mix of nickel and cobalt – that has emerged as a feedstock of choice for batteries. Indonesia has rapidly emerged as a key player in MHP production, and its dominance looks set to grow.
Chinese workers ‘suffering’ in Indonesia’s nickel factories, complaint says
“If you look at our forecasts, we’ve got about 60 per cent of global nickel production coming from Indonesia by 2030,” said Harry Fisher, a project manager at Benchmark Mineral Intelligence. He expects about half of this growth to come from MHP.
Currently, Chinese companies stand as not just key developers of refining facilities but also the main buyers of this new competitively priced MHP.
When contacted for comment, a representative of Ford did not deny plans to take advantage of the IRA’s special treatment of commercial vehicles.
Instead, the company contested the characterisation of section 45W as a loophole.
“The Inflation Reduction Act contains many different programmes, each of which have different requirements that are clearly stipulated in the law. To call it a loophole would be like saying driving 50mph (80km/h) on a highway with a 55mph speed limit is ‘taking advantage of a loophole’ because residential streets have a speed limit of 25mph,” the company said.
However, Ford also emphasised that a memorandum of understanding with Vale and Huayou was signed in July 2022, before the IRA became law. “The driver here is that this is one of the lowest-cost ways to secure nickel,” said a company spokesperson.
“Ford’s been on the planet for a while,” said Prasad. Its perspective on the matter will be “pure business, plus today’s usual ESG considerations”, focused on profitability in the competitive EV sphere.
Still, regulatory wrangling could affect the calculus. “We do not know if this [loophole] will be closed when the IRA is officially finalised, as it takes away from the ‘spirit of the law’, to some supporters of the IRA,” said Devin Lindsay, associate director at S&P Global Mobility.
