Elon Musk has even more power in the electric car price war thanks to the climate change bill signed by President Joe Biden.
Tesla The company and its battery partners are set to receive about $1.8 billion in production tax credits under the Inflation Control Act this year, according to researcher Benchmark Minerals Intelligence. general motors and LG Energy Solutions. another rival, fordit will not be until 2025 to start benefiting from the legal battery manufacturing credits.
The disparity reflects the design of legislation that provides substantial incentives to battery suppliers and automakers that produce in the United States, and, more importantly, the size of the rewards. In other words, the more batteries and EVs companies produce in the United States, the more money they make through tax credits.
And Tesla, which broke ground almost a decade ago at a battery factory in Nevada that it jointly operates with Panasonic, has far outpaced traditional automakers in mass-producing large target products.
“We are in a pretty good position to take advantage of this for the next few years,” Tesla CFO Zachary Kirkhorn told investors in January.
Tesla said it plans to use the money from the credits to continue lowering prices for consumers as part of a strategy of sacrificing short-term profit margins to boost sales volume against the backdrop of inflation and increased competition. Stated. Musk’s pricing reforms have created pressure for incumbent automakers such as GM and Ford to follow suit, adding to the extraordinary profitability challenges traditional automakers already face in electrifying their lineups. ing.
Piper Sandler analyst Alexander Potter said that because of the production tax credit, Tesla’s average selling price could fall by $125 per vehicle quarterly over the next two years without affecting profits. I have calculated.
Even Musk nodded at the huge profit potential the law would bring. In a recent interview with CNBC, he said the credit was “helpful” and said the IRA was a “very well written” bill.
The huge profits Tesla is making from this law create an unfavorable political reality for Musk: His company is benefiting from the president’s key policy achievements. he mocked As a “wet sock doll”.
first mover advantage
Immediately after the IRA’s passage, industry and analysts largely focused on how the Act’s consumer EV tax credit would reshape the market. There’s now a growing realization that production credits are the real prize – especially given Tesla’s already dominant market share.
The incentives will cover many aspects of the EV supply chain, from mining and processing raw materials such as lithium to manufacturing batteries in the U.S., giving Tesla a first-mover advantage. Tesla is expanding production at its own battery factory in Austin, in addition to the battery factory near Reno that it jointly operates with Panasonic. lithium refinery Early May in Corpus Christi, Texas.
GM and Ford, meanwhile, are investing heavily to produce batteries in the United States, but it will be years before domestic production matches Tesla’s. A battery joint venture between GM and LG in Ohio has already begun manufacturing batteries, and there are two plants in Tennessee and Michigan jointly with LG, which are expected to go live in 2024 and 2025, respectively. . There are also plans to build a new factory in the US jointly with Samsung SDI.
Ford and battery joint venture partner SK Innovation have established three battery plants in Tennessee and Kentucky. but production has not started. 2026.
“Tesla is already producing batteries in high volume, so it will make more money from the IRA than anyone else,” said Austin DeVaney, chief commercial officer of Piedmont Lithium, which has supply deals with Tesla and battery maker LG. will produce,” he said.
Since the bill passed in August, competitors have gotten a clearer picture of what Mr. Musk does with his booty. Tesla lowered prices across its entire lineup in January and has since adjusted prices regularly based on order trends.
Kirkhorn told investors earlier this year that management “hopes to use these incentives to improve affordability.”
Known in policy circles as “Section 45X,” the IRA’s manufacturing tax credit will significantly reduce the cost of batteries for both EVs and domestic grids, while decarbonizing the economy by building a robust domestic supply chain. This is part of our efforts to It does not depend on China.
We offer $45 per kilowatt hour (kWh) for US-made battery packs. Battery cells are $35/kWh and battery modules are $10/kWh. Most EVs in the US have 60kWh to 100kWh batteries. This equates to a tax credit of approximately $2,700 to $4,500 per vehicle.
It’s hard to estimate exactly how much tax credit Tesla, automakers and battery makers will get after 2023. Because that number depends on how many EVs with US-made batteries are sold. The Treasury Department has yet to issue final rules on the 45X, but an announcement is expected later this year.
Redemptions also depend on revenue-splitting arrangements between companies, particularly in joint ventures such as GM’s Ultium joint venture and Ford’s partnership with SK Innovation. The two companies typically do not disclose such terms, and the huge sum of IRA dollars is likely to lead to renegotiation of supply contracts between automakers and battery companies.
These variables may explain why Tesla’s own forecasts for earnings from credit are lower than forecasts by Benchmark Minerals, which includes Panasonic’s share of credit. Production forecasts can also fluctuate. Kirkhorn said in January that Tesla’s manufacturing tax credit under the IRA could reach $150 million to $250 million per quarter for the company in 2023, up to $1 billion annually. said to expect.
In addition to a $300 million tax credit this year, GM aims to produce 1 million EVs annually by 2025, with revenues of $3.5 billion to $5.5 billion if all production is sold out. said it would.
Ford did not provide an estimate of the amount of credit it would receive, but said in an emailed statement that it plans to produce 600,000 EVs annually worldwide by the end of this year and 2 million by the end of 2026. said.
As production credits begin to be phased out in 2030, there is an urgent need to get battery factories up and running quickly. Sam Abuelsamid, an analyst at Ypsilanti, Michigan-based Guidehouse Insights, said the flood of new EV models will intensify price competition as more automakers receive more credit. Stated.
“The next three to five years are going to be tough for everyone in the industry and it’s going to be a tough battle,” he said.
Automakers will have to find ways to compete on price without discounting their products to the point of hurting their brands.
The IRA could end up in political jeopardy one day, especially if Biden isn’t re-elected. House Republicans are attacking Goldman Sachs Group Inc.’s price tag. say it could reach $1.2 trillion — three times the government estimate.
“It’s really a risk. People don’t think cars have a 100% chance of survival,” said Mark Wakefield, head of automotive at consultancy AlixPartners.
But for now, the credit will give Tesla room to stimulate consumer demand. In his research notes, Piper Sandler analyst Potter wrote that automakers’ sticker prices “could steadily decline thanks to Uncle Sam.”