A Response to U.S. Inflation Reduction Act
Hyundai Motor Group is considering starting the construction of an electric vehicle (EV) plant in Georgia within this year to advance its operation to 2024 from the originally planned first half of 2025.
The reason for the rush is to respond to the U.S. Inflation Reduction Act (IRA) that took effect on Aug. 16 (local time). The Korean government is conveying its concern to the U.S. government that the IRA may be in violation of the Korea-U.S. Free Trade Agreement (FTA) and World Trade Organization (WTO) rules. But Hyundai Motor has no choice but to consider various options, such as starting EV production in the United States earlier than originally planned.
Already, Hyundai Motor Co.’s IONIQ 5 and Kia Corp.’s EV6 were excluded from a list of models eligible for tax credits as the Inflation Reduction Act went into effect last week. The IONIQ 5 has become more expensive than the Tesla Model 3 as only EVs produced in North America are eligible for a subsidy of US$7,500. Hyundai Motor and Kia’s EVs currently sold in the U.S. are 100 percent produced in Korea.
Hyundai Motor plans to build an electrified production line at its Montgomery plant in Alabama and produce the Genesis GV70 EV beginning from the end of this year. However, it seems difficult to produce additional models such as the IONIQ 5 and EV6 here. Accordingly, experts expect that Hyundai Motor will advance the operation of the EV-only plant in Georgia to 2024, and build additional EV production lines at its existing internal combustion engine car plant.
Consumers who signed IONIQ 5 and EV6 purchase contracts before Aug. 16 will be able to receive subsidies as scheduled if their cars are shipped within this year. Sales of the two models are expected to be strong this year as their back orders are considerable. But next year, it will be a different story. In 2023, regulations limiting subsidy payments for 200,000 units per year for each manufacturer will disappear. This is why sales of Korean-made EVs are expected to falter next year, while market shares of American EV makers such as Tesla and General Motors (GM) are expected to rise further.
From next year, to qualify for tax credits, batteries should contain certain proportions of minerals and parts produced in the United States or countries that signed free trade agreements (FTAs) with the United States. According to the Korea International Trade Association, China accounted 84.4 percent of the US$1.748.29 million worth of lithium hydroxide Korea imported from January to July of this year. During the same period, China accounted for 81 percent of Korea's cobalt imports, which totaled US$157.4 million. In the case of natural graphite, the Chinese proportion stood at 89.6 percent.
Accordingly, the Korean battery industry is in a hurry to lower dependence on Chinese minerals. “Even before the IRA was passed, all Korean battery companies were aware that they were too dependent on China,” said an industry insider. “Korean battery makers are expected to expedite the diversification of supply chains.”
Industry watchers say that the IRA will limit major Chinese battery companies' entry into the U.S. market and, as a result, will benefit Korean battery makers.