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Hyundai Motor’s Ioniq 5 electric vehicle. (courtesy of Hyundai Motor)

“Considerable damage is expected to befall the domestic automobile industry. It is expected to cause difficulties in the secondary battery industry in the short term and could act as an opportunity in the mid- to long term.”

The Korea Institute for Industrial Economic & Trade (KIET) released a report Thursday analyzing the impact of the US Inflation Reduction Act (IRA) on domestic industries, particularly the automobile and the secondary battery industries. The report concluded that the IRA is an “immensely negative factor” for the automobile industry, while its influence on the secondary battery industry will vary from the short term to the mid- and long term.

The IRA, which took effect on Aug. 16, includes changes to the terms of electric vehicle tax credits.

To explain why the automobile industry will be negatively impacted by the IRA, the report noted: “Since it is difficult to meet the ‘final assembly in North America’ condition that has come into effect together with the IRA, domestic automobile companies presently will not be able to take advantage of electric vehicle tax deductions and therefore fall behind competitors in terms of price competitiveness in the US market.”

Hyundai Motor and Kia, neither of which has a production base in the US, are currently producing electric vehicles sold in the US market in Korea. Under the IRA, each electric vehicle (including plug-ins) qualifies for a US$7,500 tax credit under the condition that its final assembly process is completed in North America.

“Indeed, there are observations that the actual damage may not be significant since vehicles listed in contracts drafted before the IRA took effect still can be eligible for tax credits and Hyundai Motor and Kia possess a considerable volume of such vehicles waiting to be shipped,” noted KIET’s report. “The fundamental nature of the damage, however, is that there has been a loss in price competitiveness of $7,500 per vehicle.”

The report explained that “this is a fatal weakness in the competition for leadership among global automakers in the US electric vehicle market, which is riding a high-growth trend.”

Despite the fact that Hyundai Motor and Kia are poised to renovate or expand their plants in Alabama starting later this year to locally produce some of their GV70 electric vehicles, the institute predicted that the volume of production will be limited. A 300,000-unit plant to be built in Georgia for the sole production of electric vehicles is also planned to begin operation by 2025. Meanwhile, certain car models of US companies, such as Ford and GM, as well as those of several German and Japanese competitors that already have operating factories in North America, will be included on the list for tax credit eligibility and are expected to enjoy a relative increase in price competitiveness.

“A more cautious approach is required to evaluate how the IRA will affect the domestic automobile industry in the mid- to long term,” said KIET. The institute analyzed that foreign companies will also face difficulties meeting the battery-related regulations, which will be gradually strengthened starting next year.

In addition to the “final assembly in North America” condition, the IRA added sourcing ratio components for battery components and minerals, set to take effect in 2023. Tax credits are available if at least 40% of the minerals used in the battery are sourced from the US or from any country with which the US has a free trade agreement, or if 50% of the battery’s components are sourced from North America.

Presently, over 80% of graphite, one of the minerals used in a battery, is produced in China, while the refinement of natural graphite is solely processed in China. Furthermore, the world depends on China for 60% of anode and cathode materials, which are key components of batteries.

The institute commented that “while the domestic secondary battery industry holds global competitiveness, it will be difficult for companies to meet the IRA’s regulations on battery minerals since the production and refinement of core minerals, such as lithium and graphite, are largely dependent on China.”

At the same time, however, the institute projected that the negative impact will be limited, as foreign battery companies like Panasonic also rely heavily on China for core minerals. In fact, it is highly likely that the three major domestic battery companies, including LG Energy Solution, will benefit from the IRA in the mid- to long term, based on the observation that the expansion rates of their production bases far exceed that of their competitors, both in terms of size and speed.

Hwang Kyung-in, an associate researcher at KIET, identified “early operation of Hyundai Motor and Kia’s plant in Georgia” and “the establishment of a secondary battery supply chain that meets the battery requirements” as tasks to minimize damages to the automobile and secondary battery industries following the IRA.

Another remaining task is to secure and maximize Korea’s interests through working-level negotiations between the US and Korea as the US Treasury Department prepares guidelines for the IRA at the end of the year.

By Kim Young-bae, senior staff writer

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