Act, while waiting for Godot

Auto OEMs has been valued at low multiples despite their resiliently high cash flows in last 3-4 years. (Hard to understand for me!) Pandemic, #semi shortages and EV #disruption by new (and mainly Chinese) entrants have been among the reasons for investors/analysts to justify low multiples. (None is credible in my view.)

The news is that US is waking up to the EV race and Inflation Reduction Act shall possible be instrumental in this. IRA includes an array of incentives (similar to Chinese incentive scheme) for electric vehicles and clean energy investments in the US.

$7,500 EV tax credit, formally known as the clean vehicle credit, is introduced by IRA and this figure is split into two equal halves of $3,750. In order to be eligible for the new credit, vehicles and consumers must meet certain requirements: 

  • A vehicle is eligible for one-half of the total credit ($3,750) if the vehicle has battery components that are manufactured or assembled in North America. 
  • To be eligible for the other $3,750, a vehicle must have critical minerals that were extracted or processed in the U.S. or countries with which the U.S. has a free trade agreement, or use critical minerals that were recycled in North America. 
  • Final assembly must take place in North America for a vehicle to be eligible. 
  • Only cars under $55,000 or SUVs, vans, and pickup trucks under $80,000 are eligible for the credit. 
  • On the consumer side, the income cap to be eligible for the credit is $150,000 for single filers, $225,000 for head of household and $300,000 for joint filers. 
  • There will be an option to apply the new credit at point of sale starting in 2024 and will end by 2032.
  • The new credit requirements for battery components and critical minerals will take effect January 1, 2023.

Interestingly, The IRA also establishes an unprecedented credit for used EVs ($4,000 or up to %30 of the vehicle price, whichever is lower).

As expected, EV charger credit has been extended through 2032. The credit is available for both individual and commercial uses to help cover the cost of charging stations.

Main motivation of these incentives are to accelerate US EV factory buildout and initial feedback from OEMs showing that could be achieved. The incentive package is well-timed for OEMs as EV demand in two largest EV markets (China and Europe) has been sluggish. Even limited upside in US EV demand would offset the downside risks for EV demand and roll-out (which were exagerated in my view, as in the case with all ‘hot topics’).

OEMs are nowadays busy with securing their place in EV battery and equipment supply chain:

> Tesla and VW is trying to internalizing some of EV battery production while majority of other OEMs are building JVs with battery cell makers.

> VW and GM announced battery material JVs on cathode/procursor areas.

> Long-term agreements with miners become a common practice (STLA, Renault, GM, Ford) in last two months, securing supply for lithium, zinc and other critical raw materials.

> Tesla, GM and BMW also shown interest to enter lithium refiningas well as material recycling.

All these efforts shows to me that OEMs’ managements finally decided to put aside their waiting mode for emerging battery technologies and act on what is currently available in terms of technology and materials.

One should also act, en attendant Godot.

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