FEOC guidance to hit Tesla, Ford affordability

Major US OEMs to see EV models effectively get more expensive under new IRA stipulations

FEOC guidance to hit Tesla, Ford affordability
Some of the most high-profile US BEV models might be losing eligibility for incentives

EVs from US auto heavyweights Ford and Tesla are set to increase in price as they lose eligibility for federal tax credits should new guidance from the US Treasury defining the foreign entity of concern (FEOC) stipulation from the Inflation Reduction Act (IRA) pass into law from January.

And more OEMs are expected to announce that their models will also lose eligibility as the new definition set to be adopted means c.80pc of EV models currently sold in the US could be at risk of losing out on discounts under the IRA, according to US trade association the Alliance for Automotive Innovation.

“The IRA disqualifies EVs that use battery components manufactured or assembled by a FEOC after 2023, and EVs that use batteries containing critical minerals that were extracted, processed, or recycled by a FEOC after 2024,” explains thinktank the Centre for International and Strategic Studies (CSIS).

Tesla says that the “federal $7,500 EV tax credit will reduce to $3,750 for Model 3 rear wheel drive and long range on 1 January 2024” in light of the new legislation. These models are currently listed at $39,990 and $49,990 respectively without any additional features, according to Tesla’s inventory website.

The total amount available to buyers under the IRA is split into $3,750 for an EV’s critical battery minerals being sourced from compliant countries, and another $3,750 in credit if an EV’s battery components meet rules of origin set out under the IRA. Tesla has not said which of these halves of the incentive package the models will lose out on.

A similar fate awaits Ford’s Mustang Mach-E EV, which is widely believed to contain a battery made by China’s Catl. “Beginning 1 January 2024, the Mustang Mach-E may not be eligible for the current $3,750 federal tax credit. If you take delivery of a Mustang Mach-E by 31 December, remaining 2023 models are still eligible for the federal tax incentive,” Ford’s inventory website says.

Also beginning in January, buyers will be able to apply IRA tax credits to the purchase price of an EV, as opposed to claiming the allowance back in rebates as before. This switch is likely to make the discounts seem like a more tangible benefit to consumers. But its impact will be softened should a large chunk of US market EVs lose some or all of their eligibility.

Battery focus

Tesla is reluctant to reveal official information about its batteries, outside of revealing that the Model 3 uses an LFP cell. Chinese market leader Catl provides LFP batteries for the entry level Chinese-made Model 3 EVs, and while neither company has commented publicly, there has to this point been nothing to stop Catl at least also providing components for the US-market units, providing final assembly took place in the US.

Tesla reportedly also has an agreement in place with Chinese battery player BYD to supply batteries for the Model Y.

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The new guidance could cause a major shake-up across the battery industry, as it leaves that status of many planned battery US-China joint ventures up in the air, as “the increasing uncertainty around the FEOC definition and IRA may lead auto manufacturers to prioritise tax incentives rather than the cheaper batteries”, CSIS says.

However, despite the threat of losing out on subsidies, “in some cases, EV manufacturing firms may determine that the cost advantage of Chinese technologies are worth more than IRA tax incentives”, CSIS continues.

But while the new law is unlikely to freeze out China from the supply chain completely, it could offer a significant boost for battery firms from South Korea, another nation with pre-eminent battery production pedigree. However, it may also not be straightforward for them.

“Given that China is designated as an FEOC and controls key battery materials covered by IRA subsidies, [South] Korean companies in joint ventures with Chinese entities are now faced with the task of adjusting or untangling ownership structures to comply with the new provisions. This involves potential adjustments in board seats, voting rights, equity interest, and licensing agreements,” says Ryan Freer, director of investment firm Solomons Capital.

“The guidance may also prove a marker for [South] Korea's battery manufacturers and battery material processors to revisit strategies, supply targets and partnerships in Australia, up to and including downstream processing and manufacturing,” Freer continues.

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