2022 has been another big year for the Electric Vehicle (EV) market. Global sales continued to rise, with over 2 million EVs sold in the first quarter of 2022, a 75% increase in the same period in 2021. China led the pack, more than doubling sales in this period, with the US and EU sales increasing by 60% and 25%, respectively.
Whilst EV sales are on the rise globally, supply chains remain heavily confined to Asia. China, Korea, and Japan dominate global battery production, holding a 93.9% market share. Although South Korea and Japan are staunch allies of the West, China is firmly the industry leader controlling 44.1% of the 93.9%.
As Chinese President Xi Jinping's grip on power hardened and Sino-Western relations became increasingly sour throughout 2022, the need to shift Western reliance away from Asian supply chains has only grown. The challenge for Western legislators to do so is great. However, the latter part of the year has seen the EU and US announce critical measures encouraging manufacturers to relocate their operations, albeit using different approaches.
The US has taken a more conventional approach. In the recently passed Inflation Reduction Act, the Biden administration has offered massive state subsidies to EV manufacturers who set up shop in the states. The act has been lauded by industry, with the US government offering generous tax breaks and covering 10% of costs incurred sourcing raw materials and parts. Conversely, the EU has drawn up the most stringent set of sustainability standards to date, imposing strict carbon footprint reporting on parts used in EV manufacturing and minimum lithium recycling levels placed on batteries (50% by 2027; 80% by 2031). Although dressed up in the language of sustainability, this policy is just as economically driven as the approach followed by the US, as it follows the logic that businesses will relocate manufacturing operations to within the EU and thereby avoid incurring import tariffs or bans in the world's largest trading bloc.
However, these contrasting measures have put traditional allies at loggerheads, with the EU fearful that the US measures will lure European business to relocate, prompting accusations of protectionism. Keen to avoid a trade war with their closest ally and largest export market, EU politicians have been desperately trying to convince their counterparts across the pond to change tack before the measures take effect on January 1st of next year. Nonetheless, these pleas have thus far fallen on deaf ears, with the Americans standing firm that this is the most significant climate protection package to date and, in essence, baited the EU to join them in a subsidies race to the bottom.
Manufacturers, meanwhile, were quick to criticise the EU, laying into the bloc's "outdated" rules on state aid. Businesses were understandably frustrated at EU expectations that manufacturers already facing the brunt of high energy costs would be expected to heavily adapt their operations at great expense to meet the new rules without significant subsidies. In a choice between receiving subsidies and meeting yet more new sustainability standards, the US is providing a far warmer welcome to any global car manufacturers looking to relocate operations from Asia.
In addition to looming transatlantic tensions, there are broader consequences to be found for geopolitics, business, and consumers alike. Both the US and the EU measures will undoubtedly be instrumental in reducing the west's reliance on Asian supply chains, bolstering self-sufficiency in an increasingly isolationist world. As for business, the capital made available by the US and bars to market entry set by the EU will be decisive in driving sustainable innovation and informing investment decisions. For consumers, the US measures, set to remain in place through to 2032, are expected to reduce manufacturing costs to a level where EVs can be priced competitively with their combustion counterparts. This is a pivotal step in ensuring the choice to transition to sustainable forms of transportation is accessible to more people than ever before.
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