June 15, 2024

U.S. brands such as Tesla and General Motors stand to benefit the most from rules that begin Tuesday to determine which electric vehicles qualify for the tax credit. Foreign automakers such as Hyundai will be at a distinct disadvantage due to restrictions aimed at keeping China out of supply chains.

Only 10 vehicles were initially eligible for the $7,500 tax credit, less than a quarter of all EVs sold in the United States. But the 10 models include many of the most popular models, which accounted for two-thirds of EV sales before the new rules took effect.

Tesla’s Model 3 and Model Y, the best-selling electric vehicles in the U.S., will be eligible for the full $7,500 credit, with one exception, according to a list released Monday by the U.S. Treasury Department. The cheapest Model 3 has half the credit because its batteries are made in China.

GM’s Chevrolet Bolt is one of the cheapest electric vehicles on the market, and the company’s sport utility vehicles and pickups, which it plans to start selling this year, will also qualify.

Fewer Ford vehicles are eligible for the full $7,500 credit because of rules requiring a certain percentage of battery components and minerals such as lithium to come from domestic sources or trading allies. Ford’s Mustang Mach-E, the third-best-selling electric vehicle in the U.S. last year, received only half the credit because its Polish-made batteries did not meet domestic sourcing requirements, according to Kelley Blue Book. The F-150 Lightning pickup will continue to be eligible for full credit.

Stellantis divisions Chrysler and Jeep don’t yet sell battery-only vehicles, but several of their hybrid models qualify for at least some of the credit. Hybrid vehicles are eligible if they have a battery capacity of at least 7 kWh.

The rules give U.S. automakers an advantage over rivals such as Toyota, Volkswagen and Nissan, at least temporarily. There are no foreign automakers on the Treasury Department list, which is expected to grow as companies adjust their supply chains.

Automakers eligible for tax credits will now get a head start as EV sales take off. “It’s had a multiplier effect on the market,” GM Chief Financial Officer Paul Jacobson told reporters in New York this month. The rules, he added, are “very consistent with the strategies we’ve adopted.”

The rules stem from the Lower Inflation Act, which Democrats passed last year to fight climate change and encourage domestic manufacturing, among other things. The Ministry of Finance is responsible for making regulations under the legislation.

The law aims to reduce the auto industry’s reliance on China, which makes most of the world’s batteries and dominates the processing of raw materials. The law also places a limit on sales prices, excluding individuals earning more than $150,000 and couples earning more than $300,000. The rules also exclude vehicles built outside of North America, including in allied countries such as South Korea and Germany.

“We’re not happy,” Jose Munoz, the chief executive of Hyundai and Genesis North America, said in an interview this month at the New York International Auto Show. Hyundai’s Ioniq 6 electric sedan was named world car of the year at the auto show, but it is not eligible for the tax credit because it is assembled in South Korea.

Seoul-based Hyundai is investing $10 billion to build a car and battery plant in Georgia that will allow the company to meet the Lower Inflation Act requirements — but not for several years.

Mr. Muñoz said officials from the automaker and the South Korean government asked the Biden administration to allow Hyundai and Kia to qualify for credit while the plants were under construction, but were told the law did not allow such exceptions.

Hyundai’s Georgia plant is expected to start producing cars in 2025. Production will begin in 2026 at the battery plant that Hyundai Motor is building in partnership with SK On. Munoz said.

Tesla has told potential buyers that the cheapest Model 3 sedan has only half the credit, or $3,750. This month, Tesla cut the price of the car by $1,000 to $41,990. After taking partial credit, the car will actually cost many buyers more than $38,000, about the same as a top-of-the-line Honda Accord and less than an entry-level BMW 3 Series sedan.

Other versions of the Model 3 and Model Y SUVs will continue to earn full credit. According to the Kelley Blue Book, Tesla sold more electric vehicles in the U.S. last year than all other automakers combined.

Some auto industry executives say the rules are too restrictive and undermine efforts to limit climate change. Other critics, such as Senator Joe Manchin III, D-West Virginia, have complained that the Biden administration’s rules are too lax.

Administration officials argue that the rules strike a balance between promoting EVs and building a domestic supply chain.

According to government statistics, in addition to the 10 vehicles that were eligible for the full credit, seven more were eligible for the half credit. For example, if a vehicle’s battery components come from the U.S., Canada or Mexico, but the minerals used to make the battery don’t qualify for the procurement, the vehicle could get a half credit.

Ten previously eligible vehicles, including the Nissan Leaf and Volkswagen ID.4, will be removed from the list, at least temporarily.

The ID.4, an SUV built in Chattanooga, Tennessee, was not included in the new list because it is still evaluating its supply chain. But Volkswagen Group of America CEO Pablo Rhodes said he expected the model to qualify. In the first three months of this year, Volkswagen ranked fourth in U.S. electric vehicle sales, behind Tesla, General Motors and Ford, according to Kelley Blue Book.

Five electric vehicles GM sells or plans to sell this year will be eligible. In addition to the Bolt, the Cadillac Lyriq and electric versions of the Chevrolet Equinox and Blazer SUVs, as well as the Silverado pickup, are also eligible for full credit. General Motors and LG Energy Solution have started producing batteries at a plant in Ohio.

The new rules may be revised based on public comments. Automakers need to prove they are eligible, but they are subject to an IRS audit and could face penalties if they provide incorrect information.The IRS issued a the list Eligible vehicles that are updated regularly.

A provision in commercial vehicle laws allows companies to collect credits for all leased vehicles, even if the cars don’t meet procurement and manufacturing requirements. Automakers and their dealers can pass the savings on to renters, and as a result, Hyundai has seen a surge in leasing, Mr. Muñoz said. The company also offers the cars on a monthly subscription basis, allowing customers to benefit from tax incentives and try out electric vehicles.

But that doesn’t make up for lost sales because most people prefer to buy a car rather than lease it, Mr. Muñoz said.

“We can’t compete unless we cut prices significantly,” he said. “From a financial standpoint, it’s impossible to make it work.”

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