Why Electric Cars Could Face a Supply Chain Problem

Looming Legislation

A proposed spending package currently making its way through Congress could soon be signed into law. It contains funding aimed at combating climate change, as well as tax credits for battery-powered vehicles, also known as EVs.

While lawmakers hope it will accelerate the widespread adoption of EVs, there are some potential challenges. One such issue lies with the batteries themselves. As a result of the negotiation process, EVs must be constructed with a certain percentage of materials made in the US, or by an established free-trade partner. That means a shortage of batteries and other components could result in the short term, considering many of those products come from China at present.

Sense of Urgency

As soon as President Biden signs the legislation into law, certain aspects of it are set to take effect immediately. This explains why a number of analysts have suggested now is the time to buy an EV, if you’re in the market for one.

For example, in order to meet eligibility requirements for the tax credit towards the purchase of an EV, the vehicle must be assembled in America. That means, in accordance with the new law, the eligible number of EVs will drop from 72 to 25. For companies like Tesla (TSLA) and General Motors (GM), those federal tax credits aren’t part of the equation until 2023. The reason is that their customers are no longer eligible, given each company has already sold over 200,000 EVs. Next year, that cap would be phased out.

Domestic Growth

EV industry observers argue the federal tax credit will become more or less a non-factor over the next several years, given the strict requirements associated with domestic production. US officials have stated their goal is for 40% to 50% of all vehicles sold be electric by 2030. Some analysts contend that’s unlikely, if credits are tightly restricted all while supply chain constraints persist.

Over time, as more EVs and their components are made in the US, including batteries, costs could start to drop. For now, prices are higher as materials are sourced from around the world. It all highlights the uncertainty associated with both this legislation and the EV industry as a whole.

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