European automobile manufacturers have expressed concerns about the risks posed by the United States’ Inflation Reduction Act and the possibility of ‘investment leakage’ out of the European Union (EU). Also, due to the arrival of Chinese government-subsidized EV manufacturers, more and more brands like NIO, Xpeng, BYD, Byton and several Geely brands have become visible on European streets. Without stronger financial and regulatory support for nascent industries, the scale of the subsidies available in the US and China may attract green and advanced technologies at Europe’s expense – from development to production and manufacturing.
The four pillars
To address this issue, the Green Deal Industrial Plan (GDIP) has been introduced, which includes four fundamental pillars for Europe to protect its green tech industry:
- A predictable and simplified regulatory environment: The European Commission will propose a Net-Zero Industry Act; a new regulatory framework that aims to simplify and accelerate the permitting process, support European strategic projects, and develop standards for scaling up technologies.
- Faster access to funding: This pillar aims to boost clean tech investment and financing in Europe with public and private funds, competition policy and EU funds. The European Commission will consult Member States on state aid rules and propose a European Sovereignty Fund, as well as guide Member States on using REPowerEU funds.
- Enhancing skills: To keep up with rapidly evolving technologies, this pillar aims to match the growth in technologies with a growth in skilled workers to utilize them. In order to do this, the European Commission will propose the establishment of ‘Net-Zero Industry Academies’ that would host up-skilling programs for relevant areas.
- Facilitating open and fair trades: The final pillar in the GDIP stands to protect the Single Market from unfair trade practices, while developing the EU’s Free Trade Agreements and facilitating the cooperation of different entities to progress green initiatives and the green transition.
The GDIP, in the form of the Net-Zero Industry Act, REPowerEU, the EU Sovereignty Fund, and the revised Temporary Crisis and Transition Framework, can help provide a bulk to keep investment in the EU.
The GDIP recognizes that one of the key challenges to developing these industries is the current high cost of energy, and access to low-carbon energy at competitive prices is a key part of the transition. The plan aims to provide a structure that does not require too much bureaucratic red tape or time to access funding, easing the administrative burden of the Temporary Crisis and Transition Framework. The plan also aims to achieve strict coherence between other EU policy initiatives in the areas of industrial policy, decarbonisation, and strategic autonomy, for example, the Critical Raw Materials Act and the Chips Act. The plan seeks to limit the regulatory burden being placed on transformational industries and avoid replicating the trade protectionist elements of the Inflation Reduction Act.
The GDIP is crucial in helping Europe reach its environmental and decarbonisation objectives while supporting its industrial base. The European industry is facing significant challenges in implementing decarbonisation pathways while defending its global competitiveness and securing jobs and industrial production in the EU. ACEA needs clear leadership by the European institutions and member states to create the right framework conditions.
The GDIP vs. the Inflation Reduction Act
The Inflation Reduction Act is described as the biggest overhaul of US automotive policy in a generation that aims to transform what Americans drive on the streets and create an economic boom for the states that manufacture new vehicles and components.
The Inflation Reduction Act offers incentives for electric vehicle (EV) consumers, including extending the $7,500 tax credit on new electric cars through 2032, adding a $4,000 credit for used EV purchases, and including up to $40,000 of credits for commercial vehicles. However, in exchange for these incentives, the government is demanding that EV makers transform their sourcing and manufacturing operations to create a new US-based supply chain for the industry, which represents a major challenge for the industry and risks exacerbating supply problems.
Automakers need to meet aggressive targets that demand a herculean effort, including sourcing 50% of the battery in North America by 2024, which increases to 100% by 2029. Furthermore, the act requires that 40% of the critical minerals needed for batteries come from countries that have free trade agreements with the US or are recycled in the US, rising steadily to 80% by 2027. The goal is to reduce dependence on China and create an independent domestic value chain of jobs and investment around EVs. The Inflation Reduction Act requires a shift to more US-based battery production, which is underway, but the challenge is whether that will be fast enough to keep up with demand. The bill’s requirements on critical materials represent an even more formidable challenge to the EV industry, given China’s dominance in the production of key materials such as lithium, cobalt, and nickel. Therefore, the Inflation Reduction Act creates significant challenges for the US automotive industry to transform its sourcing and manufacturing operations to create a new US-based supply chain for the industry.
As briefly mentioned in the intro, we in Europe are also seeing more and more Chinese car manufacturers on European roads. The price and quality that these carmakers deliver currently seems unattainable by the legacy of American, German and French carmakers. Achieving the consequences of decades of long-lasting low production costs in a global playing field has meant that Asia has not only gained a lot of knowledge but has also rigged up all the facilities to deliver top-quality vehicles at a price that makes Western cars manufacturers cringe. As Denzel Washington once said, “You pray for rain, you gotta deal with the mud too.”
It will have to be seen whether the GDIP and Inflation Reduction Act are appropriate means of dealing with the mud.
Although the GDIP will be a key component of the EU’s effort to become carbon neutral by 2050 and represents a significant opportunity for the automotive industry to transition to a more sustainable and competitive future, it will require significant investments and changes in business practices.
This will involve heavy investments in developing new technologies and processes that reduce carbon emissions, including the production of electric and hybrid vehicles and sustainable manufacturing practices. Automakers will also need to rethink their supply chains and may need to retrofit or build new factories to ramp up production. Additionally, the shift to a digital economy will require the development of new software and connectivity features, as well as adapting to changing consumer preferences. These changes will impact the entire automotive ecosystem and may require new partnerships and business models.
Nevertheless, ACEA, the European Automobile Manufacturers’ Association, has welcomed the GDIP’s focus on transforming the European labor force to meet the demands of this transition, recognizing the importance of skills and human resources in achieving the plan’s goals.
The plan includes a focus on reducing greenhouse gas emissions and increasing the deployment of renewable energy, which could lead to increased demand for electric vehicles and other low-emission vehicles. This could create opportunities for automotive organizations to develop and implement strategies for transitioning to electric vehicles, developing charging infrastructure, and optimizing supply chains.
On the other hand, the GDIP’s policies and regulations aimed at reducing emissions could also create challenges for automotive clients, such as increased costs for complying with new regulations, or changes in demand for certain types of vehicles.
Overall, the GDIP has the potential to create both challenges and opportunities for consulting firms working with automotive clients, and firms will need to be adaptable and innovative to help their clients navigate this changing landscape.
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Mario van den Broek
E-mail: [email protected]