Assembly plants that manufacture electric or plug-in hybrid vehicles in Mexico could see increased demand thanks to the measures contained in the US Inflation Reduction Law.
The US Congress included Mexican and Canadian manufactured electric vehicles among those that could access the tax benefit of 7,500 dollars (about 151,000 pesos) that the United States government will grant to those interested in acquiring a car of this type, whose price does not exceed 80,000 dollars (around 1.6 million pesos). Used electric cars will also be eligible for a $4,000 tax credit.
The most immediate effect of the new provision will be the prohibition of tax credits for vehicles assembled outside North America, which today represent about 70% of the 72 electric and plug-in hybrid models available in the US market. However, the new provision is less restrictive than an earlier version, which favored only those who buy electric vehicles made in US plants operating under a collective bargaining agreement negotiated with unions.
Currently, among the vehicles eligible for the tax credit are the Mexican-made Mustang Mach-E and Nissan Leaf, in addition to other plug-in hybrids produced in the region, such as the Audi Q5 and the Mexican-made BMW 3 Series.
More regional content
In addition to encouraging the sale of more electrified cars, the US government seeks to strengthen the regional supply chain with the measure. Pete Buttigieg told Reuters last week that this would be “a very important long-term policy transformation to ensure the sale of Made in America electric vehicles ”.
The new restrictions will come into force on January 1 and the new supply rules will increase annually, until a high percentage of regional integration is achieved.
As of 2024, according to the Inflation Reduction Law, electric vehicles must integrate at least 50% North American content, that is, from the United States, Mexico or Canada, by 2024, which must reach 100 % by 2028. In addition, battery manufacturers must source at least 40% of their critical minerals for cells from countries with which the United States has a free trade agreement. The percentage will gradually increase over the next two years and by 2026 the regional content of critical minerals will increase to 80%.
Critical minerals can also be made from recycled materials in North America, but in no way can those that were “mined, processed or recycled by a foreign entity of interest” be used, which rules out China as a supplier.
All these restrictions, however, have raised questions about how capable vehicle manufacturers will be to adapt their supply chains amid constant disruption. “The industry is sometimes capable of more than what they see at first,” Buttigieg added in the interview he gave to Reuters.
Opportunities for Mexico?
The National Automobile Dealers Association (NADA) estimates that in the next few years, the United States will go from having just a dozen fully electric vehicles to offering more than 40 different models. But only those that prove regional manufacturing will be able to access the tax incentive, which leaves Japanese, South Korean and European-made electric vehicles at a disadvantage, at least in terms of price.
It also represents an additional barrier for Chinese-made electric models looking to break into the Western market.
Affordability still plays an important role in a consumer’s purchase decision. According to a 2022 consumer survey by Deloitte, more than half of American respondents were unwilling to pay $500 more for alternative energy vehicles than a comparable gasoline-powered vehicle.
Thinking that American consumers will lean towards those models that are eligible for the tax credit, assembly plants that already manufacture or will manufacture electric vehicles or plug-in hybrids in the three countries could benefit from greater demand driven by the new measures established in the Inflation Reduction Law.
“In our region we produce together to compete globally. We must deepen our productive integration to provide well-being to our societies and leave no one behind,” the Mexican Ministry of Economy said on Twitter.
Ford manufactures the Mustang Mach-E model in Mexico at a plant in Cuautitlán, State of Mexico, and recently announced that it will triple production. General Motors will start in 2023 with the assembly of the Blazer EV model in Ramos Arizpe, Coahuila; while Audi recently announced that it plans to produce a fully electric version of its Q5 SUV starting in 2027.
At least one other manufacturer will announce investments for the production of an electric vehicle in Mexico in the last quarter of the year.
Some of the models that would qualify for a tax credit under the Inflation Reduction Act are:
Ford Transit EV
Ford F150 Lightning
Rivian EDV, R1S and R1T
Plug-in hybrids (PHEV)
BMW 330e Sedan
Jeep Grand Cherokee
Lincoln Aviator PHEV
This is the complete list of vehicles that may aspire to the tax credit published by the United States Department of Energy