There is an old expression often heard in the halls of Congress that goes like this: “A billion here, a billion there. Pretty soon it begins to add up to real money!” The US Inflation Reduction Act is reversing the decades long trend of offshoring American jobs (though it’s not doing much to tamp down inflation). The latest news regarding the IRA is that Volkswagen, one of the largest European manufacturers of electric cars, is putting its plans to build more battery factories in eastern Europe on hold until the EU decides how it will respond to the IRA with manufacturing incentives of its own.
The Financial Times reports that Volkswagen could benefit from up to $10 billion in IRA incentives if it built a battery factory or two in the US. Volkswagen may be a European company — it has manufacturing facilities in many European countries, not just Germany — but that $10 billion figure has certainly gotten its attention. It would be fiscally irresponsible for it or any other business entity to ignore such a large sum of money when making plans for the future.
There are always knock-on effects as well. If Volkswagen built battery factories in America, might it not also decide to build more electric cars in America, too? And wouldn’t building more cars in the US create even more jobs for American workers? That’s the funny thing about economics. Money attracts more money, creating an economic engine that brings prosperity, at least to those on the inside.
Volkswagen Battery Factory On Hold
Automotive News Europe says a spokesperson for Volkswagen told the Financial Times recently the company is still evaluating suitable locations for its next cell factories in Eastern Europe and North America and no decisions have been made yet. “We stick to our plan to build cell factories for about 240 GWh in Europe by 2030, but for this we need the right framework conditions. That is why we wait and see what the so-called EU Green Deal will bring.” An unnamed source told Reuters recently, “It is the case that we are getting ahead far faster in North America.”
When Herbert Diess was the head of Volkswagen Group, he put a plan in place to build six battery factories in Europe by 2027, with Hungary, Poland, Slovakia, and the Czech Republic all in the running for one of them. The first of those factories — a joint venture with Northvolt in which Volkswagen holds a 20% stake — is scheduled to begin production this year. A second factory with Gotion High Tech is scheduled to be built in Germany. Volkswagen holds a 26% stake in that venture.
Another cell factory will be built in Sagunto, near Valencia, Spain, with production starting in 2026. Skoda, which is based in the Czech Republic, would like to see at least one of the new Volkswagen battery factories constructed in its home country. Last October, Volkswagen Group said it expected to finally decide on a location for the eastern Europe plant in the first six months of 2023.
Last week, Volkswagen board member Thomas Schmall posted on LinkedIn that Europe risked losing “the race for billions of investments that will be decided in coming months and years” to the US because of the incentives made available by the Inflation Reduction Act. He added that he was talking with EU officials via the European Battery Alliance last week on what conditions will be needed in Europe for battery production. Those conditions may include government support for battery manufacturing similar to what China and the US is providing, a raw materials strategy, and access to affordable renewable energy.
Energy Costs Are Part Of The Discussion
That reference to the cost of energy is notable. Europe has been rocked by soaring energy prices thanks to Putin’s war of aggression in Ukraine. Europe used to rely on unlimited supplies of methane gas from Russia to generate cheap electricity, but that dream scenario is now long gone. The good news is, losing access to Russian gas has spurred a massive shift to renewable energy in Europe. The bad news is it takes years to get all those renewable resources built and online. In the meantime, European manufacturers are paying historically high prices for electricity.
Last year at this time, Northvolt said it would build a third battery factory in Germany. A location in northern Germany was chosen specifically because it offered access to abundant supplies of clean renewable energy from onshore and offshore wind farms. It hardly makes sense to manufacture batteries for zero emissions cars using electricity made from burning coal.
Northvolt has since backed away from that plan, saying it has not decided whether to build in Germany or expand first in North America. “Given what is happening in North America and what is happening in Europe on the other hand, with energy prices not the least, we are during next year going to decide what to prioritize,” Jesper Wigardt, a Northvolt spokesman, told Automotive News Europe last fall.
“IRA has changed the dynamics for suppliers, the entire value chain is looking at North America instead of at Europe,” Wigardt said. “European politicians on various levels need to act quickly to ensure that Europe remains attractive to invest in.” A decision in favor of North America might delay the German plant “a bit,” he said.
Jobs For America, But At What Cost?
A story in Barron’s this week puts things this way: “President Joe Biden’s policies appear to be having their desired effect. It should mean more jobs and cheaper electric vehicles for America in the long run.” That may be true, but the US effort to slow down the Chinese juggernaut that has become the world’s primary source of electric vehicles and the components needed to make them has also put enormous pressure on America’s European allies, whose citizens are struggling with soaring food and energy costs. America’s clean energy and transportation financial incentives couldn’t come at a worse time for European nations.
“Follow the money,” is age old advice that does a pretty good job of explaining things. Right now, the money is leading corporations around the world to consider building or expanding their businesses in America. That’s good news for Americans, not such good news for its friends in other parts of the world. America can’t afford to let short term economic gain create a rift between it and its traditional allies. It’s a dangerous world and the US may need all the friends it can get in the not too distant future.
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