Suppliers must pivot as Biden accelerates ZEV push

Big government spending often gets a bad rap, but there are times when it can have a truly transformative impact.

Take the massive public works program in the 1950s that built the U.S. interstate highway system. Conceived during the Cold War as a way to move military vehicles, it revolutionized the way Americans have traveled, connected and traded ever since, and is a critical part of the continental U.S. infrastructure.

A similar push is now imminent for the auto industry as Congress weighs the Biden administration infrastructure package. Whichever version of the bill gets approved, it will rapidly accelerate the demise of the internal combustion engine and hasten the rise of electric vehicles.

That's likely to have a huge impact on an auto industry that is on the precipice of a once-in-a-century transformation. The bill, along with other administration steps, will mark the first serious U.S. attempt to catch up with Europe and China's big head start on EVs, and forms a seminal part of the Biden plan to cut carbon emissions and combat climate change. The official goal is for 40 to 50 percent of new U.S. vehicles to be battery-electrics, fuel cells and plug-in hybrids by 2030. Currently, only 2 percent of U.S. new cars sold are electric, compared with 13.5 percent in Germany, 11.3 percent in France and the U.K. and 75 percent in world leader Norway.

For automakers and their suppliers, the bill represents a massive opportunity to accelerate their transformation by taking advantage of funding and incentive programs. Many auto suppliers have dragged their feet, with executives often too caught up in day-to-day operations to act upon the major pivot they will need to make.

There are three key initiatives where the infrastructure bill and other Biden administration measures are set to tip the scales toward an EV future much faster.

1. Expanding the charging network. A big reason the U.S. has lagged on EV adoption is the chicken-and-egg problem created by its paltry national network of charging stations. The U.S. has about 30 charging stations per 100,000 people compared with 125 in South Korea and 313 in Norway. The infrastructure bill aims to address this with $7.5 billion in funding for new charging stations. While this still falls short of what's needed, it represents an important jump-start that should begin to assuage one of the key deterrents to consumers opting for EVs today.

2. Localizing supply chains. The administration is pushing to reduce reliance on foreign supply chains, recently laid bare by concerns over American jobs and pandemic-induced supply disruptions. The infrastructure bill earmarks $6 billion for battery-materials processing and manufacturing projects, with another $140 million allocated for a rare earth material demonstration plant. That forms part of the administration's push for the U.S. to reemerge as a dominant player in the rare earths supply chain, which is needed for EV production, battery making and renewable energy systems. The separate U.S. Innovation and Competition Act, passed by the Senate in June, provides $50 billion to fund the domestic production of semiconductors — which have for decades been outsourced to Asia.

3. Consumer and manufacturer incentives. The federal EV tax credit of $7,500 could increase to $12,500 if the larger budget reconciliation version of the infrastructure bill passes. Combined with the Biden EPA's announcement of tougher fuel emissions standards, that should help to rapidly reduce the price gap between EVs and conventional gasoline-powered vehicles, which I expect to disappear in the next four to five years.

Irreversible shift?

Sure, some factors could emerge that slow or disrupt the transition to EVs. A rapid breakthrough in fuel cell technology could reduce the volume of lithium ion batteries needed in coming years. An economic crisis or change of administration could set back the transition by a few years. But the overall move to EVs, backed by mounting concern over the climate, appears irreversible.

Companies that are still making parts for internal combustion engines need to have a strategy for transitioning their expertise and production capabilities to the very different needs of EVs, along with identifying potentially new customers. That may require partnering with a wide array of tech companies or acquiring another business with the necessary expertise in EV-based technology.

At the same time, the push for more U.S.-based production will require auto players to reevaluate traditional supply chains that have prioritized low-cost countries over the long distance to market. Companies should be seeking ways to leverage the new funding and incentives coming out of Washington to help them and decide where they want to produce and how much they want to vertically integrate production.

Shorter supply chains and more U.S.-based production will also require companies to use more automation and tech in factories to keep costs competitive and reduce vulnerability to labor shortages.

Any auto industry player that has been hesitant to join the EV revolution needs to wake up and act now, or risk becoming irrelevant in just a few years. The good news is that the funding and other support coming out of Washington should make it a lot easier to do so.