Carmakers Adjust Supply Chains Amidst FEOC Restrictions

The electric vehicle (EV) market faces as shift with the implementation of revised federal tax credit regulations on January 1st, 2024. While the revamped incentive retains its $7,500 ceiling, it introduces stricter eligibility criteria designed to fortify domestic supply chains and prioritize geopolitical security.

Aiming to mitigate dependence on potentially adversarial nations, the credit now excludes EVs containing components or critical minerals sourced from designated “Foreign Entities of Concern” FEOCs, including companies fully or partially controlled by the governments of China, Iran, North Korea, or Russia. This challenges carmakers to diversify their supply chains and prioritize North American or US-based sources.

Automakers are proactively reshaping their supply chains to adhere to FEOC restrictions. Nevertheless, widely acclaimed models that were once eligible for full credit are now grappling with reduced competitiveness, compelling manufacturers to prioritize sourcing from compliant regions, as highlighted by insights from Sam Abuelsamid, an analyst at Guidehouse Insights.

The revised federal EV tax credit introduces challenges for popular models like the Tesla Model 3 and Mustang Mach-E, impacting manufacturers and buyers alike.

Due to its reliance on a Chinese-made CATL battery, the Model 3 sees its credit slashed in half, dropping from $7,500 to $3,750, affecting its market competitiveness and prompting Tesla to potentially explore alternative battery sources.

Previously eligible for a $3,750 credit, the Mach-E now also finds itself completely disqualified under the new FEOC restrictions. This change could dampen sales and prompt Ford to expedite plans for shifting to non-FEOC-sourced materials.

Certain GM models may face temporary ineligibility due to Chinese-sourced components. However, GM is actively seeking alternative sources for these materials, offering hope for potential future eligibility.

This dynamic situation highlights the need for manufacturers to adapt quickly to evolving regulatory conditions, ensuring the viability of their electric vehicle offerings in a competitive market.