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Impact of the green industry agreement plan on the automotive industry in Europe

European carmakers have expressed concern about the risks posed by the US Inflation Reduction Act and the potential for investment leak out of the European Union (EU). In addition, due to the emergence of electric vehicle manufacturers sponsored by the Chinese government, more and more brands such as NIO, Xpeng, BYD, Byton, and some brands like Geely appear on the road in more and more European cities. Without stronger regulatory and financial support for nascent industries, given the size of subsidies available in the US and China, these two countries could attract green and cutting-edge technologies. powerfully and overshadowed European efforts – from development to production and manufacturing.

Four Pillars of the GDIP

To address this, a Green Industry Agreement Plan (GDIP) was launched, which includes four basic pillars for Europe to protect its green tech industry:

1. Predictable and simplified regulatory environment: The European Commission will propose the Net-Zero Industry Act; a new regulatory framework to simplify and accelerate the licensing process, support strategic European projects, and develop standards for scaling technology.

2. Faster access to capital: This pillar aims to promote clean technology investment and financing in Europe with public and private funds, competition policy, and EU funds. The European Commission will consult the member states to aid rules and proposals for a European Sovereign Fund, as well as provide guidance to Member States on the use of Repower EU funds.

3. Upgrading skills: To keep up with rapidly evolving technologies, this pillar aims to combine the development of technologies with the development of skilled workers to use them. To do this, the European Commission will propose the establishment of a 'Net-Zero Industry Academy' to organize skills development programs for related fields.

4. Facilitation of Open and Fair Trade: The final pillar of the GDIP is to protect the Single Market from unfair trade practices, develop EU Free Trade Agreements, and facilitate the cooperation of different entities to promote green initiatives and green transition.

Ursula von der Leyen, President of the European Commission, gives an address at the World Economic Forum in Davos, 17 January 2023.
Ursula von der Leyen, President of the European Commission, gives an address at the World Economic Forum in Davos, 17 January 2023.

The Green Industry Agreement Plan (GDIP), in the form of the Net-Zero Industry Act, REPowerEU, the EU Sovereignty Fund, and the revised Interim Transition and Crisis Response Program Framework, can help deliver a bulwark to sustain investment in the EU. The GDIP points out that one of the main challenges facing the development of these sectors is that current high energy costs and access to low-carbon energy at competitive prices are an important part of the transition. change. The plan aims to provide a structure that does not require too much bureaucracy or time to access funding, easing the administrative burden of the Temporary Crisis and Transition Framework. The plan also aims to achieve close coherence among other EU policy initiatives in the areas of industrial policy, decarbonization, and strategic autonomy, such as the Critical Raw Materials Act and Chips Act. The plan seeks to limit the regulatory burden placed on transition industries and avoid copying the trade protectionist elements of the Inflation Reduction Act.

The GDIP has become crucial in helping Europe achieve its environmental and carbon-reduction targets while supporting its industrial base. European industry is facing significant challenges in implementing decarbonization pathways while preserving its global competitiveness and securing jobs and industrial production in the EU. ACEA needs clear leadership by European institutions and member states to create the right framework conditions.

GDIP vs. Inflation Reduction Act

The Inflation Reduction Act has been described as the biggest overhaul to US auto policy in a generation aimed at changing the way Americans drive on the streets and creating an economic boom for manufacturing states to export new vehicles and components.

The Inflation Reduction Act offers incentives for electric vehicle (EV) consumers, including extending a $7,500 tax credit on new electric cars through 2032, adding a $4,000 credit for deals used in electric vehicle purchases, and including a credit of up to $40,000 for commercial vehicles. However, in exchange for these incentives, the government is asking electric vehicle manufacturers to transform their production and sourcing practices to create a new US-based supply chain for the industry, which is a major challenge for the industry and risks exacerbating supply problems.

Automakers need to meet aggressive goals that require extraordinary effort, including sourcing 50% of batteries in North America by 2024, increasing to 100% by 2029. Furthermore, ethics The law requires that 40% of critical minerals needed for batteries come from countries with free trade agreements with the United States or be recycled in the United States, steadily increasing to 80% by 2027. The goal is to reduce dependence on China and create an independent domestic investment and employment value chain around electric vehicles. The Inflation Reduction Act requiring a shift to more battery production in the United States is underway, but the challenge is whether that will be fast enough to keep up with demand. The bill's requirements for critical materials represent an even more formidable challenge for the electric vehicle industry, given China's dominance in the production of key materials such as lithium, cobalt, and nickel.

As a result, the Inflation Reduction Act creates significant challenges for the U.S. auto industry in transforming sourcing and manufacturing to create a new U.S.-based supply chain for the industry.

On August 16, at the White House, US President Joe Biden signed the Inflation Reduction Act worth more than 430 billion USD in the presence of Democratic Party leaders.
On August 16, at the White House, US President Joe Biden signed the Inflation Reduction Act worth more than 430 billion USD in the presence of Democratic Party leaders.

As briefly mentioned in the introduction, we in Europe are also seeing more and more Chinese automakers on European roads. The prices and quality these automakers offer currently seem unattainable by the established American, German, and French automakers. Achieving the results of decades of low-cost production stretched in a global playing field means that Asia is not only gaining a wealth of knowledge but is also equipped with all the means to deliver quality vehicles at prices comparable enough to make Western car-making manufacturers sweat.

As Denzel Washington once said, “You pray for rain, you gotta deal with the mud too. That's a part of it."

It will take a longer time for us to see the real applicability of both the GDIP and the Inflation Reduction Act.


Author: Mario van den Broek / Partner / RSM Netherlands

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