Figure 1Kia's EV6 electric vehicle / Courtesy of Kia Corp.

Short-term setback inevitable but long-term outlook bright for Korean automakers

By Kim Hyun-bin

The implementation of the Inflation Reduction Act (IRA), signed by U.S. President Joe Biden, Tuesday (local time), is expected to have a short-term impact on Hyundai Motor Group's U.S. electric vehicle (EV) sales in the coming years, according to industry officials and analysts, Thursday.

The IRA provides tax credits and subsidies for EVs manufactured in the U.S., which could deal a blow, in the short term, to Hyundai Motor and Kia's EV strategy for North America. The bill aims to provide tax credits only for EVs manufactured or assembled in North America.

Currently, Hyundai Motor's Ioniq 5 and Kia's EV6 are locally produced and both companies have no EV production lines in the U.S., which inevitably excludes U.S. customers from receiving tax credits and subsidies of up to $7,500 per vehicle when purchasing Hyundai or Kia EV cars.

In addition, EVs using Chinese batteries are excluded from receiving subsidies, while 40 percent of the minerals used for batteries must be produced in North America or in countries that have free trade agreements (FTAs) with the U.S.

"There are no specific countermeasures at this point, as Hyundai cannot produce EVs in the U.S. immediately. Hyundai Motor is scheduled to build an EV factory by 2025, which is going ahead as planned and from the end of this year, Hyundai Motor's Alabama plant will produce the GV70 electrified model," an industry official familiar with the matter said.

One goal of the IRA is to counter China, which currently dominates the EV supply chain and establish a U.S.-centered EV supply chain.

Hyundai and Kia will mostly be excluded from subsidies for three years until 2025, when an EV-only plant in Georgia, is completed. The delay will reduce Hyundai Motor Group's EV competitiveness in the U.S. market, as consumers who want to buy the Hyundai Ioniq 5 or Kia EV6 will have to pay $7,500 more without subsidies.

Hyundai Motor has not announced how it will cope with the changing business environment in the U.S. but it is reportedly scrambling to come up with countermeasures.

Since EVs are more expensive to manufacture than internal combustion engine vehicles, government subsidies are essential for the expansion of the EV market.

However, many experts point out that the IRA will benefit Korean companies in the mid- to- long run with more plants being built in the U.S.

"As detailed regulations on subsidies are tightened, the benefits will inevitably go to companies that can meet them. The need for local EV and battery production facilities in North America will increase to meet the relevant regulations," Song Sun-jae, an analyst at Hana Securities, said.

"Korea is in an FTA with the U.S., Korean automakers will build more factories in the U.S., and key battery suppliers are accelerating plant expansion, so it will be easier for them to meet the relevant regulations and create opportunities in the future," Song said.