In revealing Friday that it is considering building a U.S. factory for electric vehicles, German automaker Audi became the latest company to signal that the Biden administration’s support for high-tech and green-energy manufacturing is bearing fruit.
Some of the projects could fail to materialize, and there are larger economic factors motivating the investments. But it’s clear that incentives in the Inflation Reduction Act (IRA) and the bipartisan Infrastructure Investment and Jobs Act (IIJA) are helping spark the activity, said Willy Shih, a manufacturing expert at Harvard Business School.
“What it’s done is it’s stimulated a huge wave of new capacity building in the U.S. for EVs and EV materials and batteries,” he said. “I used to be a skeptic about the practicalities of bringing manufacturing back to the U.S. Now that I see the impact of the IIJA and Inflation Reduction Act, my observation is, well, that seems to be working.”
Brad Setser, an economist in the Obama and Biden administrations who is now senior fellow at the Council on Foreign Relations, said recent investment announcements have been “big and impressive” and show there is “a lot of support for specific sectors.”
He cautioned that the larger projects will take time to come online and could face obstacles along the way. There are also some head winds to domestic production at the moment, he said, including the strength of the U.S. dollar and the post-pandemic shift in consumption from goods to services.
Still, some of the activity is showing up in data, he said. Investment in U.S. factories grew from roughly $70 billion at the end of 2020 to roughly $105 billion at the end of 2022, according to the Bureau of Economic Analysis. And investment in industrial equipment grew from $250 billion at the end of 2020 to around $320 billion at the end of last year.
“There is growth and expansion and certainly there should be an expectation that this will get stronger over the next couple of years as the incentives kick in, as we go from announcement of plans to steel in the ground and new production equipment under the roof,” Setser said.
In comments to the German newspaper Frankfurter Allgemeine Zeitung published Friday and confirmed by the company, Markus Duesmann, chief executive of Volkswagen-owned Audi, said EV subsidies provided by the IRA made the prospect of a U.S. factory “much more attractive.”
“Decisions have not yet been made, but the VW Group will probably make more cars over there in the future for the U.S. market,” Duesmann said.
Agnes Schwägerl, Audi Group’s head of communications for international sites, emphasized that no formal decision has been made. “The U.S. market is enormously important to us,” Schwägerl added. Audi has said it wants to shift all of its new vehicle introductions to electric by 2026 while investing a planned 18 billion euros in hybrid and electric technology.
The Biden administration and supporters in Congress are directing tens of billions of dollars to various manufacturing incentives, saying they will boost high-tech employment, lower carbon emissions and reduce U.S. reliance on Chinese-made goods.
The IRA offers subsidies and tax incentives to support a range of green industries, including a $7,500 tax credit for North American-made electric vehicles and subsidies for domestic manufacturers of EVs, batteries, solar panels and other technology.
The IIJA earmarked billions for processing, manufacturing and recycling battery materials and additional funds for clean hydrogen manufacturing and recycling, among other projects.
The Chips and Science Act provided $52 billion in subsidies to the semiconductor industry to rebuild manufacturing of the tiny electronic components seen as vital to U.S. economic and national security. The United States relies heavily on chips manufactured in Taiwan, a dependence that worries U.S. officials as the democratic island’s tensions with China rise.
The programs have prompted huge investment announcements. Intel, the California-headquartered chipmaker, is building a $20 billion manufacturing campus in Ohio. Micron is spending tens of billions on new chip factories in Idaho and New York, and Taiwan’s TSMC is constructing a $12 billion factory in Phoenix.
Ford this month announced a new battery plant in Michigan and also plans to invest $11 billion with a South Korean partner in new manufacturing campuses in Tennessee and Kentucky that will employ 11,000 people. General Motors, meanwhile, has pledged to spend $7 billion — its largest investment ever — on four Michigan manufacturing sites for battery cells and electric vehicles.
Congressional critics of the subsidies programs have said the largesse creates an unnecessary pot of corporate welfare for highly profitable industries. “Semiconductors, or chips, are important, but that doesn’t mean we should write these companies a blank check,” Sen. Charles E. Grassley (R-Iowa) said last summer.
Asked this week whether the chip subsidies will create a cycle of taxpayer-funded dependence, Commerce Secretary Gina Raimondo said the money must be doled out carefully “to make sure it’s not a runaway train.”
“There are a lot of people, including me, who are reluctant to engage in this kind of subsidy for large, profitable companies. And so I think we have to do it with caution,” she said during an event at Georgetown University. “However, I think you have no alternative when you are reliant on Taiwan for 92 percent of your chips, and the cost of creating a [chip manufacturing plant] in America is 30 percent more than it is to do it there.”
Andrew Adair, a foreign trade specialist at VDMA, an industry group for German machinery manufacturers, called the IRA a “thumb on the scale” encouraging investments in the United States.
“It’s not a be-all and end-all. It’s a big accelerator, but you have a lot of other factors,” he said in an interview, citing lower energy prices in the United States, compared with Europe, as a major attraction for manufacturers, which consume a lot of power. “You have a number of factors that are prompting German industry to look at America in a different way,” he said.
Improvements in green technology are also inspiring the investments, said Michael Hicks, an economics professor at Ball State University in Indiana. Solar panels today can produce power even during harsh, stormy weather, making them more attractive to manufacture and buy, he said. And “the political instability we are seeing in China is really prompting manufacturers to rethink their manufacturing deployment in China,” he added.
“Most of that won’t come back to the U.S. It will go to emerging countries in South Asia,” he said. But automation will make the United States more competitive than it has been.
“The success of doing manufacturing in the U.S. depends on doing it with fewer people,” Hicks said. “Those facilities are probably going to deploy a significant amount of robots.”