The Inflation Reduction Act of 2022, or IRA, signed into law in August 2022, was the most meaningful climate-related legislation enacted in U.S. history and, through its incentives, aims to solidify electric vehicles as a mainstream option among both automakers and consumers, claims Fidelity's Aidan Brandt.
"The IRA offers funding, programs, and incentives to auto consumers and manufacturers alike, with the overarching goal of accelerating the transition to a clean-energy economy in hopes of securing the country's position as a world leader in this arena," contends Brandt, portfolio manager of Fidelity® Select Automotive Portfolio.
In managing the fund, Brandt favors high-quality businesses exhibiting above-average growth due to a strong electric vehicle portfolio, a robust geographic sales mix, suppliers with growing content per vehicle that are outpacing their competitors, and companies that are repurchasing shares, thereby accelerating earnings-per-share growth.
In an environment of elevated vehicle prices, coupled with high interest and financing rates, points out Brandt, the IRA includes an enticing $7,500 tax credit for EV purchases, effectively renewing and modifying the pre-existing tax credit to entice auto buyers. However, he says there are stipulations for both buyers and manufacturers.
For consumers to be eligible for one half of the credit ($3,750), the vehicle's battery minerals must be at least 40% sourced from the U.S. and its free-trade agreement partners—totaling 20 countries—in 2023, rising 10% each year thereafter, says Brandt.
He notes that the remaining half of the credit eligibility requires that at least 50% of the battery components be manufactured in North America.
As for automakers, Brandt explains that the credits are broken down into battery cell and battery pack manufacturing, all of which must be U.S.-based.
To this point, he illustrates that companies are able to earn $35/kWh for battery cells and $10/kWh for battery packs.
In his view, Tesla and General Motors—major fund holdings as of June 30—could be big beneficiaries of these EV content requirements, as both companies have invested in their respective North American supply chains.
"In contrast, I would highlight that many auto manufacturers abroad, namely in Japan, South Korea and Europe, are relatively disadvantaged by these domestic incentives as most lack U.S. battery chains," concludes Brandt.
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