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Published in Energy

Q&A: Chicago Fed auto policy adviser discusses EV transition, incentives competition

BY Monday, October 17, 2022 03:44pm

The global transition to electric vehicles and low-carbon transportation is well underway and creating a high-stakes competition among countries, and even states, to capture the associated manufacturing jobs. “There’s a lot on the line,” said Kristin Dziczek, who earlier this year joined the Federal Reserve Bank of Chicago as automotive policy adviser after more than 17 years at the Ann Arbor-based Center for Automotive Research, most recently as senior vice president of research. In her new role, Dziczek will advise federal economic policy makers during the auto industry’s sweeping transition away from internal combustion powertrains. As Michigan joins the national pursuit of advanced automotive supply chain jobs, Dziczek discussed the “dumb” but increasingly necessary use of large incentive packages to attract these projects and the high stakes involved in the process.

From a policy perspective, how prepared are states and the country for the electric vehicle transition?

Kristin Dziczek COURTESY PHOTO

You have to take this in a global context. This isn’t just California saying it’s not going to sell internal combustion engine (ICE) vehicles anymore, chasing one state policy or just what the flavor of the month is in Washington. This is a global trend. Governments and regulators around the world have recognized that lowering the carbon footprint … of vehicles is a priority. Because this is a global industry that makes products on global platforms and sources components from all over the world, there is some homogenization, even if the U.S. market were not having these regulatory pushes or aggressive goals for moving forward. We would still get dragged along by Europe, South America and China, and other countries’ regulatory regimes will pull us forward.

But I think this is a big challenge. This part of the country makes half of all engines and three-quarters of transmissions for ICE vehicles in the U.S. And we’ll make even fewer of them as we make this move. It’s about being more purposeful about it. You can go into this transition unarmed with policy and get what you get. But trying to be more purposeful and strategic about what the position of a state like Michigan or the country is when this transition happens is important. There’s a lot on the line.

Where is Michigan positioned in this competition for advanced automotive manufacturing jobs?

Michigan comes from the position of incumbency. (About 20 percent) of all light vehicles are made in Michigan. A large share of electric vehicles are projected to be made here. If you’re a state like Michigan, Ohio or Indiana, you’ve got to look at: What’s a win? If we make X-percentage of ICE vehicles and get the same share of EV, are we good? Or is growth the goal? You could go back a couple of governors ago, and there was a big push to land a lot of battery plants in Michigan. At that time, the scale of battery manufacturing was very different. There were no gigafactories, these were little factories. It was the view that we were electrifying light vehicle propulsion and Michigan had to have a stake in that future. States had been looking even back that far and saying this is coming, we stand at the precipice, and we could lose a lot of jobs. And every state is doing that now. Other states are similar to Michigan and Indiana and need to grow that auto footprint. For other states, this is new, it’s the wild wild west, let’s get what we can. It certainly is a desirable industry and those are desirable investments states are trying to get. They’re long term … and there’s a lot of jobs in this. There’s a lot at stake on both sides, in gains and losses.

What is the risk for states investing large amounts of taxpayer funding for incentivizing these projects compared to the risk of business as usual?

When companies are looking at where they’re going to site a new operation, they’re looking at some very fundamental things that need to be there: Enough land for the space they’re going to take up, and water and electricity at reasonable rates that are critical inputs to their processes. They need enough reliance that there’s a workforce there and an ability to train and replicate that workforce going forward. These are all must-check boxes. When they get four, five or six different places that check all of those boes, then it comes down to incentives.

Is this the best, most efficient way to do this? No. It is not efficient for states to be putting all kinds of money out there to lure one producer from one state to another. The fact is, you can get very equal sites on all of those other factors and companies know they can get these incentives that can tip the scale. The reality is that competition exists, it tips the scales and makes those wins — but it’s kind of a dumb system. It’s not that efficient of a way to really decide where things should go, but there’s no way to unilaterally disarm.

Are these incentive packages a necessary evil?

I can say that it’s stupid, but states are still having to do it because every other state has to. It’s a game theory thing. If you don’t do it and everyone else does, you will stand on the losing end every time. If you can’t put the icing on the cake, you will lose every time.

From an industrial real estate perspective or reusing former manufacturing sites, what potential land use effects do you see from these projects?

We may not be doing these projects with optimal land use in the end. One of the most critical things right now is speed to market. Everyone is making these big investments in batteries, EVs, semiconductors and all of this stuff because they need these up and running in the shortest amount of time. Speed is of the essence in all of these deals. Going into an existing plant can be fast in some cases, especially if you already own it. If it has to change hands, if there are remediation issues and all of the things that can tie it up, then it’s not as fast. Is it going to end up with an optimal distribution of things on brownfield that need to be on brownfield and things on greenfield that need to be on greenfield? Probably not. It’s where it can go and be up and running as fast as possible.

How are you seeing the supply chain adapt to electric vehicle transition?

There are several different groups of suppliers: Legacy Tier 1s, legacy lower tiers and new suppliers. Legacy Tier 1s are pretty well positioned to make the EV transition — most have been engaged on this for a long time. For the lower tier in the ICE supply chain … that may need to pivot more. That has heavy cost pressures, and there’s likely a lot of consolidation coming in that part of the industry. A lot of suppliers aren’t affected — those that are (affected) are really tied to engines, transmission, exhaust and fluid systems. Then there’s new suppliers, big conglomerates … that are looking to expand in North America to meet this growing need. And some are newer, little startup companies developing better battery chemistry.

I don’t envy state and local economic developers who have to evaluate everyone who comes through their door. Is that going to be the best provider of jobs for citizens in my community for years to come? Everyone wants to be in on the ground floor of the next big thing, but it’s hard to tell what the next big thing is. Nothing has come of it yet, but you want to believe — with the speed that this is coming to fruition — that these jobs will be in your community pretty soon and this bet is worth it. There’s a lot at stake. Michigan has a lot at stake, and doing nothing would guarantee loss.

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