President Donald Trump’s crackdown on electric vehicle tax credits has contributed to a growing battery surplus that may hinder U.S. manufacturing, experts warn.
The lack of incentives is driving slower EV sales, leaving battery producers with an overcapacity. This could lead to slower production and expansion, as well as higher energy costs, weakening U.S. manufacturing campaigns against China.
“It’s a combination of removal of the incentives, plus maybe a little stagnant interest from buyers, which is leading to lower demand,” Willy Shih, a professor of management practice in business administration at Harvard Business School, told Fortune. “But the incentives are substantial.”
BNEF analyst Matthew Hales, who specializes in trade and supply chains, told Bloomberg the surplus, as well as lack of government support for renewable energy, would be a “a poison pill for U.S. manufacturing hopes.”
“The President is delivering on his promise to stop subsidizing electric vehicles with Americans’ tax dollars,” White House spokesperson Taylor Rogers told Fortune in a statement. “The Administration remains committed to an America First economic agenda of tariffs, tax cuts, and deregulation that strengthens American manufacturing without forceful EV mandates.”
But increasing inventories of batteries threaten this vision, Shih said. Slowing demand and slowing manufacturing activity eliminates opportunity for innovation that comes with rampant production and iteration, meaning prices for locally produced batteries will likely tick upward.
These demand shocks create a “bullwhip effect” across the supply chain, according to Li Chen, professor of operations, technology, and information management at Cornell University’s SC Johnson College of Business. Declines in consumer demand eventually amplify, leading not only to a surplus, but a likely battery shortage down the line as a result of decreased manufacturing capabilities.
“The initial effect is the battery surplus as we are seeing now,” Chen told Fortune. “But after the battery manufacturers cut back their capacity in response, my prediction is that there will be a shortage of [batteries] down the road with very high probability.”
“Facing a demand fall-off is actually very bad for the long-term health of the U.S. manufacturing of batteries,” Shih said. “And if you believe—as many people do—that batteries are a key technology as the world moves towards more electrification, that’s not a good scenario.”
This is a profitable model when demand for solar energy is high, but when demand is low, companies will sometimes have to pay negative feed-in tariffs for its oversupply. Batteries that can store energy help eliminate the risk of oversupply and negative feed-in tariffs, according to Shih.
“He looks at one thing at a time, as opposed to looking at the bigger picture,” he said. This bigger picture, according to Shih, includes the argument that the U.S. has a lot to gain in the long term by looking at the long-term cost of energy, which could be cheaper if the U.S. invested in battery manufacturing.
“The U.S. would benefit by being globally competitive, but in order to do that, you have to have somebody who’s willing to buy products so that you can invest in manufacturing and growing that capability, right?” Shih said. “So it’s a bit of a contradiction.”
