Improvements in battery and semiconductor technology are essential for automation. Physically instantiated AI systems need power cells that can fuel them for work. Tethering them to long cables is impractical in most situations.
Unfortunately, demand for these ancillary technologies is drying up, despite billions of dollars in direct U.S. government funding. Slowing growth in electric vehicle sales is partly to blame.
Still, pundits are also anticipating Donald Trump’s return to the Whitehouse, dampening sentiment in the science and technology sector’s long-term investment plans.
Biden’s Industrial Policies
Love or loathe him, President Joe Biden has been instrumental in re-shoring much of the US’s technology efforts over the past two years.
In 2022, he signed off on one of the most critical industrial policy acts in the country’s history, putting hundreds of billions aside for new research breakthrough technologies, such as semiconductor manufacturing and cell production.
Incentives included things like tax breaks for clean energy companies, lower healthcare costs, and mountains of money for research.
The Biden administration also attempted to induce structural changes in the economy and reduce reliance on an ailing (and politically unstable) China. The act mandated EV purchasers to receive $7,500 in tax credits, but 40 percent of critical battery components had to be extracted and processed in the US.
That figure is set to rise to over 80 percent by 2027 under current plans, designed as a boost to America’s growth and to help expand the domestic economy beyond its current confines while dealing with the deficit.
Of course, the 2022 spending boost was a post-pandemic measure designed to stimulate the economy. And, given the impressive economic growth data from 2023, the spending seems to be working.
But there is deeper geopolitical thinking behind the Biden administration’s recent moves. The environment is one concern, but the war in Ukraine and the deteriorating situation in the Middle East are making reliance on fossil fuels less palatable for US leaders.
To this end, the move to electric transportation diversifies the nation’s mobility and makes its economy more resistant to oil shocks (which caused devastation in the 1970s). Biden wants to make the country more autonomous and less reliant on deteriorating global geopolitical circumstances.
Not So Good Times
Pundits heralded the acts as a success initially. American firms began pouring billions of dollars into clean energy projects, racking up over $224 billion in investment, a tremendous buildout, the likes of which the country hasn’t seen since the increase in industrial capacity during WWII.
However, the picture isn’t as rosy as the administration would like. Despite massive investments in places like upstate New York, Arizona, and Idaho, demand is dragging down efforts to reorient the U.S. economy toward a more sophisticated and automated future.
The problem is, unfortunately, the automotive sector. The IRA originally managed to attract investments from big Korean battery makers, such as LG Energy and Hyundai. These firms agreed to plow billions into various plants in places like Arizona and Georgia, with capacity for building up to a million new EVs per year, with production starting in 2025.
However, demand for semiconductors and batteries is slowing. Despite headlines to the contrary, the need for these components in the automotive sector is lagging.
Commentators identify several reasons for the lack of demand. However, without more complete research, nobody quite knows what the dominant driver is.
One theory is that we are witnessing an early adopter plateau. All the people who would have bought an EV have already done so, with everyone else sticking to gasoline-powered vehicles. While EVs now comprise a significant chunk of the auto market, they are not mainstream.
The price point hurdle is another issue. Despite various government incentives, EVs remain significantly more expensive than equivalent gasoline cars, making it harder to obtain and service loans.
Shifting gas prices are also playing a role. Lower charges at the pump are making more Americans consider whether it is worth moving over to electric transportation on purely economic grounds. Previously, lower long-term costs offset higher upfront purchase prices. Now, though, that no longer seems to be the case.
Infrastructure concerns are another driver of the fall in demand. Many people worry that they won’t find places to charge in rural areas.
Major manufacturers are attempting to resolve this problem by expanding the charging network with thousands of new terminals across North America, but work is only just getting under way and could grind to a halt if EV demand doesn’t materialize.
Falling Cash Flows at Major Tech Companies
The cash flow situation at many of the most relevant companies is also deteriorating. For example, the U.S.’s largest EV manufacturer, Tesla, recently reduced its prices by 25 percent to shore up demand. This move means that it is having to let go of its industry-leading demands and operate leaner.
Other EV makers are struggling even more. For example, Ford recently announced its EV division made a $1.3 billion loss.
The semiconductor industry is also struggling. TSMC is facing restrictions on the Taiwanese workers it can fast-track into the U.S., potentially delaying the development of its new plants. And Apple is struggling because it relies on a narrow supply chain originating in the Far East. It needs TSMC to succeed, but the company’s operating cash flow is tanking and profitability looks uncertain going forward.
Fortunately, there are some solutions on the horizon and the future still looks okay (even if it doesn’t live up to the hype that has dominated since 2018). LEONID, a finance company that arranges funding for government contractors, believes there are alternative investment models.
“The government is a critical driver of innovation in the U.S. economy, but it often demands more of contractors than they can supply,” it says. “There’s a need for massive injections of capital into the economy as it expands its productive base and re-shores the manufacturing lost overseas to places like China since the 1970s.”
Once companies have this investment, LEONID believes they will be in a better position to thrive and provide the myriad of smaller breakthroughs the economy needs to make large-scale transitions.
“To get these technologies off the ground, there needs to be a wider technical base,” the outfit says. “During the Industrial Revolution, people knew steam engines, but there weren’t enough applications to make them economically viable or incentivize investment in the technologies. That changed with deep-shaft mining. The same could be true of semiconductors and cells. The more industries, like aerospace, that can use them, the more incentives there are for companies to invest in research and development and enhance their products. The government should be a driving force behind this if the private sector is unwilling to do it.”
Following this line of reasoning, it could be the case that the electric battery market still hasn’t reached the required critical mass. (The same probably can’t be said of the semiconductor market).
The more investment that generates real-world products that consumers want, the more likely the energy economy will reorient around battery tech. It will become an indispensable part of national security and policy.
Falling prices could also be a solution. The fact that Tesla recently slashed the prices of some of its vehicles means that EVs may become more competitive with existing gasoline vehicles. Breakthroughs in production technologies (and even lower battery weights) could enable the aerospace sector to increase its reliance on the industry in the near future.
Another key solution would be to increase the range of battery vehicles. Three hundred miles might not be sufficient to eliminate anxiety, but a thousand miles would certainly do the trick for most drivers.
Already, more advanced battery chemistries than standard lithium-ion are making this possible. Companies are developing new, more-energy-dense solid-state cells that won’t go up in flames during a crash.
These can hold more energy safely without the weight penalty, potentially pushing EVs’ range closer to the 750-mile mark, which is better than most production gasoline vehicles.
Solutions for the semiconductor market must begin with diversifying the supply chain. Today, the world is far too reliant on Taiwan for the most advanced chips. That’s why the U.S. is keen to encourage chipmakers to set up fab plants on its soil.
Keeping Moore’s law going is also critical. Performance improvements in modern chips are slower than those occurring historically, so there is less incentive for consumers and businesses to demand the latest models.
Finding ways to advance the technology and keep it doubling every two years will drive demand and encourage consumption and new applications.
Finally, talent development in the semiconductor sector could help. The industry needs a skilled workforce to test chips and design new concepts or materials. While silicon enables fantastic advances, it is nearing the limits of what it can do.
To summarize, government investment in battery and semiconductor tech worked, but structural issues are preventing it from realizing its ambitions. Falling demand is the main problem. Hopefully, what we are witnessing is just a lull in activity, with normal service resuming once existing investments bring prices down.