What the new Treasury rules mean for EV supply chains
Catalyst with Shayle Kann
The EV Tax Credit and Foreign Entity of Concern
The administration or the Treasury at least was kind of trying to thread this needle where like on one hand, you know, they're the whole point of this legislation is to protect domestic manufacturing and build up a supply chain. So I think that this, there is one big hole in, in what we don't know, which is foreign entity of concern for the purposes of the EV tax credit. They didn't give any guidance. And that's important because if you are today shipping your spodumine to China to be made into lithium hydroxide, then that will disqualify that material from being qualified.
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Speaker 2
Is the thing where you're like, oh, 25. Yeah,
Speaker 1
only 25. Oh man, I'll
Speaker 2
take that any day. Good
Speaker 1
Lord. You remember the rule of 72, right?
Speaker 2
Well, I do because you talked about it last time.
Speaker 1
Rule of 72, divide three into 72. Three into 72 goes two and they carry a one, two, which is four, right? 24%. In other words, if you get 24% compounded return, you're doubling your money every three years. These guys have 25%. They've been at it 15 years. That's five doubles, right? Every three years, it's actually faster than that, but let's go every three years, it doubles once. So if they started with $10,000 in that portfolio and just went to sleep for 15 years and didn't touch it, and never mind that some of those companies did badly, right? Let's just keep the money in there. Just a sleep at the wheel. So there's all human judgments taken out of it except for the original judgment to put the money in. You've got five doubles. $10,000 goes to $20,000, $40,000, $80,000, 320,000 on $10,000. Wow. Wow. Dude, that's so powerful. So hooray for not doing anything. Do you think anybody actually did it? No. Chances are. Chances are pretty good. Nobody actually did it, including me. Yeah.
Speaker 2
Right.
Speaker 1
No, I had, you know, I have my own view of things. And I will tell you, I didn't do that well over that period of time, but we did well.
Speaker 2
this but there's a fallacy of thought in that we think that the more we do the better we are and the more we do the better we'll produce and the more we do the more will xyz and in in many things that is true and in some things it's not and i think investing part of the huge challenge is knowing, well, I feel like we can't really ever know, is guessing when to stop. When is like, this is what I'm sticking with. And when is it I need to go full force or like last time you said like you had two months to research a company before it doubled and didn't make it in the two months and that should have been like a all hands on deck go really fast kind of situation lots of work work is good work helps right
Speaker 1
it's
Speaker 2
it's like the those two sides of the coin exist and they're never going to change and i think like the great investors somehow divine which one to do when. I agree. Some of the time. I agree. Not even all of the time. I agree. Like look at you. Okay. You constantly talk about things you get wrong. Buffett constantly talks about things he gets wrong. Everybody does. And so, like, just expecting that that's part of it is good, I think. And then getting the rest of it to just be good choices and sort of stay away from it. It's extraordinary. Like, that's where the that's where the gravy is, you know, it's wild.
Speaker 1
Yep. And I have to say that there's, you know, you watch an investor who is the best in the world, pushing, coming out of investments that are, you know, many people think are the best companies in the world. Apple, for example, coming out of that investment, but keeping a chunk for sure, but largely bringing the money out and stacking up 325 billion. And I will not be the littlest bit surprised if within 18 months, Buffett is buying $325 billion worth of companies that have gone on sale, that the market crumbles, and he's standing there with this enormous hoard of cash. And I know he wants to, because he would love nothing more than to put all that money to work before he really is done, right? Before it's all over, and leave this amazing legacy of here goes another years at 30% a year as these companies recover and come back into their true value.
Speaker 2
Oh, but I think for him it's also like knowing that he could make a huge difference in the American economy and help it to come back from a crash. Putting a bottom in? Yeah, I really do. I feel like that's something that he's talked about and that he's super proud that berkshire would do that yes and i i think you're right that before he hangs it up not that he wants a crash to happen but if it does he would like to be the one to help yep
Speaker 1
100% right and that's that's his promise is that berkshire will be here if nobody else is here probably including the federal government, Berkshire will still be here. And so I think we all need to pay a little bit of attention to that. But it is ironic for a guy who is the investor who says buy, hold, never sell, to be unloading and gathering up cash. And had I not seen historically that he's done that repeatedly in his career, because at the end of the day, what he said seven years ago in 2017 was that every seven to 10 years or so there's an economic storm and it rains gold and you have to be ready to go outside with a bucket, not a thimble. A bucket is cash, You can't, if you're just invested fully, there's nothing you can do when the opportunities show up because you're already invested and everything you own has gone down with everything else. And now you can't buy more. So there's the, there's the conundrum
Speaker 2
of this. It's all been said for so long that, you know, the clock strikes 12 twice a day. Even
Speaker 1
a blind dog gets a bone. Your turn. Yeah, had a 18% per year growth rate in their stock for quite some time. And then now it's shifted to about a long-term 12%. The market is fully valuing them, if these are the accurate numbers. So probably we're not in a big hurry here. This is not on fire on sale. There doesn't seem to be any event around this company that has driven the stock down other than they loaded the market with medical equipment and supplies, and then COVID didn't keep happening. And the whole world doesn't need to buy those supplies at that same rate. So that's an event, but that's being worked through now. And the question is, do we really like this company? Does it look right to us? So now this being a Japanese company, it's, and it's, I'm, I could check our own website and I guess I should. Why don't I do that for a second real quick?
Speaker 2
Sure.
Speaker 1
Going over to the toolbox here and log in.
Speaker 2
Well, so what we talked about last time, just to fill while you are doing that, was if you randomly come up with a company as I did out of the sheer blue that you've never thought about and want to go figure it out and look at it, what do you do? So we talked about go to their website, not even the investor website, just the regular website.
Speaker 1
Go on their website. Yeah.
Speaker 2
Go to just like Google and look at the basic stock charts basic financial info that google gives and just get a very very broad what the heck even is this company what do they make what do they sell where are they and what do they um to be doing in the future? And what we found about Terumo very quickly was that they, I thought they only did blood related supplies. But turns out they, their vision is that they are a medical technology company. Full stop. So they want to do all sorts of things. And then I think the next question for me is, what do you do then? So those sort of basic, like, okay, I did my gooks. What happens after I know what they do, where they are, what's going on with them. And I have enough interest to keep going. So what I do is go more immediately. People always ask me like, where do you go first? So what I do is I go to the investor website. Sometimes they have a good one. Sometimes they don't. A lot of times these days they do. And look at what they're presenting to investors and try, I don't know. I try to see like, do they give the annual reports proudly? Do they have letters from the executives on there right away? Are they putting forward with pride what they've been doing? Or is it really hard to find the annual report or they don't even link to it, which happens. And that tells me something. And then I go to the most recent annual report. That's what I do. What do you think about that? I
Speaker 1
think you're pretty right on, although I'm not really rigid about that flow.
Speaker 2
I'm not rigid either, but that's just sort of like, oh, what do I do? I'll do that. That's my basic.
Speaker 1
So let's do that. The first thing I do is I go over to my own website to see if we're picking up this company and we're not. and I'm not sure why. It's an ADR company and it's traded over the counter, which means that the company doesn't really have to file all the reports that a fully listed company has to file. And so we don't spend a great deal of time on over-the companies in part because it takes more research to dig into it. So being aware of that.
Speaker 2
You know, one thing though we did talk about for a number of episodes was that those kind of companies, well, this one's OTC because it's foreign, but that those kinds of companies that are harder to know about might be opportunities for those of us who are starting with smaller amounts of money. 100%
Speaker 1
right on that. You're absolutely 100% right. This company is not a small company. It's 4.6 trillion in Japanese yen. So if you'll tell me how big that is. Well,
Speaker 2
I'm going to
Speaker 1
get enough for that.
Speaker 2
I
Speaker 1
suspect with 30,000 employees, they're probably everything on here is yen for some reason. What did you say it is?
Speaker 2
For what? 4.6
Speaker 1
trillion in JPY. Do the conversions?
Speaker 2
It's roughly 30 billion. About
Speaker 1
30 billion. So there you go. Not exactly a small cap, right? So they're quite large. And so, all right, they're a big company. Let's go figure out if we're interested in them. So my next step is to read a little bit about what they do a little bit deeper, right? We led that one paragraph. But now I want to know a little more because before I start digging into numbers, I do kind of want to get a sense of whether I feel comfortable in this particular industry group, medical devices. I haven't owned a business in this area, so this is a little bit new, but I've definitely researched companies in this area. In particular, when your sister started doing surgery using intuitive surgical devices, the DaVinci, I dug into intuitive surgical and started to get a better idea about that industry. So I've got a little bit of experience digging into it here, and I don't feel totally uncomfortable. So I'm going over on their website to their business overview and um and it's one of the major major uh drop downs that they have there and they just start going down through it there they have a terumo interventional systems which is to expand the potential of vascular treatment to raise patient comfort. And one of the first things they show is how you can use their stuff to put a stent in by just going up through the artery and then in the wrist. So you can just, because they've got the right kind of product, you can do that without, you know, obviously used to be open heart surgery. And then it became going up through your groin, I guess. And now you can go through your wrist.
Speaker 2
So they're innovating. They're proud of that.
Speaker 1
Innovating, proud of it. And they got a whole lineup of devices that covers all of the process along with a big training program to use that. So you've got the introducer sheath and you've got the guy wires and you've got the angiographic catheter and you've got the vascular closer device and the drug eluding stent and the balloon catheter and the peripheral stent and the embolization coil system. I mean, it tells me that they are out to dominate this area. They want to sell the entire solution in this particular part of interventional medicine. Now, it doesn't tell me if their stuff is good, but it tells me that they've got a range of devices that cover all of the solution. So, you know, I'm just
Speaker 2
kind of putting that into my head. Yeah, exactly. What I hear, or if I were reading that, I would be going, okay, I don't know what that is. I don't know what that is. I don't know what that is. I kind of know what that is. That word is familiar, but basically I have no clue what they're talking about, mostly in this paragraph. That's okay. Do I like want to find out?
Speaker 1
want to yeah
Speaker 2
and you know what you may learn what those are i don't think it would be very hard you
Speaker 1
may not but i would because you know i'm at that age where i'm
Speaker 2
saying like that's the question is like do i want to do i want to to find this stuff out because maybe i'm so glad you pointed that out because
Speaker 1
as soon as I started reading this list of stuff, the reason I kept reading it is because that was interesting to me. And the reason it is, is because I've had all that stuff done to me, not the stints, but putting a camera up into your heart to look it over. At my age, you just got to go get the full cardiac evaluation and this is all the stuff that they used on my wrist while i was wide awake and i know i can call up piedmont hospital and say who provided that stuff that you used on me so that's immediately interesting it's
Speaker 2
like you have a connection to it i peanut butter.
Speaker 1
Yeah. Right there. So you guys, that's kind of the thing. And so from immediately right here, I'm already more interested in this than I was just trying to understand it as a guy that, you know, a company that made bags. And now they do imaging. They do interventional oncology where they deliver anti-cancer drugs directly to the organ that's affected. They do, that's one division. That's TIS division. All right. Can I understand this? I absolutely think so. I don't think this is rocket science. I think this is interesting to me at my age because I might be looking at any or all of these things down the road. And I would like very much to find out if these guys are what my local hospital providers use. And if not, why not? And if not, what
Speaker 2
is it? Yeah,
Speaker 1
who's doing their stuff? Who's better than Terumo and why? So already I can see the research on this being number one, interesting. Number two, doable, relatively easily. And those two things go together to make me absolutely interested in this. So I think next step is to do a little work on this thing. So
Speaker 2
I would frankly, completely ignore the numbers at this point, because I don't care. I want to find out if this is a great company and I'm interested in the area. I want to know what those words mean. So go for it. That would be my thinking, but you are much more numbers oriented than I am. So would you check the numbers or would you have to confess?
Speaker 1
I would check those numbers. Absolutely. Check
Speaker 2
the numbers before you ever read the paragraph. Let's be honest.
Speaker 1
I did. I did. And I liked the numbers. I went over to, I Googled Turumo investor relations. That's going to always get you to the investor page. Investor website, yeah. Right. So investor relations, because sometimes a retail company will have a page that doesn't show any investor data because they don't want their customers digging into it. So I did that and I looked at the numbers and they're very good at putting the numbers out on nice graphs because the numbers are very good. Everybody's happy to graph their numbers and make it real obvious what's going on if they're really good. And the numbers here are really good. And they do in fact show that 12 to 15% growth rate is consistent, lower in some of the recent revenue stuff, but higher in some of the net earning stuff. And so, yeah, the numbers look good. They're very steady. And I have suspicion if I ran this through our predictability charting, we would find it to be a pretty predictable company at a high score.
The battery manufacturing announcements have been coming one after another—a VW cathode facility in Canada; a Tesla factory in Mexico; a Ford battery plant in Michigan.
These companies hope to take advantage of the Inflation Reduction Act’s lucrative EV tax credits:
- Up to $3,750 for strategic minerals mined in the U.S. or its many free trade partner countries
- Up to $3,750 for battery components produced only in the U.S., Mexico, or Canada.
But there’s a catch. A whole bunch of intermediate battery products don’t fit neatly into either bucket. For example, lithium gets processed into precursor cathode active material before it becomes cathode active material, the powder that actually makes it onto the factory floor of a battery manufacturer. Battery electrolytes go through multiple processing steps, too.
Until last week, suppliers of these products were left wondering: Where should we manufacture to qualify? And for which credit?
Congress had left these details up to the Treasury Department, and on Friday regulators released guidance for these intermediate products, or “constituent materials.” The new rules pleased some and angered others.
So what do the changes mean for EV supply chains?
In this episode, Shayle talks to Sam Jaffe, our resident EV-supply-chain whisperer. He’s the vice president of Battery Storage Solutions at E Source. He’s come on the show before to talk about the holy grail of batteries and the basics of the IRA’s EV tax credits.
This time, Sam explains the new Treasury guidance.They cover topics like:
- Incentivizing domestic manufacturing while also giving auto companies the flexibility to qualify for credits
- Why Joe Manchin and European countries are upset about the new rules
- Japan’s last-minute free trade agreement before the rules came out
- How hard it will be for EV manufacturers to get qualifying constituent materials anytime soon, especially as they launch new mass market models
- What we still don’t know about how the Treasury will implement the IRA, including which countries or companies will qualify as “foreign entities of concern”
Recommended Resources:
- U.S. Treasury: Anticipated Direction of Forthcoming Proposed Guidance on Critical Mineral and Battery Component Value Calculations for the New Clean Vehicle Credit
- The New York Times: New Rules Will Make Many Electric Cars Ineligible for Tax Credits
- Politico: Bitter friends: Inside the summit aiming to heal EU-US trade rift
Catalyst is a co-production of Post Script Media and Canary Media.
Support for Catalyst comes from Climate Positive, a podcast by HASI, that features candid conversations with the leaders, innovators, and changemakers who are at the forefront of the transition to a sustainable economy. Listen and subscribe wherever you get your podcasts.
Catalyst is supported by Scale Microgrids, the distributed energy company dedicated to transforming the way modern energy infrastructure is designed, constructed, and financed. Distributed generation can be complex. Scale makes it easy. Learn more: scalemicrogrids.com.
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