How Australian lithium helped Tesla make Model 3 cheaper than Toyota Camry

Oct 02, 2023

Australian lithium content in batteries that are made in the US and China may be a major factor behind the recent news that all three US Tesla Model 3 variants now qualify for the full $7,500 US IRA electric vehicle tax credit.

While the Model 3 Performance already qualified for full $7,500 credit, until recently the more affordable Standard Range and Long Range variants only qualified for half that amount. Analysts have speculated how Tesla managed to restructure its supply chain so that all models now qualify. Australian lithium may be a major factor.

The IRA EV tax credit scheme consists of two parts. If 50% of the value of battery components were produced or assembled in North America the EV qualifies for $3,750. If 40% of the value of critical minerals are also sourced in the US or a US FTA (Free Trade Agreement) country, the EV qualifies for the full $7,500.

In May a comprehensive report on global EV supply chains from Morgan Stanley showed that around 50% of the word's lithium used in EV batteries comes from Australia.

Morgan Stanley says that in 2022, 94% of Australian lithium was allocated to China for battery making.

This means it's highly likely that a large portion of the lithium going into CATL battery cells manufactured in China is coming from Australia. CATL is a major supplier of batteries for the US made Tesla Model 3.

According to the IRA regulation guidelines, car makers "could average the qualifying critical mineral content calculation over a limited period of time (for example, a year, quarter, or month) with respect to vehicles from the same model line, plant, class, or some combination of thereof."

In a recent market update paper this week Morgan Stanley posited that the reason Tesla now qualifies for all Model 3 variants may be because it's producing enough models at its Fremont factory that it can offset the other models which have batteries sourced from CATL in China.

However there may be another reason.

If the majority of lithium in CATL battery cells produced in China is coming from Australia, those cells could theoretically qualify under the IRA guidelines for the second part of the tax credit. CATL battery cells are then sent to Tesla factories in the US where they are assembled into full battery packs helping bump up the local US manufacturing content.

Canadian Tesla sales are now coming from China meaning the vast majority of Tesla's US production is destined for the US market, optimising the supply chain further for IRA guidelines.

If CATL's Australian lithium content is indeed a factor, the IRA is actually incentivising Chinese battery makers to source their lithium from Australia so they can continue suppling Tesla while still qualifying for the US EV tax credits.

EV YouTuber Sam Evens, AKA The Electric Viking, thinks this is how Tesla is doing it.

Tesla's entry level Model 3 qualifying for the full $7,500 IRA EV tax credit is an absolute game changer for EV uptake in the US which is the world's second largest car market.

With the entry level Standard Range Model 3 starting at $US40,240, the full federal tax credit now brings its price down to $32,740. Adding in California's $7,500 Clean Car Rebate takes the purchase price down further to just $25,240.

This is cheaper than an entry level Toyota Camry which starts at $26,320.

In California around 1.8 million vehicles were sold in 2022 putting the state in the top 10 largest markets in the world (if it was a country). 18.8% of all new cars sold last year in California were ZEVs, according to the California Energy Commission.

With a Tesla Model 3 now cheaper to buy than a Toyota Camry in California, EV uptake is now set to surge even higher as ditching ICE vehicles becomes a complete no brainer and Australian lithium might be the key ingredient.

Daniel Bleakley is a clean technology researcher and advocate with a background in engineering and business. He has a strong interest in electric vehicles, renewable energy, manufacturing and public policy.