Market challenges force owners to hit the brakes on EV projects

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Once a bustling site poised to power the electric vehicle revolution, a $2.6 billion battery factory under construction in Lansing, Michigan, now sits at a near standstill, its future frozen as economic headwinds stall its progress.

EV battery maker Ultium Cells, a joint venture between General Motors and LG Energy Solution, placed construction of its facility on hold in July amid sluggish market conditions, namely high interest rates and concerns around EV demand, according to the company. It intends to resume construction once it has a clearer understanding of this outlook, an official from LG Energy Solution told The Korea Herald.

Uncertainty around interest rates is causing many on-hold projects to pile up like water behind a dam, according to Richard Branch, chief economist for Dodge Construction Network. These high rates are especially problematic for projects done in phases, like multibillion-dollar EV plants, where owners need to seek funding to complete each new phase of construction, said David Suchar, a partner at Maslon, a Minneapolis-based law firm.

“Many, if not most, construction megaprojects are undergoing some form of delay these days,” said Suchar, who regularly represents clients in construction. “At the center of the delays are a combination of increased construction material costs and borrowing costs due to high interest rates.”

For example, LG Energy Solution temporarily paused a portion of its $5.5 billion battery manufacturing complex in Queen Creek, Arizona, earlier this summer due to market conditions, according to a company statement shared with Construction Dive. Around the same time in New Hill, North Carolina, Vietnamese EV maker VinFast also delayed the first $2 billion phase of its manufacturing plant until 2028, citing market volatility.

“If you have supply chain issues on one part of the project, that can lead to delays in the project schedule,” said Suchar. “For projects planned in phases over several years with numerous trades involved, you can have a cascading effect.”

In addition, consumer demand for these types of cars has been less than expected. Growth rates around EV sales have decelerated this year, according to data from the International Energy Agency. Carmakers across the board, such as Ford and GM, are slashing production plans amid this demand slowdown.

Lingering supply chain issues

Supply chain challenges around key materials, such as lithium, cobalt and graphite, drove up prices and made EVs more difficult to manufacture, said Kari Beets, senior manager of industries research at JLL, a Chicago-based real estate services company.

The availability of power, water, labor and land, which are often all in competition with other megaprojects, is also making further investments challenging, as are the unknowns of the political landscape during a presidential election year, she added.

“Uncertainty still looms around EV manufacturing, especially with the upcoming election,” said Beets. “The EV industry still remains reliant on incentives and credits.”

That creates issues for builders in both staffing placement and timing of long lead procurement, said Anthony Johnson, president of the industrial business unit at Clayco, a Chicago-based construction firm. Clayco is the general contractor on a number of manufacturing projects across the United States, such as Rivian’s $5 billion EV plant in Stanton Springs, Georgia, Entek’s $1.5 billion EV plant in Terre Haute, Indiana, and VinFast’s project in North Carolina.

“We are forecasting some disruption, but also some positive impact in the project pipeline this fall, for these same manufacturing companies, as we go through the cycle of an election year and the uncertainty that is inherent in that process,” said Johnson. Keys to mitigating those disruptions are communicating with clients, an efficient procurement strategy and optimizing the timing of resource deployment, he said.

The reason that’s important is because those snarls can trickle down to subcontractors and suppliers as well, leading to performance issues and ultimately delays, said Jeffrey Gilmore, chair of the construction practice at Miami-based law firm Akerman.

“Lower-tier subs, who can’t perform as expected, who can’t meet rigorous project schedules, who can’t muster what they need in terms of working capital to stay up with the growth in labor and other costs — that can then lead to delays,” Gilmore said.

Managing risks

Megaproject construction contracts increasingly include escalation clauses to handle price increases, said Suchar. For example, contractors may agree to cap the cost of any increase or to allow for termination of the contract if the price of materials increases over a certain amount.

These types of clauses were not typically found in the standard form contracts used across the construction industry prior to the COVID-19 pandemic, so they usually have to be negotiated in, he added.

“They usually grant the contractor the right to additional compensation if the price of a material changes by some fixed percentage from expected cost, usually tied to some index,” said Suchar. “This allows the contractor, who often takes on a great deal of risk for the project budget, to shift the risk of material price increases back to the owner.”

These protections ultimately allow contractors to navigate periods of uncertainty with more confidence, said Gilmore.

“Of course, there’s the question of whether the owner has the wherewithal to pay for those growing costs — that’s where you see the potential exercise of a suspension, or termination for convenience, as well,” said Gilmore. “The last step that will be taken in order to avoid unforeseen cost growth or changes in market conditions.”

As the market waits for further changes — in the form of hoped-for interest rate cuts — Ultium Cells has said it plans to eventually resume construction on its $2.6 billion project in Lansing, Michigan.

Similarly, LG Energy Solutions remains committed to completing its $5.5 billion Arizona facility while VinFast expects to restart construction on its $2 billion production plant in North Carolina in 2028.

“Parties are often much more attuned to these issues in 2024 than they were when these larger megaprojects began years ago,” said Suchar. “Where the project is far enough along and all parties have the interest of timely completion in mind, a more practical approach is to renegotiate some terms or agree to change orders with an eye toward getting the project done.”

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