EV tax rules lift Magna Steyr's hopes for U.S. production

Magna Steyr, the Austrian contract vehicle manufacturer, sees a big opportunity cracking open to finally expand its business model to North America.

Automakers large and small are hot to put new EV models on the U.S. market. The problem for many of them is the EV tax credit rules laid down last year by the U.S. government. Among other things, the Inflation Reduction Act stipulates that for a vehicle to qualify for the federal $7,500 tax credit (all figures in USD), it must be assembled in North America.

And therein lies Magna Steyr's opportunity to set up auto assembly operations in the United States.

Magna Steyr's interest is nothing new. For years, leaders at its corporate parent, the diversified Canadian parts supplier, Magna International, have been open about wanting to expand the company's production-for-hire footprint beyond the plant in Graz, Austria, and, more recently, a joint venture in China with BAIC Group. Speculation has simmered about whether it might build a vehicle for Apple if the tech giant takes a plunge into car design.

But the passage of the Inflation Reduction Act and the rapidly growing market for EVs have breathed new life into Magna Steyr's North American hopes, said Roland Prettner, the business unit's interim president.

"We're working with a number of customers on ideas to help them in North America," Prettner said. "We have a team looking at selecting sites, looking at options, working on layouts and offering different solutions for customers on how we can help them manufacture a vehicle in North America."

Prettner said the company is exploring potential areas in various regions of the country but declined to name specific locations. He said Magna Steyr would want a new assembly plant to be an environmentally friendly, state-of-the-art facility.

"I believe when it comes to complete vehicles that you should build them where you sell them," Prettner said. "The U.S. is a big market, and it will need some companies like us to produce new electric vehicles."

Selling the idea to customers is slow going.

Magna Steyr missed out on potential business in February when Volkswagen Group said it had decided to build its own assembly plant in South Carolina for its upcoming EV brand Scout instead of working with an outside assembler. Automotive News Canada sibling publication Automobilwoche reported last year that VW was in talks with Magna Steyr, and also with Foxconn, about outsourcing Scout manufacturing here.

That leaves Magna still looking for a customer — or multiple customers — with orders large enough to justify constructing and staffing a new factory for ongoing business.

That's easier said than done, said Tom Narayan, an analyst with RBC Capital Markets. Legacy automakers have turned to Magna Steyr in the past, including Mercedes-Benz, BMW, Toyota, Jaguar, VW, Audi and Jeep. But automakers might be hesitant to outsource unproven models to a contract manufacturer.

"I'm not sure it'd make a lot of sense for them, given the shift to EVs and the fact that many of them are making their own dedicated platforms for them," he said.

That could leave Magna Steyr to work with EV startups and other new market players. It's a strategy the company is pursuing in Graz, where it has contracted to build the Ocean SUV for EV startup Fisker.

To new EV makers with less capital to spare than the major automakers, Magna Steyr is pitching itself as a one-stop shop for engineering and manufacturing. In that strategy, aspiring EV entrants and smaller-volume manufacturers could rely on Magna to help get their vehicles to market sooner, without needing enormous amounts of capital to build those internal capabilities.

"We have complete vehicle know-how [and] technical know-how," Prettner said. "We have access to the entire supply base because of that."

It remains unclear how lucrative a strategy of relying on smaller EV makers could be for Magna, Narayan said. Those companies might look for Magna to absorb a portion of their startup costs, eating into the supplier's profitability. And some could find themselves struggling both to gain share in an increasingly crowded EV market and to raise capital as interest rates rise, Narayan said.

"They have to really absorb a lot of the costs, and it won't be super profitable," he said of Magna Steyr. "I'm not sure how they'll get business, especially from a legacy OEM."

As Magna Steyr makes its pitch for North America, it's in the midst of its own electrification transformation in Austria. The Graz plant builds a mix of internal combustion engine, hybrid and electric vehicles, but that lineup is expected to tilt heavily toward EVs in the coming years.

The early days of that shift are weighing on the unit's financial results, much as they are weighing down profits for legacy automakers. In the fourth quarter of 2022, Magna International sales revenue dropped 12 per cent from a year earlier to $1.33 billion. Magna Steyr built about 27,000 vehicles in that span, down from 32,700 a year earlier.

The business unit expects its sales revenue to continue shrinking. In its latest outlook, Magna said it expects its complete vehicle business to generate sales of between $4 billion and $4.5 billion in 2025, down from an estimate of between $4.9 billion and $5.2 billion for this year.

That stands in contrast to the supplier's other business units, which are expected to grow at a compounded annual rate of six to 10 per cent from 2022 to 2025.

"It becomes a declining percentage of Magna's total sales," Narayan said. "It's not a huge driver for the overall business."

But Prettner said lower volumes are to be expected as the company turns over old programs and as new ones begin.

"There's a period where you have lower volumes as a result," he said. "But we're not planning to adjust our capacity or anything. We'll remain in the range where we can produce between 100,000 and 150,000 vehicles in our plant, and we have a plan for that."

With or without a new factory in the United States.