January 4, 2023 • Posted in Market Insights

Inflation Reduction Act Will Spark North American Manufacturing Renaissance

Enacted in August 2022, the U.S. Inflation Reduction Act (IRA) is expected to create a more favorable environment for U.S. manufacturing for years to come. Including nearly $500 billion in new spending and tax breaks, the IRA is set to catalyze the clean energy transition, increase tax revenues and reduce healthcare costs. The act aims to boost domestic manufacturing capacity with targeted funding to jump-start research and development (R&D) efforts and encourage manufacturers’ use of domestically sourced materials.

The IRA represents the most significant government spending in decades on U.S. physical infrastructure and climate investments. “Along with recent legislation like the CHIPS & Science Act and Bipartisan Infrastructure Law, the IRA is creating a renaissance for North American manufacturing,” said Dwight Morgan, Executive Vice President of Corporate Development at M. Holland. “The IRA is the latest in a line of legislation passed since 2020 that focuses on stimulating growth in the U.S. economy with increased innovation and industrial productivity.”

What’s in the IRA?

According to Dwight, the IRA is a bit of a misnomer. “It’s really a climate bill with some additional tax and healthcare benefits,” he explained. The bill began as an effort to reduce U.S. greenhouse gas (GHG) emissions by 2030. Despite the name, the IRA’s main purpose is to enable businesses and consumers to adopt more climate-friendly practices.

A nearly $400 billion investment in clean energy will transform the American energy and transportation sectors. The areas of clean electricity and transmission will receive the most funding, followed by clean transportation, including electric vehicle (EV) incentives. Tax credits for solar panels, heat pumps, energy-efficient appliances and EVs will make clean energy and transportation affordable to an increasing number of Americans. The IRA establishes tax breaks to incentivize U.S. manufacturing to meet the expected increase in demand for affected products.

While climate is the focus of the legislation and will see the greatest impact, the act will also help to reduce inflation. The Congressional Budget Office estimates it will decrease the deficit by more than $237 billion over the next decade, stimulating economic growth and helping to fight inflation. Additional provisions in the healthcare sector will lower the cost of prescription drugs and extend subsidies for insurance care premiums through 2025.

How Will the IRA Impact Plastics?

There are no direct provisions included in the IRA for plastics. Still, the act will stimulate American manufacturing, encourage the expansion of domestic supply chains and create millions of jobs.

“Targeted investments are creating a very favorable environment for new manufacturing,” Dwight said. “The IRA is accelerating trends that were already underway relating to energy and the electrification of the globe as we move away from fossil fuels and deal with dangerous emissions.”

Corporations can benefit from an estimated $216 billion worth of tax credits designed to generate private investment in clean energy, transportation and manufacturing. Consumer incentives totaling around $43 billion will make EVs, solar panels, geothermal heating, home batteries and energy-efficient appliances more affordable. Together, the investments will create the ideal environment to produce and consume climate-friendly technology.

“Anyone making plastics related to electrification and improving sustainability is going to benefit from the IRA’s tailwinds, despite existing recessionary pressures that may stall things for the next 12 months,” Dwight said. He explained that M. Holland is already seeing growth related to the increased demand, especially in its Automotive, Electrical & Electronics and Wire & Cable markets.

Growth in these markets will likely continue for the foreseeable future. The IRA incentives make the U.S. a preferred location for manufacturers to take advantage of continued growth. As a result, new factories and foreign entrants are reshoring manufacturing operations. The legislation’s domestic procurement and production requirements ensure material sourcing and supply chains stay local. All this localization will create over 9 million jobs in the next decade, some of which will be in the plastics industry.

What Happens Now?

The impacts of the IRA will span years into the future. There is no predicting the extent of its reach, but Dwight expects these four trends to influence the plastics industry directly:

  1. Job Creation: The IRA’s domestic manufacturing provisions will create millions of new jobs in the plastics industry. “The number of available employees will govern how quickly we can reshore manufacturing and bring supply chains home,” Dwight said. “Recent immigration limitations and older people leaving the workforce have created a worker shortage that will need to be addressed to see the full effect of the IRA.”

Employers must prioritize training and retraining efforts to fill these jobs as available positions exceed available employees. The IRA incentivizes employers to assist in building more diverse science, engineering and math talent pipelines by offering the full value of available tax credits to employers only if they meet prevailing wage and apprenticeship requirements.

  1. New Entrants and Non-Traditional Customers: The IRA is attracting a slew of new entrants into the U.S. manufacturing industry. Existing foreign producers, especially from Europe and Asia, are moving operations to the U.S. to take advantage of more stable trade routes and supply availability. Established technology companies are expanding into new areas, and new businesses are springing up to take advantage of IRA-related incentives.

“There is a great opportunity for suppliers and manufacturers to expand their existing idea of a target customer,” Dwight said. “Companies that look beyond their usual sales base will find entry points to work with new companies in so-far undiscovered ways.”

  1. Education-Driven Sales: Going forward, education will be a key component of securing new business in the plastics industry. “The onus is on our industry to educate new players on how plastics fit into their goals and help determine which products and materials will meet their specifications,” Dwight said. He cited new entrants in the automotive industry, such as EV startups and tech companies, as examples.

“Companies entering the industry aren’t the only ones that have things to learn,” he continued. “It’s important to educate your sales and business development teams to break the status quo of traditionally relevant customers and identify new opportunities in emerging markets.”

  1. New Materials and Applications: Identifying new opportunities will be a group effort. Plastic suppliers should work closely with manufacturers to create the materials and applications to support new technology development.

“Petrochemical and resin companies are spending their R&D dollars differently to move into new areas,” Dwight said. “As technology and products evolve, collaboration between suppliers and manufacturers will increase the effectiveness and profitability of both.”

M. Holland helps connect suppliers and manufacturers in finding mutually beneficial materials and technical solutions. Our team of experts can help companies explore plastics-related opportunities enabled by the IRA. Visit mholland.com/our-markets to learn more.

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