Once a bustling site poised to power the electric vehicle revolution, a $2.6 billion battery factory under construction in Lansing, Mich., is now at a near standstill, its future frozen as economic headwinds slow their progress.
Electric vehicle battery maker Ultium Cells, a joint venture between General Motors and LG Energy Solution, suspended construction of its facility in July amid sluggish market conditions, namely high interest rates and concerns about demand for electric vehicles, according to the company. He intends to resume construction once he has a clearer understanding this perspectivean official from LG Energy Solution told The Korea Herald.
Uncertainty around interest rates is keeping many on hold projects that accumulate like water behind a damaccording to Richard Branch, chief economist at Dodge Construction Network. Those high rates are especially problematic for projects done in phases, such as multibillion-dollar electric vehicle plants, where owners must seek financing to complete each new phase of construction, said David Suchar, a partner at Maslon, a law firm. based in Minneapolis.
“Many, if not most, mega construction projects are experiencing some kind of delay these days,” said Suchar, who regularly represents construction clients. “At the heart of the delays is a combination of rising costs of building materials and borrowing costs due to high interest rates.”
For example, LG Energy Solution has been temporarily stopped part 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, a Vietnamese manufacturer of electric vehicles VinFast also delayed the first phase of $2 billion of its manufacturing plant until 2028, citing market volatility.
“If you have supply chain issues in one part of the project, that can cause delays in the project schedule,” Suchar said. “For projects planned in phases over several years with numerous trades involved, you can have a cascading effect.”
In addition, consumer demand for this type of car has been lower than expected. Growth rates around electric vehicle sales have slowed this year, according to data from the International Energy Agency. Car manufacturers around the world, like Ford and GMare cutting production plans amid this slowdown in demand.
Persistent supply chain issues
Supply chain challenges around key materials, such as lithium, cobalt and graphite, pushed up prices and made electric vehicles more difficult to manufacture, said Kari Beets, senior director of industry research from JLL, a Chicago-based real estate services firm.
The availability of energy, water, labor and land, which are often in competition with other megaprojects, also makes additional investments difficult, as do the unknowns of the political landscape during a presidential election year, he added.
Electric vehicle sales fall by 2024
Slowing demand caused growth rates to decelerate in the first quarter of this year.
“Uncertainty is still around EV manufacturing, especially with the upcoming election,” Beets said. “The electric vehicle industry remains dependent on incentives and credits.”
That creates problems for builders both in staffing and in the timing of long-term lead hiring, said Anthony Johnson, president of the industrial business unit at Clayco, a Chicago-based construction company. . Clayco is the general contractor for a number of manufacturing projects in the United States, including Rivian’s $5 billion electric vehicle plant in Stanton Springs, Georgia, Entek’s $1.5 billion electric vehicle plant in Terre Haute, Indiana, and the VinFast project in North Carolina.
“We’re forecasting some disruption, but also some positive impact on the pipeline this fall, for those same manufacturing companies, as we go through the cycle of an election year and the uncertainty that’s inherent in that process,” Johnson said. . The keys to mitigating these disruptions are customer communication, an efficient procurement strategy and optimizing resource deployment time, he said.
The reason it’s important is because those grunts can also trickle down to subcontractors and suppliers, causing performance issues and ultimately delays, said Jeffrey Gilmore, chairman of the construction practice at the Miami-based law firm Akerman.
“Lower-level subordinates, who can’t perform as expected, who can’t meet rigorous project schedules, who can’t raise what they need in terms of working capital to keep up with the growth of labor and other costs, that can then lead to delays,” Gilmore said.
Risk management
Construction contracts for megaprojects increasingly include escalation clauses to handle price increases, Suchar said. For example, contractors may agree to limit the cost of any increase or allow the contract to be terminated if the price of materials rises above a certain amount.
These types of clauses weren’t typically found in standard contracts used in the construction industry before the COVID-19 pandemic, so they typically have to be negotiated, he added.
“Generally, they give the contractor the right to additional compensation if the price of a material changes by a fixed percentage from the expected cost, usually tied to some index,” Suchar said. “This allows the contractor, who often assumes a large amount of risk for the project budget, to shift the risk of material price increases back to the owner.”
Ultimately, these protections allow contractors to navigate periods of uncertainty with more confidence, Gilmore said.
“Of course, there’s the question of whether the owner has the means to pay those increased costs — that’s where you also see the potential exercise of a suspension or termination for convenience,” Gilmore said. “The last step that will be taken to avoid unforeseen cost growth or changes in market conditions.”
While the market is waiting for new changes, in the form of the expected interest rate cuts – Ultium Cells has said it plans to end it resume construction at 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 when these larger megaprojects started years ago,” Suchar said. “When the project is sufficiently advanced and all parties consider the interest of timely completion, a more practical approach is to renegotiate some terms or agree to change orders with the intention of doing the project.”
