[Initial Insight] The Butterfly Effect Triggered by the Inflation Reduction Act (IRA)

The term "butterfly effect" originates from a meteorological concept suggesting that the flap of a butterfly's wings can trigger a typhoon. It means that a small change can have a massive impact on the whole. The Inflation Reduction Act (IRA) implemented by the United States to alleviate the public's burden caused by inflation through subsidies (tax incentives) has triggered an unforeseen butterfly effect.

The U.S. included a strategy in the IRA to curb inflation while restructuring supply chains centered on its own country. By offering tax incentives, it aimed to attract advanced industries and reclaim "Made in USA." Companies worldwide invested in the U.S. to benefit from the IRA. As a result, simultaneous facility investments sprouted like mushrooms after rain.

Korean companies also joined this trend. Since the Biden administration took office, Korean companies have confirmed investments in the U.S. totaling $55.5 billion, approximately 72 trillion won. The White House proudly stated, "Foreign direct investment in U.S. manufacturing has nearly doubled compared to before the pandemic," and "Asia-Pacific region companies have invested nearly $200 billion (259 trillion won)." More than a quarter of that amount belongs to Korean companies.

As companies rushed to build factories in the U.S., the real beneficiaries were the American construction industry. Construction demand exceeded supply, triggering increases in construction material costs and wages for construction workers. An executive from a company I met during a recent business trip to the U.S. remarked, "Since the IRA was implemented, factory construction has increased nationwide, making it as difficult to find not only people but also construction equipment as picking stars from the sky."

With factories established and jobs increasing, finding production workers became even more difficult. This led to wage increases for production workers. Hyundai Motor's U.S. subsidiary agreed to raise production worker wages by 25% at its Alabama and Georgia plants by 2028. The U.S. "Big 3" automakers?General Motors (GM), Ford, and Stellantis?also accepted the wage increase proposal from the United Auto Workers (UAW) union last month. Battery companies faced similar situations.

The wind that started with the IRA also blew strongly through the domestic nuclear power industry. There is controversy over the feasibility of small modular reactors (SMRs), which are attracting attention as next-generation nuclear power plants. The first SMR project in the U.S., the Carbon-Free Power Project (CFPP) in Utah led by NuScale Power, was canceled. NuScale Power is known to be a company in which Korean firms, including Doosan and IBK Investment & Securities, hold about 33.4 million shares (64% of common stock).

The direct reason NuScale Power abandoned the CFPP was the failure to find buyers for the electricity produced by the SMR. This was also due to increased project costs. NuScale Power had stated in 2021 that it could supply electricity at $58 per megawatt-hour, but this cost recently surged 53% to $89. Upon learning this, a Korean civic group questioned the feasibility of the SMR project, and the opposition party cut the entire SMR budget planned during the Moon Jae-in administration.

Encountering unexpected crises during business operations is common. New businesses with high uncertainty, like SMRs, bear even greater risks. Companies seek growth opportunities through risk-taking. We must not hinder but rather help overcome crises. If the choices we make today bring about crises in the future, who will take responsibility?