(WSJ) Chinese battery makers key to electric vehicles are striking deals with the U.S. free trade partners South Korea and Morocco, seeking to exploit growing demand in America and skirt rules aimed at excluding them from the market.
Chinese companies that supply raw materials to make electric vehicle batteries have announced at least nine joint ventures and investments worth more than $4.5 billion in South Korea this year, according to a review of stock market filings. Wall Street Journal.
At least four Chinese companies have announced plans to build factories in Morocco producing battery-related products. Morocco has more than 70% of the world’s known reserves of phosphate, an essential raw material for electric vehicle batteries.
By working in both countries, Chinese suppliers hope to supply auto and battery makers eligible for incentives granted by the $430 billion Inflation Reduction Act, which rewards companies that source materials at the level nationally or with free trade partners.
For the next two years, the new law excludes battery contents and critical materials from so-called “foreign entities of concern,” a provision that industry experts say is intended to minimize China’s involvement in the US electric vehicle supply chain.
Analysts say Chinese suppliers hope such joint ventures will allow customers to continue sourcing from them while benefiting from incentives, offsetting more than a tenth of the cost of an average electric vehicle.
“The Chinese don’t have much choice,” said Johan Bracht, an analyst at McKinsey.
An executive at Shenzhen, China-based GEM said its partnership with a South Korean company would help the raw materials refiner meet IRA conditions and help the company tap demand for electric vehicles at worldwide.
“We will not abandon the US market,” said Pan Hua, deputy general manager of GEM. “The United States also cannot completely exclude Chinese suppliers from its market, because much of the upstream supply chain is concentrated in China. »
GEM announced in March that it would collectively invest up to $900 million with South Korean companies SK On and EcoPro Materials to build a precursor factory in South Korea by the end of 2024.
SK On, an electric vehicle battery maker whose partners include Ford and Hyundai, has two factories in the United States and plans to build four more.
South Korean electric vehicle suppliers benefit from partnerships with Chinese companies to access key materials and processing expertise, according to industry experts.
Other Chinese suppliers mention in public statements that their Korean joint ventures would help them expand internationally, with several citing the United States and Europe as target markets.
Chinese battery makers have long eyed an expansion into the United States, the world’s second-largest auto market behind China, and the money offered by the IRA has accelerated their timetable for activity there. At the same time, intense competition and overcapacity issues in China are also pushing companies to seek opportunities overseas.
Analysts say an unpredictable element is that US authorities have not defined what constitutes a “foreign entity of concern” in the IRA. The United States has not defined what level of Chinese involvement or at what point in the supply chain it is acceptable for auto and battery producers to qualify for tax credits, they say.
That uncertainty means there is a risk that such joint ventures may ultimately fail to benefit from incentives, said Chris Berry, founder of energy metals consulting firm House Mountain Partners. “To what extent China can get involved in different parts of the supply chain is an open question,” Berry said.
China’s role as an indirect beneficiary of the IRA has come under scrutiny from American politicians.
Ford last month suspended a $3.5 billion plant making electric vehicle batteries with Chinese battery giant Contemporary Amperex Technology Co., or CATL, in Michigan. The move follows months of pressure from top lawmakers in Washington over its Chinese partner.
Ford said it was suspending work until the company was confident it could operate the plant competitively.
The strangulation of the Chinese supply chain
Chinese companies are the world’s largest producers of the four key components needed to produce electric vehicle batteries: cathodes, anodes, electrolytes and separators, according to industry analyst SNE Research.
The country has much of the capacity needed to refine metals such as lithium, cobalt and manganese to make them suitable for battery production, said Lukasz Bednarski, research analyst at S&P Global.
As a result, it is difficult for the United States and Europe to build an independent electric vehicle battery supply chain without help from China, at least in the short term, Bednarski added.
Three of China’s largest battery materials suppliers – GEM, Huayou Cobalt and CNGR Advanced Materials – have been the most active in signing such cross-border deals, citing growing global investment restrictions against China as reasons to cooperate.
Many recently formed Chinese partnerships with South Korean and Moroccan companies produce precursors, a mixture of metals needed to make cathodes, a key component of batteries. Batteries are the most expensive component of an electric vehicle, accounting for around 40% of the car’s cost.
Huayou Cobalt, based in Zhejiang, China, has formed partnerships with the battery subsidiary of South Korean titans Posco Holdings and LG Chem to build factories in South Korea this year, while CNGR, based in Guizhou, is partnering with Posco and its subsidiary to invest $1.13 billion to build two factories in the country.
In Morocco, LG Chem announced last month that it would partner with Huayou Cobalt and its parent company to build lithium refining and cathode materials plants, joining CNGR and Chinese lithium producer Sichuan Yahua Industrial, which have partnerships there to produce materials for electric vehicle batteries.
Huayou Cobalt, Sichuan Yahua, LG Chem and Posco did not respond to requests for comment. CNGR reiterated its public statement that the deal would contribute to the company’s global expansion.
Chinese and South Korean companies are preparing for the possibility that these joint ventures will not be considered IRA-compliant.
Posco Future M, the Posco subsidiary with Chinese partnerships, said the company would amend its joint venture agreements to reduce the participation of Chinese partners, if their partnership did not meet IRA requirements. The company said it also sources raw materials from countries such as Indonesia, the Philippines and Australia to move away from China’s influence.
CNGR said in a stock market statement that the company and its partner could sell shares in the business, in the event of a major change in laws and policies. GEM’s Pan said the company was preparing for adverse rule changes by avoiding having a majority stake in any joint venture in South Korea.
“When we develop production bases, we will bring in foreign partners to reduce our risks,” he said. “Yet if anyone is considering completely separating themselves from the Chinese supply chain right now, it’s simply not possible.”
Source: Wall Street Journal by Rachel Liang and Liza Lin Updated October 12, 2023 at 12:03 a.m. ET
Published in the print edition of October 13, 2023 under the title “Chinese electric vehicle suppliers seek to bypass US borders”.