Chinese battery companies critical to electric vehicles are pursuing deals with U.S. free-trade partners South Korea and Morocco, seeking to tap growing demand in America and bypass rules aimed at shutting them out of the market.
Chinese businesses that supply raw materials to make EV batteries have announced at least nine joint ventures and investments worth more than $4.5 billion in South Korea this year, according to a Wall Street Journal review of stock exchange filings.
At least four Chinese firms said they plan to build plants in Morocco producing battery-related products. Morocco sits on over 70% of the world’s known phosphate reserve, a raw material key to EV batteries.
By working out of the two countries, the Chinese suppliers hope to supply car and battery makers eligible for incentives doled out by the $430 billion Inflation Reduction Act, which rewards businesses that source materials domestically or from free-trade partners.
Over the next two years, the new law shuts out battery content and critical materials from so-called “foreign entities of concern,” a provision industry experts say is targeted at minimizing China’s involvement in America’s EV supply chain.
Analysts say Chinese suppliers hope such joint ventures will allow customers to continue sourcing from them and still access incentives, which offsets more than one-tenth the cost of an average EV.
“The Chinese don’t have much choice,” said Johan Bracht, a McKinsey analyst.
An executive at Shenzhen, China-based GEM said its partnership with a South Korean firm would help the raw material refiner meet IRA conditions and help the firm tap demand for EVs globally.
“We won’t give up on the U.S. market,” said Pan Hua, deputy general manager at GEM. “The U.S. can’t completely shut out Chinese suppliers from its market either, as much of the upstream supply chain is concentrated in China.”
GEM said in March that it would collectively invest up to $900 million with South Korean companies SK On and EcoPro Materials to build a precursor plant in South Korea by the end of 2024.
SK On, an EV battery maker whose partners include Ford and Hyundai, has two factories in the U.S. and plans to build four more.
South Korea EV suppliers benefit from partnering with Chinese firms to access key materials and expertise in processing, industry experts say.
China’s dominance over key battery materials in 2022Source: SNE ResearchNote: Measured by production output.ChinaKoreaJapanOthersAnodeCathodeElectrolyteSeparator0%255075100Other Chinese suppliers mention in public statements their Korean joint ventures would help them expand internationally, with several listing the U.S. and Europe as target markets.
Chinese battery companies have long eyed expansion in the U.S., the world’s second-largest auto market behind China, and the money offered by the IRA accelerated their timeline of doing business there. At the same time, intense competition and overcapacity challenges in China are also driving firms to seek opportunities overseas.
Analysts say one wild card is that U.S. authorities haven’t defined what constitutes a “foreign entity of concern” in the IRA. The U.S. hasn’t defined what level of Chinese involvement and at what stage of the supply chain is acceptable for auto and battery producers to qualify for tax credits, they say.
This uncertainty means there is a risk that such joint ventures could ultimately be barred from receiving incentives, said Chris Berry, founder of energy metals consulting firm House Mountain Partners. “How involved China can be with different parts of the supply chain is an open question,” Berry said.
China’s role as indirect beneficiary of the IRA has come under scrutiny by American politicians. Ford last month put on hold a $3.5 billion plant making EV batteries with Chinese battery giant Contemporary Amperex Technology Co., or CATL, in Michigan. The move followed months of pressure from key lawmakers in Washington about its Chinese partner.
Ford said it was pausing work there until the company was confident about operating the plant competitively.
China’s supply chain chokehold
Chinese companies are the world’s biggest producers of the four key components needed in EV battery production—cathodes, anodes, electrolytes and separators, according to industry analyst SNE Research.
The country has a chokehold over much of the capacity needed to refine metals such as lithium, cobalt and manganese to make them suitable for battery production, said Lukasz Bednarski, a research analyst at S&P Global.
As a result, it is difficult for the U.S. and Europe to build an independent EV battery supply chain without China’s help, at least in the near term, Bednarski added.
Three of the largest battery materials suppliers in China—GEM, Huayou Cobalt, and CNGR Advanced Materials—have been the most active signing such cross-border deals, citing growing global investment restrictions against China as reasons for cooperation.
Many of the newly formed Chinese partnerships with South Korean and Moroccan firms produce precursors, a mix of metals required for making cathodes, a key component of batteries. Batteries are the most expensive component of an EV, accounting for about 40% of the cost of the car.
Zhejiang, China-based Huayou Cobalt has formed partnerships with the battery subsidiary of South Korean business titans, Posco Holdings and LG Chem to build plants in South Korea this year, while Guizhou-based CNGR joined with Posco and its subsidiary to invest $1.13 billion to build two factories in the nation.
In Morocco, LG Chem last month said it would join 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 EV batteries.
Huayou Cobalt, Sichuan Yahua, LG Chem and Posco didn’t respond to requests for comment. CNGR reiterated a public statement that the deal will help the company’s global expansion.
Chinese and South Korean companies are bracing for the possibility that these joint ventures wouldn’t be deemed as IRA-compliant.
Posco Future M, the Posco subsidiary with Chinese partnerships, has said the company will modify their joint venture agreements to reduce the stake of Chinese partners, should their partnership fall short of IRA requirements. The company said it is also sourcing raw material from countries such as Indonesia, the Philippines and Australia to move away from the influence of China.
CNGR said in a stock exchange statement that the firm and its partner may sell shares in the venture, in the event of a major change of laws and policies. GEM’s Pan said the company is preparing for unfavorable rule changes by avoiding majority ownership in any joint venture in South Korea.
“When we develop production bases, we will bring in overseas partners to lower our risk,” he said. “Still, if anyone plans to completely disentangle itself from the China supply chain now, it’s just not possible.”