Chinese electric vehicle (EV) battery giant Contemporary Amperex Technology Co., Limited (CATL) has accepted the invitation from the U.S. carmaker Ford to cooperate and will provide preparatory and operational services for Ford Motor's battery plant in Michigan as well as license its patented battery technology. This business model combines CATL-licensed technology with processing at Ford's own plants, most likely lithium iron phosphate (LFP) plants. On the one hand, CATL's partnership with Ford deals with the challenges brought by the Inflation Reduction Act (IRA). On the other hand, it demonstrates the technical strength of CATL and offers the company the potential for long-term growth.
In this report, we will further discuss the restrictions that the IRA has imposed on Chinese battery makers and how Chinese battery makers handle these challenges.
According to Marklines, an auto industry data provider, the global new energy vehicle (NEV) penetration rate averaged about 12% in 2022, with both China and Europe logging NEV penetration above 20% and that of the United States relatively stable at around 7%. If the EV penetration rate is lower than 10%, the policy stimulus will have the most apparent impact on EV sales. Therefore, the implementation of the IRA will greatly boost the U.S. EV market.
Figure 1-1: Penetration rates of NEVs in major countries in 2022
Sources: Marklines and Mysteel
As shown in Figure 1-2, NEV sales in the U.S. totaled nearly 1 million units in 2022, surging 57.6% year on year and presenting another sales boom after the sales first exceeded 630,000 units in 2021, as compared with flat sales of some 350,000 units during 2018-2020.
Figure 1-3 shows that the U.S. EV sales were about 4.28 times its PHEV sales in 2022, mainly because Tesla dominated the U.S. EV market with sales motoring ahead, accounting for about two-thirds of the country's total EV sales. The top 10 best-selling EVs in the U.S. were the Tesla Model Y, Tesla Model 3, Ford Mustang Mach-E, Tesla Model S, Tesla Model X, Hyundai IONIQ 5, Kia EV6, Nissan LEAF, Kia Niro EV, and Polestar 2, four of which were from Tesla. The top 10 NEV makers in the US in terms of sales were Tesla, Ford, Chevy, Jeep, BMW, Kia, Hyundai, Volkswagen, Rivian, and Volvo.
Figure 1-2: NEV sales in the U.S.
Sources: Marklines and Mysteel
Figure 1-3: Market share of NEVs in the U.S. (by technology)
Sources: Marklines and Mysteel
In contrast to China's withdrawal and Europe's gradual phasing out of subsidies on NEV purchases, the United States has just started providing such subsidies. With the U.S. NEV subsidy regulation taking effect in 2023, it will greatly excite local NEV producers and win over consumers, thus enabling the country to keep up with Europe in NEV sales.
Although the IRA has local sourcing and manufacturing requirements on critical minerals and battery components, the scope and scale of its subsidies are larger compared with the previous tax credit policy. Also, the IRA has lifted the 200,000-vehicle cap for NEV makers, allowing those that have already hit the cap, such as Tesla, General Motors and Toyota, to reclaim tax credits. This will encourage NEV producers and material manufacturers worldwide to build factories and set up assembly lines in the United States, as well as source raw materials and batteries there, thus greatly promoting the development of the country's NEV sector and boosting its NEV sales.
The IRA has imposed restrictions targeting China, though the U.S. NEV market is promising. The IRA stipulates that vehicles equipped with batteries from a "foreign entity of concern" will not receive any subsidies. According to the IRA's Provision C, all Chinese enterprises can be defined as "foreign entities of concern", while Provision E gives the US government the discretion in defining a "foreign entity of concern". According to the IRA provisions, any NEV that uses battery components from Chinese manufacturers is not eligible for subsidies in the U.S. So, what are the opportunities and challenges for Chinese companies to team up with global market players under the context of IRA?
Here we analyze two examples: Gotion High-tech and CATL, two Chinese battery makers that have entered the US market. Gotion High-tech established its U.S. plant jointly with local automakers. We have learnt that Volkswagen is its largest shareholder and only two of Gotion High-tech's five non-independent directors are Chinese. The battery maker also enjoys tax credits from the local state Michigan. Moreover, Gotion High-tech supplies lithium iron phosphate (LFP) batteries, but phosphorus is not on the IRA's list of critical minerals. Although CATL likewise produces LFP batteries and locates its plant in Michigan, it cannot follow the same path as Gotion High-tech which may not be viewed as a complete Chinese company. Therefore, CATL chooses to cooperate with Ford to build its plant in the U.S. by licensing its patented battery technology, thus breaking through the IRA restrictions.
The following are major ways for Chinese battery manufacturers to face the challenges brought by the IRA:
1) Get strong support from local state governments. Only with the support of large local automakers can Chinese battery companies avoid the IRA impact, or they can obtain local states' tax credits to compensate for the lack of subsidies.
2) Produce LFP batteries. Phosphorus is not included in the list of critical minerals under the IRA. No matter the price of lithium is $400,000 or $200,000, LFP batteries can meet the requirements for critical minerals regulated in the IRA.
3) Be identified as not 100% Chinese-owned. The identification requires that either the company's largest shareholder is a foreign company, or its plant is a joint venture set up with U.S. carmakers. But both requirements are beyond the reach of most Chinese battery manufacturers.
4) Build battery plants in the U.S. via licensing patented battery technologies. One thing to note is that the company needs to protect its core battery technologies. At present, leading Chinese battery producers like BYD, CALB and Sunwoda are capable of building plants in the United States through licensing patented battery technologies. Chinese battery plants with limited annual sales thus are suggested to focus more on the domestic market.
China now holds a first-mover advantage in the new energy supply chain, ahead of the United States, Europe, Japan and South Korea. However, in the past year, European countries and the United States have successively issued corresponding policies to hinder China's NEV expansion in overseas markets. Also, both the IRA of the United States and the New Battery Regulation of the European Union (EU) are protectionist. Under such circumstances, Chinese battery manufacturers must not be discouraged, and instead, they should actively participate in global competition and build plants in Europe and the United States.
The EU and the United States are not always on the same side due to their own interests, which seems to provide opportunities for China to obtain subsidies. Recently, the EU has unveiled a draft to ease restrictions to support investments in green sectors via tax credits, in response to the U.S. IRA. This draft allows more state support to be granted to EU member states without explicit commission approval, which would make it easier for European governments to subsidise hydrogen, zero-emission vehicles and energy efficiency measures. And Germany, the most powerful economy among the EU member states, is more capable of providing more subsidies for NEVs. Whether the EU releases the draft proposal for tax credits in fear of European companies migrating to the US which may erode the competitiveness of the EU's green companies globally, or the US aggressively provides subsidies to promote its new energy sector, it is good for Chinese companies to get subsidies. CATL is forward-looking enough to build a plant and plan production expansion in Germany, as well as enter the United States. For other leading battery manufacturers in China, it is also important for them to lay out overseas markets, find ways to get subsidies, and strengthen their product competitiveness, so as to seize the vital year of 2023.
Written by Mysteel Nonferrous Metal & New Energy Research Center
Edited by Ruby Zhang, zhangjiajing@mysteel.com; Alyssa Ren, rentingting@mysteel.com