Summary 

  • The US introduced tax credits of up to $7500 for EVs whose final assembly occurrs in North America using locally sourced components. 
  • However, it will not be easy to power American-made cars without Chinese imports. 
  • “We are disappointed," a spokesperson for Hyundai Group tells fDi. 
  • FDI into the manufacturing of batteries and EVs in the US has risen quickly. 

Global carmakers are facing a challenging environment in the US as president Joe Biden’s administration introduces novel requirements for buyers looking to access electric vehicle (EV) tax credits. 

The Inflation Reduction Act, which sets aside $369bn for “the most aggressive action” — namely, tackling climate change and economic challenges — envisages tax credits of up to $7500 for EVs whose final assembly occurred in North America, including Canada and Mexico.

Advertisement

This is in addition to the requirement that carmakers use critical materials and battery components sourced from the country’s trade partners, and avoid using Chinese parts.

However, it will not be easy to power American-made cars without Chinese components; indeed, the automaking industry has raised concerns over the restrictive requirements.

“We are disappointed that the current legislation severely limits EV access and options for Americans,” a spokesperson for Hyundai Group tells fDi, adding that this will hinder the country’s transition to sustainable mobility. The company is putting up a new $5.5bn EVs and batteries facility in Georgia, scheduled to be operational in 2025.

Given China’s role in EV production, it is unlikely that such requirements will facilitate further momentum. Henry Sanderson from Benchmark Mineral Intelligence tells fDi that attempts to exclude China from the EV supply chain will be “tricky”, as the country dominates raw materials processing and battery component manufacturing, including both cathodes and anodes.

Clean vehicle tax credit

The $7500 tax credit is split equally into two parts. The first demands that 50% of the components in EV batteries are manufactured or assembled in North America by 2023. By 2028, battery components should be entirely processed in North America. 

Advertisement

The second determines that 40% of the critical minerals used in EV batteries must be extracted or processed in the US or “in any country with which the US has a free trade agreement”, which currently includes just 20 countries. This percentage requirement will increase to 80% by 2026. 

Starting in 2025, the new tax rules will ban the use of battery components and critical minerals coming from China or another “foreign entity of concern” — Iran, North Korea and Russia. 

Onshore battery supply chain 

Demand for EVs in the US is set to increase drastically. Mike Fiske, associate director at S&P Global Mobility, notes that the market share of EV sales in the US will experience a 10-fold growth by 2030 from 3.2% today. 

With such demand on the horizon, an investment boom is already underway. During the first six months of 2022, the US experienced record high levels of foreign investment into its EV manufacturing market, totalling $15.6bn, according to fDi Markets data. 

After the bill was enacted in August, global automobile manufacturers stepped up their efforts to boost the regional EV supply chain in North America.

On August 23, Mercedes-Benz and Volkswagen signed agreements with the Canadian government on battery value creation and raw material security, respectively. The two companies said that a key focus of such private–public co-operation is the battery value chain and supply of critical raw materials, such as lithium, nickel and cobalt.  

In an announcement on August 29, Japanese car manufacturer Honda and South Korean battery maker LG Energy Solution unveiled plans to establish a joint EV battery plant in the US, co-investing $4.4bn. While the location for the plant is yet to be determined, LG Energy Solution said the company expects to begin construction in early 2023.

Toyota, another Japanese automaker, said on August 31 that it would invest Y325bn ($2.32bn) in its North Carolina battery plant, which is currently under construction, to increase its automotive battery production. An endorsement from the world’s largest car manufacturer is an additional boon for the country.

Industry challenges

Yet, while large-scale investment is underway, the burden to cut ties with China in the supply chain will ultimately fall on the global car manufacturers. 

Experts agree that the biggest challenge posed by the act is its critical minerals requirement, as Chinese companies influence every level of both the EV and battery supply chains.

The country refined 87% of the world’s rare earths,

65% of the world's cobalt, 59% of the world's lithium, 40% of the wold's copper and 35% of the world's nickel in 2019, according to the International Energy Agency’s 2021 report. Even though Australia and Chile are the leading global lithium miners, most of the lithium goes to China to be processed. 

“It can take up to 10 years or more to establish new mines, and mineral processing plants will also be challenging to open,” Mr Fiske notes, adding that establishing a domestic EV supply chain will be difficult while the industry is cutting ties with China. 

It is unclear whether the US will make “100% Made in America” batteries from scratch in this limited timeline. Mr Sanderson believes that there will be hurdles for battery manufacturers to remove China’s output from the battery supply chains entirely. Indeed, Benchmark Mineral Intelligence says that China dominates cathode and anode production. According to its 2020 analysis, 61% of all cathodes and 86% of all anodes are produced in China, with all of the world’s all-natural-graphite anode production in 2019 taking place in China.

Moreover, major battery suppliers are reliant on the Chinese mid-stream supply chain. 

LG Chemical, the second-biggest battery manufacturer after China’s CATL, launched a joint venture with Huayou Cobalt, another Chinese company, in May, in order to secure a steady supply of raw materials and cathode materials. LG Chemical also announced an agreement for the long-term supply of cathode active material to General Motors (GM), another American automaker, for the building of their joint venture in the US.

According to Benchmark Mineral Intelligence, Huayou is China’s largest cobalt refiner, but it is also investing heavily in nickel-processing plants in Indonesia.

Another Korean battery materials manufacturer, Posco Chemical, announced a joint venture with GM in March to build a cathode active plant in Quebec.

Posco also established a joint venture with Huayou in 2021, for the supply of cathodes and precursors. The company expects this will help to secure raw materials for battery materials.

Ultimately, the US “needs more options to more quickly reduce [its] reliance on China”, says John Bozzella, CEO of the US trade association of automotive manufacturers Alliance for Automotive Innovation. The Alliance also noted in its blog that the Act’s requirements will “jeopardise” the country’s ambitious target of 50% of EV sale shares by 2030: “We can’t currently meet the demand for these materials on our own. That’s the reality.” 

This article first appeared in the October/November 2022 print edition of fDi Intelligence. View a digital edition of the magazine here.