Will Biden’s anger erase China from the electric car supply chains?
Through the Inflation Reduction Act, the United States wants to emancipate itself from China for minerals and electric car batteries. But the separation is difficult: Beijing's grip on supply chains is very strong. Here's how companies are organizing themselves
The Inflation Reduction Act, the symbolic law of Joe Biden's presidency, is worth 369 billion dollars and has a great objective to achieve: the creation in the United States of industrial supply chains for all technologies for the energy transition, in order to reduce China's influence – currently very strong – on the sector to be kept to a minimum. These technologies, called "clean technologies", also include electric vehicles, which require devices (batteries) and materials (lithium, nickel, graphite, cobalt and more) defined as critical, whose supply chain are currently dominated by Beijing.
THE INFLATION REDUCTION ACT WANTS TO REVOLUTIONIZE THE ELECTRIC CAR INDUSTRY
Given the importance of the automotive sector for the American economy and employment, one of the main areas of application of the Inflation Reduction Act iselectric mobility . Tesla, the most important company in this field, is working on a domestic value chain: it already sources batteries from a factory in Nevada, for example, and soon lithium from a refinery in Texas. But Elon Musk's company still hasn't cut ties with China, both because it owns a large factory in Shanghai (the Gigafactory Shanghai), and because shortly after the approval of the Inflation Reduction Act it started importing huge quantity of lithium ion batteries. An expense of 2.5 billion dollars, writes Bloomberg .
The purchases, however, were interrupted towards the end of 2023 due to the more stringent requirements issued by the American government for access to tax credits (up to 7500 dollars) of the Inflation Reduction Act. The Biden administration really wants exclude China from the electric mobility supply chain, effectively forcing car manufacturers interested in incentives to seek Western suppliers of raw materials. Given that Tesla is the dominant company in the American electric vehicle market, all analysts are carefully watching its moves. In fact, it is not certain that this restructuring of the supply chains will be successful – the Chinese presence is very strong – and above all it is not certain that it will prove beneficial for sales, given that the prices of electric cars will probably rise.
– Read also: Can we do without China for electric car batteries?
FORD'S PROBLEMS
Beyond Tesla, the challenge of electric mobility and liberation/competition with China also concerns traditional car manufacturers, such as Ford and General Motors. Ford CEO Jim Farley said 30 percent of the company's global revenue is at risk from competition from cheaper Chinese models; So far, however, Ford has relied heavily on Chinese technology, components and raw materials to keep production costs as low as possible. Both Ford and General Motors will therefore have to quickly review their supply chains or they will be excluded from tax credits and lose attractiveness to consumers.
THE REQUIREMENTS OF THE INFLATION REDUCTION ACT ON RAW MATERIALS
Complying with the requirements of the Inflation Reduction Act, however, is difficult, as Bloomberg highlighted in its in-depth analysis.
In 2023, the law required that at least half the value of battery components be assembled in North America, and that at least 40 percent of battery raw materials come from the United States or countries with which free trade agreements exist. By 2027, the raw material requirement will be increased to 80 percent.
Last year there were five companies with fourteen car models that met the Inflation Reduction Act's requirements for the sourcing and processing of basic materials. Producers could meet the 40 percent quota by buying lithium from suppliers in Australia or Chile, or by refining lithium purchased elsewhere in South Korea and the United States. Seven Tesla models sold in the United States fully complied with the requirements of the Inflation Reduction Act and therefore had access to the full credit of $7,500 per vehicle, thanks to supply agreements with Albemarle (US), Glencore (Switzerland) and Panasonic (Japanese). .
The requirements for 2024, however, are more stringent: at least 50 percent of the battery raw materials must come from the United States or a free trade partner. Furthermore, the Treasury Department has defined restrictions on the so-called foreign entities of concern , the foreign entities that cause concern: it means that car manufacturers will no longer be able to use battery components made in China; from 2025 they will no longer be able to use raw materials extracted or refined in the country.
Meeting these quotas will be increasingly difficult for companies because the mining of battery raw materials is concentrated in nations that do not have free trade agreements with the United States: for example, 75 percent of the cobalt mined globally comes from the Democratic Republic of Congo; over half of the nickel comes from Indonesia. Meeting the requirements of the Inflation Reduction Act would still be possible if these minerals were processed in a free trade partner country, but the vast majority of the world's refining capacity is located in China.
Given the difficulties in accessing raw materials, the Treasury Department has softened its stance, allowing non-state Chinese companies operating outside of China to access the US automotive market until US supply chains become organized.
CHINA'S INFLUENCE ON BATTERY MATERIALS
“China's influence on battery materials is bigger than OPEC's influence on oil ,” Mattias Gromark told Bloomberg . “The entire battery industry in Europe and North America needs to think seriously about how it can diversify its supply chains .” Also because China can exploit its dominance over supply chains to hinder American efforts to diversify: last December, for example, Beijing imposed restrictions on the export of graphite .
The Inflation Reduction Act, however, not only incentivizes the purchase of electric vehicles but also the manufacturing of batteries through tax credits that cover 30 percent of manufacturing costs. Thanks to the subsidies, in the first fifteen months after the law's approval (in August 2022) the United States attracted over $100 billion in investments in electric mobility, according to BloombergNEF calculations.
THE ROLE OF SOUTH KOREA
In particular, South Korean companies – such as Samsung SDI, LG Energy Solution and SK On – have committed to investing nearly $48 billion in refining, cathode and battery manufacturing facilities in South Korea and North America. They too, however, are currently dependent on China for raw materials.
Furthermore, it seems that several Chinese companies have shown interest in investing in South Korea in order to exploit the country as a gateway to the US market, as they are already doing in Mexico (or Hungary , in the case of the European Union) .
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/smartcity/inflation-reduction-act-filiere-auto-elettriche/ on Sat, 24 Feb 2024 07:12:13 +0000.