US efforts to adopt a Chinese-style industrial policy have left the world’s electric vehicle (EV) battery makers in a state of worry. Signed into law last month, the Inflation Reduction Act (IRA) aims to overhaul the EV tax credit in the US and is designed to see if the final assembly of power-packs and EVs takes place in North America, Whereas for the battery the sugar content is excluded. the supply chain. To do so, the policy has addressed demand and supply by providing new incentives for advanced domestic manufacturing and redesigning existing ones for buyers.
All of this pushes America towards a greener future. But working to shut down the world’s largest market and maker of EV batteries is short-sighted. That’s because nearly every manufacturer operating in the U.S. or elsewhere is dependent on China—not just for raw materials, but for refining them and then ultimately power-packed. In the value chain, China dominates with 92% processed materials, 71% cell assemblies and 65% battery components.
Theoretically, the IRA aims to create a domestic supply chain as quickly as possible while reducing dependence on China and creating jobs. It is sensible, but it is not based on what is possible in a realistic time frame. Going cold turkey on the required processes means there will still be a huge gap between the raw material and the battery pack.
According to analysts at Nomura Holdings, in excluding China, the cost would increase to about $30 to $35 per kilowatt hour and about $1,000 on other variable costs. Since IRAs subsidize materials through tax credits, companies have to start making a profit in order to benefit from it. Yet firms will tell you from bitter experience that making batteries profitable and on a large scale is not too soon for most.
Meanwhile, the US has the highest capital expenditure compared to Europe and China. Labor costs are rising across America and major disputes in railways and ports—the key machinery in the supply chain—are also underway.
Most global EV and battery makers have found themselves in a bind: their production, at some point, ends through China. For example, South Korea has called on representatives of the Biden administration to reconsider measures such as US production requirements and early ending reliance on China.
As it stands, U.S. law doesn’t broadly benefit companies that can actually help start building U.S. supply chains, or those that have the technology to build a robust system for EVs and their batteries. And there is capacity. Instead, it stands to promote Toyota Motor Corp., the maker of some of the most popular cars in America, as well as the biggest American car companies—all of which lag far behind global manufacturers in the electric rush. It would have been better to encourage rapid construction of factories, resolve labor issues, and then secede from China.
Although Korean battery makers with various partnerships and joint ventures with US automakers seem to benefit, the reality is that their hold on the processed material is limited and still dependent on China. Meanwhile, the IRA inadvertently favors Hyundai Motor and its affiliate, Kia Corp., which come in at No. 2 behind Tesla in EV sales volume in the US because they aren’t made there. Globally too, they are one of the biggest players in terms of shipments. Consumers clearly love their EVs, but IRAs will no longer subsidize them.
Ensuring that incentives run down the value chain are vital and supportive suppliers – who are an integral part of it, not just with their brand on the final product – is even more important.
A June 2021 White House review of supply chains called China’s practices for encouraging its domestic industry “offensive” and “well outside globally accepted fair trade practices”. But perhaps there is something to be learned from Beijing’s laser-focused policies. Rather than allowing national security and geopolitics to limit the IRA, legislators should try to understand that China produced some of the most successful battery companies in the world, including the contemporary Amperex Technology Company (CATL) and BYD. How did you do it. So it’s no surprise that CATL will now supply batteries to Ford Motor Company of America through a recently announced strategic collaboration, and not vice versa.
China’s supply so far is facing rising battery material costs, power shortages, rolling Covid lockdowns and regulatory pressure. The companies there have managed to increase EV battery installations across the country. This is no small achievement. But subsidies alone do not encourage this, nor do policies focused on keeping others out. If the US really wants a stake in the region, it should take a leaf out of Beijing’s book. That is, to confront and strengthen our industrial weaknesses.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia.
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