Carmakers try to frustrate US push to cut China from EV supply chain

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The world’s largest carmakers are trying to water down a Biden administration effort to replace Chinese components with US ones in electric-vehicle manufacturing, as the industry grapples with dependence on battery materials processed overseas.

President Joe Biden’s flagship climate legislation, the Inflation Reduction Act, offers generous tax credits to electric vehicles made in North America. The new rules on the origin of batteries, their components and the critical minerals that make them will take effect in phases starting in 2024.

From that year, to qualify for the maximum $7,500 tax credit available under the new law, EVs must not have any battery components made or assembled “by a foreign entity of concern” — a reference to China, Russia, Iran and North Korea. In 2025, those batteries must exclude critical minerals extracted, processed or recycled in the same countries.

But carmakers still depend heavily on minerals processed in China, and they worry that they will lose customers for any vehicle not made $7,500 cheaper by the US government. While carmakers initially welcomed the new law, companies and their trade groups have been pushing for a loosening of the rules around what would be counted as a Chinese-owned company, with some advocating for a small amount of Chinese content to continue to be allowed.

“As our industry works to domesticate our supply chain, clarity and guidance on what would constitute a ‘foreign entity of concern’ is necessary to ensure that joint ventures in critical mineral extraction, processing, or recycling will not cause vehicles to be automatically excluded [from the tax credit],” said Christopher Smith, Ford’s chief government affairs officer. “Relatedly, clear guidance on the scope of ownership is essential.”

Ford, Stellantis and Volkswagen are among the carmakers asking regulators to establish a threshold allowing a small amount of Chinese content in batteries. Volkswagen suggested setting it at 10 per cent or less.

Ford also wants to avoid the “foreign entity of concern” label for any company organised in the US, regardless of ownership, and for joint ventures that are affiliated with blacklisted countries. The Michigan carmaker said in July that CATL, the Chinese battery manufacturer, will supply the batteries for the Mustang Mach-E car next year and the F-150 Lightning truck in 2024. The two companies have signed a non-binding memo to explore further expanding the relationship.

China has invested in mining critical minerals around the world for the past decade, said Chicago Federal Reserve automotive policy expert Kristin Dziczek. While mineral deposits are mined where they are discovered, the International Energy Agency reports that China controls the processing of 35 per cent of the world’s nickel, half the lithium, 60 per cent of cobalt and 90 per cent of rare-earth elements.

Production at all stages of the EV battery supply chain is concentrated in a handful of companies, with the manufacture of cathodes and anodes, both crucial components for batteries, dominated by Chinese companies.

A recent analysis by the IEA found that seven companies were responsible for more than half of global cathode production, with two of the top three companies being Chinese.

The top six largest manufacturers of anodes, another critical battery component, are Chinese and account for two-thirds of global production capacity, the IEA said.

The country’s dominance means that for carmakers “to switch on a dime to not using any of it is going to be tough”, Dziczek said.

But representatives for US suppliers are eager to hasten the day when China’s role in making batteries is reduced. Ben Steinberg of Venn Strategies, a Washington lobbying firm representing US battery manufacturers and critical mineral miners, said that allowing Chinese content through “loopholes today” would have “long-term implications for the supply chain”.

“The North American industry is interested in setting up shop in our country, and we need to give them every opportunity to do so,” Steinberg said.

Carmakers, suppliers and environmental groups have until the end of the year to lobby the Internal Revenue Service, which plans to issue the final rules then. The stakes in the tussle over “arcane accounting rules” are nonetheless high, said Guidehouse Insights analyst Sam Abuelsamid, because carmakers “want to be able to make the EVs as affordable as they can, so they can sell as many as they can”. 

The US car industry ultimately does want to reshore the supply chain, because it wants to avoid the supply disruptions that have plagued it since last year, Abuelsamid said. It just does not want to move as swiftly as the IRS mandates.

“It’s so hard to cut China out of this supply chain,” said Chad Bown, of the Peterson Institute for International Economics. “In order to do it, you have to use policy instruments that we have never thought about using before.”



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