Chinese Battery Domination Defies U.S. Inflation Reduction Act

▲The world’s leading battery cell company in China, CATL, has unveiled its Shenxing LFP battery. The battery enables travel up to 248.5 miles with just a 10-minute charge and over 435 miles with a full charge. It is expected to be commercialized in the first quarter of this year.

The U.S.’s Inflation Reduction Act (IRA), which does not provide subsidies to electric vehicles equipped with Chinese batteries, has proved ineffective. Chinese batteries have dominated markets worldwide, including the U.S. Korean battery companies are making various efforts, such as using minerals from countries with which North America or the United States have signed FTAs, to qualify for subsidies. However, it is estimated that this only raises the unit cost, and they are still unable to surpass the competitiveness of Chinese batteries.

According to the export and import statistics of the Korea Trade Association on the 20th, China’s lithium-ion battery (HS code: 850760) exports last year amounted to $64.9 billion, a 27.4% increase from the previous year. It rose from 6th place in 2022 to 3rd place last year as the most exported item.

Ironically, the U.S. is the largest importer of Chinese batteries. Exports to the U.S. amounted to $13.464 billion, a 33% increase from the previous year. Germany followed this at $9.331 billion (up 20.9% of the prior year), South Korea at $7.827 billion (up 48.4%), the Netherlands at $3.641 billion (up 8.4%), and Vietnam at $3.284 billion (up 16.2%).

The U.S. is trying to curb Chinese batteries. The Biden administration enacted and implemented the IRA in August 2022, providing a $7,500 subsidy for electric vehicle purchases, but batteries using Chinese batteries and minerals were not eligible for the subsidy. Initially, Chinese batteries were expected to be removed from the U.S. market, and Korean batteries would benefit most from this.

However, more than a year and a half later, Chinese batteries are thriving in the U.S. market, and Korean battery companies, while increasing sales, are struggling with deteriorating profitability. The reason is simple. Chinese batteries are competitively priced even without subsidies, and Korean batteries have reduced margins to match those prices.

Recently, SMM, a Chinese mineral trading specialist website, analyzed that “it is believed that it will be difficult for lithium-ion battery products from new supply chains (non-China) to form a price advantage over Chinese products” and “as a result, the price of electric vehicles equipped with American batteries that received IRA subsidies may be more expensive than imported electric vehicles.”

Analysts say that Korean battery companies are securing minerals from North America or countries with an FTA with the U.S. to meet the IRA requirements, but it has little effect.

For example, Company A signed a contract earlier this year to acquire a stake in a North American nickel mine and secure its products. However, the quality grade of this mine turned out to be low, making it difficult to invest at current nickel prices. The industry believes the situation is the same for other minerals, such as graphite.

The general analysis is that it is difficult to beat the price competitiveness of Chinese batteries even if they receive purchase subsidies because the battery production unit cost only increases when rebuilding the supply chain that meets the IRA requirements.

Professor Park Chul-wan of Sejong University’s Smart Automobile Department said, “I think the rosy outlook that the IRA could build a non-Chinese supply chain and that Korean batteries would benefit greatly from this was a misjudgment,” and added, “More than anything, Korean companies have been complacent about the IRA, slacking in their efforts to develop technology and reduce costs, and I think they may have missed the golden opportunity to get ahead of China.”

There are suggestions that South Korea’s short-term supply chain strategy should be reorganized in a long-term and meticulous manner.

Jung Kang-hee, chairman of the Mineral Resources Industry Association, said, “Looking at the process of Korean companies securing minerals, they are not trying to make any efforts. If they search, there are plenty of mines that can be secured under better conditions,” and advised, “Mine development takes about 10 years, so the strategy for resource development and supply chain construction should be meticulously planned to look 10 years ahead. Now, when resource prices have fallen sharply, there is a golden opportunity to build up a supply chain advantageously. Along with this, it is also crucial to secure advanced refining technology to drive cost reductions.”