The Chinese power battery industry, which is crucial to the electric vehicle industry, is seeking to strike deals with the United States' free trade partners South Korea and Morocco in order to profit from the growing demand in the United States and bypass the regulatory barriers that prevent them from entering the market.
According to the Wall Street Journal's review of stock exchange announcements, Chinese companies that provide raw materials for manufacturing electric vehicle batteries have announced the establishment of at least nine joint ventures in South Korea this year, with a total investment of over $4.5 billion.
At least four Chinese companies have expressed plans to establish factories in Morocco to produce battery related products. Morocco has over 70% of the world's known phosphate reserves, which are key raw materials for the production of electric vehicle batteries.
By producing in these two countries, these Chinese suppliers hope to supply automotive and battery manufacturers that meet the incentive conditions of the Inflation Reduction Act. The $430 billion Inflation Reduction Act provides incentives for companies purchasing materials from within the United States or from free trade partner countries.
In the next two years, this new law will exclude the battery components and key materials of so-called "foreign entities of concern". Industry experts believe that this regulation aims to minimize China's participation in the US electric vehicle supply chain.
Analysts say that Chinese suppliers hope to establish such joint ventures so that customers can still receive incentives while continuing to purchase from them; The relevant incentive measures can offset more than one tenth of the cost of a regular electric vehicle.
Chinese companies don't have many choices, "said McKinsey analyst Johan Bracht.
A senior executive at GEMCo., headquartered in Shenzhen, China, stated that partnering with a Korean company would help the raw material refiner meet the conditions of the Inflation Reduction Act and help the company benefit from global demand for electric vehicles.
Pan Hua, Deputy General Manager of Greenway, stated that the company will not abandon the US market. He said that the United States cannot completely abandon the industrial chain involving China because the concentration of the industrial chain is too high.
In March, Greenway announced that it would jointly invest no more than $900 million with South Korean companies SKOn and EcoProMaterials to build a precursor factory in South Korea by the end of 2024 at the latest.
SKOn has two factories in the United States and plans to build four more. The company is a manufacturer of electric vehicle power batteries, with partners including Ford and Hyundai.
Industry experts say that by collaborating with Chinese companies, Korean electric vehicle suppliers can gain professional knowledge in key materials and processing.
Other Chinese suppliers mentioned in public statements that their Korean joint venture will help them expand into the international market, with several of their target markets being the United States and Europe.
Chinese battery companies have long focused on expanding in the United States, and the funding provided by the Inflation Reduction Act has accelerated their timeline for conducting business in the United States. At the same time, the fierce competition in China and the challenge of overcapacity have also prompted companies to turn overseas to seek opportunities. The United States is the world's second largest automotive market after China.
Analysts say an uncertain factor is that the US government has not yet defined what constitutes a "foreign entity of concern" under the Inflation Reduction Act. They said that the United States has not yet clearly defined the level of China's participation and at which stage of the supply chain it is acceptable for car and battery manufacturers to qualify for tax credits.
Chris Berry, founder of energy metal consulting firm HouseMountainPartners, said that this uncertainty means that such joint ventures may eventually be banned from enjoying government incentives. The extent to which China can participate in all aspects of the supply chain is still an open question, "Berry said.
US politicians are already eyeing China's indirect benefits from the Inflation Reduction Act.
Last month, Ford shelved plans to build a $3.5 billion electric vehicle battery manufacturing plant in Michigan with Chinese battery giant Contemporary Amperex Technology (300750.SZ); In previous months, some heavyweight lawmakers in Washington have been exerting pressure on Ford regarding its Chinese partners.
Ford stated that work there will be suspended until the company has confidence to operate the factory in a competitive manner.
China Seizes the Throat of the Supply Chain
According to industry analysis company SNER Research, Chinese companies are the world's largest producer of the four key components required for the production of electric vehicle batteries - cathode, anode, electrolyte, and separator.
Lukasz Bednarski, a research analyst at S&P Global, said that China has the majority of the production capacity needed to refine metals such as lithium, cobalt, and manganese; These metals can be refined and used for battery production.
Therefore, Bednarski added that without China's help, it is difficult for the United States and Europe to establish independent supply chains for electric vehicle batteries, at least in the short term.
The three largest battery material suppliers in China - Greenway, Huayou Cobalt, and CNGR Advanced Materials - have always been the most actively engaged in such cross-border transactions, citing increasing global investment restrictions on China.
Many newly established joint ventures between Chinese enterprises and Korean and Moroccan enterprises produce precursors. The precursor is a metal mixture that needs to be used to produce the cathode, a key component of batteries. Batteries are the most expensive component of electric vehicles, accounting for approximately 40% of the total vehicle cost.
Huayou Cobalt, headquartered in Zhejiang, China, has established a cooperative relationship with the battery subsidiaries of two South Korean commercial giants, Posco Holdings (005490. SE) and LG Chem (051910. SE). This year, the company established a factory in South Korea, while Zhongwei, headquartered in Guizhou, teamed up with Posco and its subsidiaries to invest $1.13 billion in the construction of two factories in South Korea.
In Morocco, LG Chemical announced last month that it will cooperate with Huayou Cobalt and its parent company to build a lithium refining and cathode material factory, joining Zhongwei Group and Sichuan YahuaIndustrial, a Chinese lithium producer. Both companies have cooperative enterprises in Monaco to produce materials required for electric vehicle batteries.
Huayou Cobalt, Yahua Group, LG Chemical, and Posco did not respond to requests for comment. Zhongwei Group reiterated a public statement that the above transaction will help the company further improve its overseas layout and promote its globalization strategy.
These joint ventures may be considered as not meeting the incentive conditions of the Inflation Reduction Act, and companies in both China and South Korea are preparing for this possibility.
Posco FutureM, a subsidiary of Posco that has established a cooperative relationship with China, stated that if the cooperation with China does not meet the requirements of the Inflation Reduction Act, the company will modify the joint venture agreement to reduce the equity of Chinese partners. The company stated that it is still purchasing raw materials from countries such as Indonesia, the Philippines, and Australia to escape the influence of China.
Zhongwei Group stated in a stock exchange announcement that if there are significant changes in laws and policies, the company and its partners may sell shares in the joint venture. Pan Hua from Greenway stated that the company is preparing for adverse rule changes, including measures to avoid having a majority stake in Korean joint ventures.
He said that in the construction of overseas bases, we will introduce overseas partners to reduce risks; However, if someone intends to completely break away from the Chinese supply chain, it is clearly unrealistic at present.