New IRA guidelines could pour cold water on joint battery ventures between S. Korea, China

Posted on : 2023-12-04 17:04 KST Modified on : 2023-12-04 17:04 KST
The US has announced new guidance that would make joint ventures with Chinese battery makers in which the Chinese government has a 25% or greater stake ineligible for EV tax credits
Executives at LG Chem and Huayou Cobalt commemorate the signing of MOUs for the construction of plants for LFP, a chemical compound used in EV batteries, in Morocco, on Sept. 22. (courtesy of LG Chem)
Executives at LG Chem and Huayou Cobalt commemorate the signing of MOUs for the construction of plants for LFP, a chemical compound used in EV batteries, in Morocco, on Sept. 22. (courtesy of LG Chem)

The US has announced that any foreign joint venture with a Chinese battery maker that is at least 25% owned by the Chinese government will be ineligible for electric vehicle (EV) subsidies or tax credits. The move comes after the Chinese government announced restrictions on the export of graphite, a key mineral in EV battery production, on Friday.

Washington and Beijing seem to be raising the stakes of their trade conflict, which has spread from semiconductors to EV batteries. To skirt US regulations, Chinese battery firms have been forming joint ventures with Korean partners, but such joint ventures appear likely to run into complications going forward.

On Friday, the US Department of the Treasury and the US Department of Energy published new guidance pertaining to the Inflation Reduction Act (IRA), which provides US$7,500 in tax credits to buyers of EVs that meet sourcing requirements and were assembled in the US. The new guidelines prohibit “foreign entities of concern” — defined as companies “owned by, controlled by, or subject to the jurisdiction or direction of a government” of China, Russia, North Korea or Iran — from receiving these credits. Any EV with a battery that contains parts or key minerals tied to such entities will be ineligible for the IRA tax credits.

The most notable thing about the recent guidelines is Washington’s updated approach to foreign joint ventures established by Chinese entities. If a Chinese state-run entity has a hand in a foreign joint venture’s board of directors, has control over its executive decisions, or has a direct or indirect stake of 25% greater, the guidelines classify it as a foreign entity of concern. South Korea requested that this criterion be revised to 50%, but the request was denied.

The foreign entity of concern guidance will apply to EV battery parts starting January 2024 and to key minerals starting January 2025. The US government is expected to hold consultations on the matter over the next month before making things official.

As of now, it appears that private Chinese firms in which the state has little to no stake will not be classified as foreign entities of concern. Realistically, if all Chinese firms are classified as such entities, there will effectively be no EVs that qualify for the tax credits. According to the New York Times, over 100 types of EVs are available on the US market, but only around 20 of them currently qualify for the EV tax credits. Once the new guidelines are applied, this quantity will diminish even further.

The Korean government claims that the new guidelines clear up “industry uncertainties,” but the guidelines themselves contain uncertainties.

The US Department of Energy’s guidelines state that any firm that “has entered into a licensing arrangement or other contract with another entity (a contractor) that entitles that other entity to exercise effective control over the extraction, processing, recycling, manufacturing, or assembly (collectively, ‘production’) of the critical minerals, battery components, or battery materials that would be attributed to the entity” can be considered a foreign entity of concern.

In short, even if a firm’s Chinese-controlled shares amount to 25% or less, it’s unclear as to whether that firm will qualify for the IRA tax credits.

“We will collect opinions from industry leaders and submit them to the US government in an attempt to negotiate,” an industry insider told the Hankyoreh.

These guidelines will surely put a damper on the rush by Korean battery firms to form joint ventures with Chinese-based entities. Funds poured into South Korean-Chinese joint ventures are estimated to be at least 5 trillion won (US$3.84 billion) for this year alone. Since the US began implementing the IRA last year, Chinese firms seeking ways to circumvent US import restrictions have joined forces with South Korean firms seeking a stable source of raw materials and parts.

LG Chem and Chinese mineral supplier Huayou Cobalt jointly invested 1.2 trillion won (US$921.7 billion) to build EV battery precursor manufacturing facilities in the Saemangeum tidal flat in North Jeolla Province. SK On and Chinese battery manufacturer Ecopro jointly invested the same amount to build similar facilities in the same region.

Earlier this year, LG Energy Solution signed a memorandum of understanding (MOU) with Chinese lithium firm Yahua to produce lithium hydroxide at facilities in Morocco. Posco Holdings and Posco Future M signed a joint venture agreement worth more than 1.5 trillion won (US$1.16 billion) with Chinese firm CNGR to produce nickel and precursor for EV batteries.

South Korean and Chinese firms have remained quiet about the contract specifics and corporate structures of such joint ventures.

“We have arranged to adjust the Chinese firm’s shares after the US confirms its guidelines in our contract,” admitted an SK On insider.

“We plan on formulating measures for adjusting our Chinese partner’s shares if necessary,” said a Posco Future M insider.

In a recent presentation, an LG Chem representative suggested that the firm was willing to “acquire the Chinese partner’s shares.”

Korean firms have indicated that they are willing to adjust their strategies to comply with the US guidelines, but these adjustments will likely place a greater financial burden on Korean firms.

“Normally, shares are split 50-50 in these joint ventures. Anything more than half becomes financially troublesome for the Korean side,” said an industry insider.

“In the short term, acquiring the shares of Chinese firms and renegotiating contracts to comply with US guidelines bears significant cost,” said Hwang Kyung-in, an associate research fellow at the Korea Institute for Industrial Economics and Trade. “However, in the long term, there is the benefit of increasing Korean ownership and control of such ventures as their corporate structures become more internalized.”

By Kim Hoe-seung, senior staff writer; Choi Woo-ri, staff reporter; Lee Bon-young, Washington correspondent

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