U.S. electric vehicle subsidy may be golden ticket for Korean battery makers

The U.S. government's "Made-in-America" electric vehicle (EV) subsidy may be the golden ticket for Korean battery makers as the western country tries to rule China out in the global race.

U.S. Vice President Kamala Harris waves upon leaving the Senate chamber after the Senate passed the Inflation Reduction Act during a marathon voting session on Aug. 7 in Washington. [EPA/YONHAP]

The U.S. government’s “Made-in-America” electric vehicle (EV) subsidy may be the golden ticket for Korean battery makers as the western country tries to rule China out in the global race.

The U.S. Senate on Sunday passed the Inflation Reduction Act, a sweeping package to combat climate change, which includes a $7,500 EV subsidy. The bill offers up to $7,500 in credit to taxpayers who would like to buy an electric vehicle or fuel cell vehicle, either new or used, that was made in North America.

But the subsidy program is divided into two parts with their own conditions: Starting in 2023, $3,750 of the EV tax credit will only be available when at least 40 percent of the critical minerals contained in the EV batteries have been “extracted or processed in any country with which the United States has a free trade agreement,” or “recycled in North America.” The percentage will increase over the years to reach 80 percent in 2027.

The remaining subsidy will be available when at least 50 percent of the battery’s components are manufactured or assembled in North America. The limit will increase to 100 percent in 2029.

The bill will now head to the House, and then to Biden’s desk, where he is expected to sign it into law.

The bill implies U.S. President Joe Biden’s intention to isolate Chinese EV and battery makers. Chinese battery makers, including world No. 1 Contemporary Amperex Technology (CATL), control the global battery industry with 56 percent as of the first half of this year, according to data from SNE Research. Korea has three battery makers — LG Energy Solution, SK On and Samsung SDI — and had a combined share of 26 percent.

“The key point of the bill is the U.S. attempt to reduce its dependence on China,” said Kang Dong-jin, an analyst at Hyundai Motor Securities. “Korean battery makers will receive more partnership requests from global automakers, with LG Energy Solution being the largest beneficiary as it supplies batteries to Tesla and General Motors, as well as constructing plants with local carmakers.”

LG Energy Solution currently runs a battery plant in Michigan. Ultium Cells, its 50:50 joint venture with General Motors, plans to build three more plants, one each in Ohio, Tennessee and Michigan. The Ohio plant is expected to start mass production in the second half of the year.

The company is also expected to break ground on a factory in Ontario, Canada, which will be constructed jointly with Stellantis.

Ultium Cells' Ohio plant is expected to start operation in the second half. [LG ENERGY SOLUTION]

LG’s production capacity in North America will grow at an annual rate of 166 percent through 2022, according to a report from Samsung Securities.

SK On also joined forces with Ford to build three plants in the United States: one in Tennessee and two in Kentucky. It owns two independent plants in the state of Georgia, with one having already started mass production early this year, and another set to start next year.

Samsung SDI is building a plant with Stellantis in Kokomo, Indiana.

Chinese battery makers, on the other hand, have no plants in the United States, make most of their batteries in China, and use mostly materials produced in China.

CATL was about to announce a plan to soon construct its first U.S. plant, either in South Carolina or Kentucky, but recently hit the pause button on the plan, according to a recent report by Bloomberg.

The postponement reportedly came due to tensions brought on by U.S. House Speaker Nancy Pelosi’s visit to Taiwan.

But analysts say the subsidy policy is not entirely good news for Korean companies, as they are still highly dependent on China for raw materials used in EV batteries such as nickel, cobalt and manganese. The three are key ingredients to making cathodes, which account for 40 percent of the production cost of an EV battery.

The largest reserves of these raw materials are found in various countries like Chile and Argentina, but China is in charge of refining the battery minerals. According to the International Energy Agency, around 70 percent of the refined minerals used for batteries come from China.

Around 81 percent of the lithium used by Korea’s three battery makers comes from China, according to the Korea Institute for Industrial Economics and Trade. Around 87.3 percent of the cobalt, and 99 percent of the manganese are imported from China.

“The bill itself is surely beneficial to battery cell and materials companies in Korea and Japan, countries that have a good relationship with the United States,” said Samsung Securities analyst Esther Yim. “But it’s difficult to manufacture batteries excluding China-made minerals in a short time. Battery makers must find an alternative means to source the raw materials by 2024.”

LG Energy Solution in June signed an agreement with Compass Minerals and promised to source 40 percent of its lithium carbonate and lithium hydroxide from the Kansas-based company every year for seven years, starting in 2025. It also signed a deal with SQM in Chile to get 55,000 tons of lithium through 2029.

SK On signed a memorandum of understanding with Posco Holdings for supplies of lithium. Posco Holdings completed the construction of its lithium plant in Argentina in March.

Automakers like Hyundai Motor and Kia are likely to be hit hard by the bill, as the companies do not have EV-making plants in the United States.

Hyundai Motor and Kia manufacture their best-selling EVs Ioniq 5 and EV6 in Korea. It announced it would spend $5.5 billion to build an EV-dedicated factory in Georgia, but mass production will not start until 2025.

SK On's two battery factories in Georgia, the second of which is currently under construction. [YONHAP]

BY SARAH CHEA [chea.sarah@joongang.co.kr]