U.S.-China tensions are blocking the road for EV manufacturers

By Jurica Dujmovic

Biden administration is confident that U.S. car companies will adapt to new tariffs on Chinese-made products

As automobiles and drivers accelerate toward an electric future, a rising cost of electric vehicles (EVs) casts a shadow over the dream of widespread sustainable transportation.

At the heart of this price surge are the intensifying political tensions between the U.S. and China, particularly when it comes to EV battery production and supply chains. The tensions have mounted further after U.S. President Joe Biden's recent announcement of a 100% tariff on Chinese-made electric vehicles.

As the U.S. and China navigate their own technological and political ambitions, the repercussions are being felt from factory floors to car showrooms. Let's start with the obvious: The Biden administration's rules for EV tax credits present a significant change compared to earlier legislation. Vehicles are disqualified if any of their suppliers have even minimal ties to Beijing - such as manufacturing parts in China or having a small percentage of their board controlled by Chinese interests. The stringent approach extends even to instances where U.S. suppliers use licensed Chinese technology??.

Such measures are not isolated - earlier U.S. Treasury Department rules that focused on domestic manufacturing had already excluded many vehicles made by European, Japanese, and South Korean automakers. As a result, only about 22 electric and plug-in hybrid models currently qualify for the EV tax credit, a stark contrast to more than 100 models available on the market??.

The rules offer some flexibility. Automakers have a two-year phase-in period to comply with regulations concerning certain difficult-to-trace battery components??. Starting in 2024 and 2025, automakers will be prohibited from sourcing any battery parts or critical minerals from "foreign entities of concern" (a category that includes China),?? which would add another layer of complexity and potential costs to their operations.

Promoting the use of electric cars is a key component of the Biden administration's broader climate agenda, and the tax credit, which can reduce the cost of an EV by up to $7,500, is seen as a vital tool to make them more accessible. However, the implementation of domestic content restrictions under the 2022 U.S. Inflation Reduction Act, aimed at reducing dependence on the Chinese EV supply chain, has significantly limited the impact of any benefit, putting it almost entirely into question. Regardless, Biden administration officials remain confident that the car industry will adapt, citing significant investments into new U.S. manufacturing facilities??.

Yet both U.S. automakers and the EV industry have expressed concerns, arguing that they need more time to fully remove Chinese elements from their supply chains despite significant investments in expanding U.S. operations??.

U.S. auto giant Ford Motor (F) has even argued that its partnership with China's Contemporary Amperex Technology Co. (CN:300750) does not funnel taxpayer dollars to Beijing and is crucial for manufacturing next-gen lithium, iron, and phosphate batteries in the U.S., highlighting the complexities of international collaborations??.

The Chinese Ministry of Commerce has condemned the U.S. regulations as discriminatory against Chinese companies and a violation of World Trade Organization (WTO) rules. The ministry views the exclusion of Chinese suppliers from U.S. tax benefits as a non-market-oriented policy??.

Trade tensions and new tariffs

The Biden administration's new tariff on Chinese-made electric vehicles is part of a broader package of measures aimed at protecting U.S. manufacturers from cheap imports, significantly escalating the trade conflict between the two nations. This move is expected to drive up the cost of Chinese-made EVs, making them less competitive in the U.S. market, and could potentially lead to retaliatory actions from China, further complicating the global EV supply chain.

In addition to the 100% tariff on Chinese EVs, the Biden administration has implemented several other tariff hikes relevant to the EV industry:

Lithium batteries: Tariffs on lithium batteries have been raised to 25% from 7.5%. This hike is significant as lithium batteries are a crucial component of EVs, and the increased cost will likely affect the overall price of electric vehicles.Critical minerals: A new 50% tariff has been imposed on critical minerals, which were previously taxed 25%. These minerals are essential for battery production and other key EV components.Solar cells: Tariffs on solar cells, which are integral to many green energy technologies, including some EV charging solutions, have been doubled to 50% from 25%. The increase could impact the cost and availability of renewable energy solutions in the U.S.Semiconductors: Tariffs on semiconductors have also been doubled to 50% from 25%. Given the global chip shortage, this increase could further strain the supply chain for critical electronic components in EVs and other technologies.Steel and aluminum: Tariffs on steel and aluminum, which range from 0% to 7.5%, will rise to 25%. These materials are vital for vehicle manufacturing, and the increased costs could affect the production costs of EVs.

Powering up

Despite recent tensions, China continues to dominate the global electric vehicle (EV) market. As of the first quarter of 2024, China maintains its leadership position, accounting for a substantial share of global EV sales. The country's EV market saw significant year-over-year growth of 31%, underscoring its critical role in the global EV sector.

In the first quarter of 2024, global EV sales grew by 21% compared to the same period in the previous year, with China contributing significantly to this increase. Specifically, battery electric vehicles (BEVs) accounted for 64% of the units sold globally, while plug-in hybrid electric vehicles (PHEVs) made up the remaining 36%??.

China's dominance is also reflected in the performance of its leading EV battery manufacturers. Contemporary Amperex Technology and BYD (CN:002594) continue to be pivotal, with BYD experiencing a 13% year-over-year growth in the first quarter. Additionally, BYD's robust export performance, particularly in Southeast Asia, highlights the global demand for Chinese EVs?.

In response to an evolving global landscape and U.S. policies, Chinese battery firms are strategizing to maintain their competitive edge. They are actively seeking to set up factories in the U.S. and build partnerships with car manufacturers to continue qualifying for the EV tax credit. Yet this process isn't going smoothly. Ford's plan to build a $3.5 billion EV battery factory in Michigan with Contemporary Amperex Technology was paused due to scrutiny from U.S. politicians??.

It's no wonder automakers want to pair up with Contemporary Amperex Technology - in terms of innovation, the company is at the forefront. In 2022, it announced the mass production of Qilin - its latest generation battery product - was scheduled to start in 2023. As of 2024, the company has begun full-scale production of the Qilin batteries, which offer greater efficiency and enable electric cars to drive more than 1,000 kilometers (621 miles) on a single charge.

Meanwhile, China's overall EV market is experiencing a considerable growth. With an estimated 500 EV manufacturing companies, China is focusing on developing sustainable transportation solutions for both personal and commercial use. One example of this is the market share of light electric commercial vehicles, which has significantly increased thanks to ample government help spurring the development and introduction of new models??.

Another reason why China is increasing electric car sales is to reduce its dependence on oil imports. Chinese OEMs are focused on developing more efficient battery EVs and enhancing vehicle systems, particularly e-powertrains, to drive market growth??.

However, China's rapid expansion has led to significant overproduction. The country has produced more EVs than it can sell domestically, which has resulted in an oversupply. Chinese manufacturers benefit from substantial government subsidies, which help them produce vehicles at lower costs and often lead to dumping excess vehicles in foreign markets at heavily discounted prices. This overflow of supercheap cars, sometimes of questionable quality, poses a threat to the U.S. market, potentially causing irreparable damage to American EV makers.

The geopolitical tensions between the U.S. and China have led to significant shifts in the global supply chains for EV batteries. South Korean companies including LG (KR:003550), Samsung Electronics (KR:005930), and SK Innovation (KR:096770) are emerging as competitive alternatives to Chinese batteries, but not without challenges as some of them, like SK Innovation's SK On, are forced to look outside China for materials for battery production??.

The prices of crucial minerals have seen considerable fluctuations as well - lithium carbonate prices nearly doubled between early 2022 and 2023. In 2022, the average battery price was about $150 per kWh, with pack manufacturing costs showing a downward trend compared to cell production costs??.

The Biden administration's focus on establishing domestic battery production and the Chinese response to set up manufacturing facilities in the U.S. to qualify for tax credits could create a geographical imbalance, which could in turn lead to disparities in EV availability and pricing.

Ultimately, rising costs and limited options could spoil the dream of widespread sustainable transportation, as consumers find it difficult to switch from fossil fuel-powered vehicles to electric alternatives.

More: The average price of EVs is dropping-here's how much

Also read: Power demand from AI, EVs and Big Tech is now the energy sector's No. 1 concern

-Jurica Dujmovic

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05-25-24 1114ET

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