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The US and South Korea have been brought closer together as both countries seek to reduce their dependence on Beijing in green technology and chips. The US overtook China as South Korea’s top export market last year for the first time since the early 2000s, while South Korean companies have been among the largest foreign investors in the US semiconductor and clean-tech sectors.
But with proximity comes friction, as decisions made in one country shape events in the other. This dynamic is especially apparent in the battery industry for electric vehicles, as Korean executives and officials grow increasingly concerned about a lack of clarity from US policymakers as to the implementation of the Inflation Reduction Act, the Biden administration’s landmark climate legislation
Korean companies are central to US efforts to spur adoption of electric vehicles. According to SNE Research, Korean firms, which are spending billions of dollars building plants across the US, are the second biggest producers of EV batteries with an expected market share of 18 per cent in 2025 — or 60 per cent of the world’s non-Chinese battery capacity. Hyundai and its sister brand Kia have together overtaken Ford and General Motors to claim second place in US electric vehicle sales behind Tesla, with their market share set to grow once a new $7.6bn plant in the state of Georgia starts production later this year.
But their investment decisions have been hampered by US prevarication. After months of delay, the Biden administration in December released draft guidance on the rules on Chinese participation in the US battery supply chain. But 18 months after the IRA was passed, industry insiders say the rules remain riddled with ambiguity and are subject to change, making it hard to know with which Chinese companies, and under what conditions, the Korean firms are allowed to co-operate.
With the new restrictions on Chinese participation due to kick in on January 1 2025, the industry insiders worry that time is running out for battery companies to make the investments they need to qualify for crucial tax credits. That in turn, will mean fewer affordable models on the US market, disrupting the EV transition. “The US government’s tardiness in clarifying the interpretation of the IRA rules is holding the industry back and impacting supply chains,” said Ross Gregory of the consultancy New Electric Partners. “Korean and Japanese firms need certainty on which raw materials and components are compliant.”
Those sympathetic to the dilemmas faced by US officials note they are being expected to accelerate domestic adoption of electric vehicles while minimising dependence on China and also creating US manufacturing jobs, all in the face of competing demands from environmental groups, labour unions, China hawks in Washington, domestic car companies and allied governments. According to one US official, the administration initially erred on the side of “flexibility”, accepting the concerns expressed by Korean officials, and that the IRA’s legislative provisions could not be reconciled with the administration’s green targets. This included allowing a loophole by which EVs assembled abroad that would not ordinarily qualify for IRA tax credits could do so if they were leased rather than sold to consumers. The Biden administration also reclassified important battery components such as anodes and cathodes so they could be produced outside North America.
But when the Biden administration finally released its guidance in December on what it would consider a “foreign entity of concern” that is disqualified from credits under the IRA, it became clear there had been a shift in its thinking. The guidance did not include a much-anticipated waiver for graphite processed in China, which dominates global supply chains for the critical mineral. According to Tim Bush, a Seoul-based battery analyst at UBS, unless the rules are amended before they come into force next year, it is possible that no vehicles will qualify for the credits in 2025 at all. “This was a worst-case scenario for the industry,” said Bush.
US officials stress they are listening to Korean concerns, and that there is still time to work out solutions. But according to one Korean battery industry official, unless the rules allow for Korean firms to qualify for tax credits, their US-made batteries will end up undercut by cheaper Chinese imports — undermining one of the rationales for passing the IRA in the first place.
christian.davies@ft.com
