US to limit China’s ability to benefit from electric vehicle industry

The Biden administration proposed new rules Friday (Dec 1) aimed at shifting more production of electric vehicle batteries and the materials that power them to the United States, in an attempt to build up a strategic industry now dominated by China.

The rules are meant to limit the role that Chinese firms can play in supplying materials for electric vehicles that qualify for federal tax credits. They will also discourage companies that seek federal funding to build battery factories in the United States from sourcing materials from China or Russia.

The rules could encourage shifts in automotive supply chains, which continue to rely heavily on China for materials and components of electric vehicles. Automakers are also facing intense cost pressures as they try to modify their factories to make electric cars; China offers some of the most advanced and lowest-priced battery technology in the world.

The Biden administration is trying to use billions of dollars in new federal funding to change that dynamic and create a US supply chain for electric vehicles.

The climate law President Joe Biden signed in 2022 includes up to US$7,500 in tax credits to consumers who buy electric vehicles made in the United States, using largely domestic materials. The law also included a general ban on Chinese products. Lawmakers mandated that firms in China, Russia, North Korea and Iran be prohibited from providing certain materials to cars that received those tax breaks.

But the law left open several questions, including what constitutes a Chinese or Russian company. Administration officials said those definitions included any entity that was incorporated or had headquarters in China or Russia, as well as any firm in which 25 per cent of the board seats or equity interest was held by Chinese or Russian governments.

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Chinese companies that set up operations outside China appear to be able to benefit from the rules, as long as the Chinese government is not a significant shareholder. That provision came as a relief to automakers, which feared that the Biden administration might ban them from contracting with Chinese-owned mines or factories in the United States or other parts of the world.

The law also requires battery makers that strike contracts or licensing agreements with Chinese firms to ensure that they are retaining certain rights over their projects. That provision is intended to make sure a Chinese firm is not effectively in control of such a project.

Some conservative lawmakers had challenged Ford Motor’s plans to license technology from the Chinese battery giant known as CATL for a plant in Marshall, Michigan, arguing that such a partnership should not be eligible for federal tax credits.

The rules kick in for battery components in 2024 and in 2025 for critical minerals like lithium, cobalt and nickel. They could be adjusted depending on industry comment.

The rules could have a profound effect on the U.S. electric vehicle market, which is rapidly growing; battery-powered vehicles made up about 8 per cent of new cars sold in the third quarter. Car and battery makers said Friday that they were still reviewing the rules and that it would take time to determine how many models would qualify for tax credits.

Tesla said Friday that the two least expensive versions of its Model 3 sedan would qualify for only half the US$7,500 credit starting in January. The Model Y SUV also might not qualify for the full credit after Dec 31, Tesla said. The Model Y and Model 3 are the top two electric vehicles by sales in the United States. Tesla buys some batteries from CATL.

John Bozzella, chief executive officer of Alliance for Automotive Innovation, wrote in a blog post Friday that the rules struck “a pragmatic balance,” including by exempting trace materials. If the administration had banned all minor Chinese parts from the supply chain, no car models might have qualified for tax credits next year, he said.

Many cars have already been disqualified from purchase credits by other rules, like a requirement that vehicles be assembled in North America. Only about 20 vehicles currently qualify for the program out of more than 100 electric vehicles sold in the United States.

The rules also raised new questions about whether stricter requirements for supply chains could continue a trend of driving more shoppers to lease, rather than buy, vehicles.

The prohibition on sourcing from China applies only to vehicles that are sold, not to those that are leased. Consumers can receive tax credits for electric vehicles they lease from auto dealers, and that has led to a boom in electric vehicle leasing.

Jack Fitzgerald, chair of Fitzgerald Auto Malls, which operates dealerships in Florida, Maryland and Pennsylvania, said he had seen a spike in customers leasing electric vehicles. But he said concern about electric vehicle range and the availability of chargers, more than price, was holding back electric vehicle sales.

“That’s the principal thing,” Fitzgerald said.

Auto industry lobbyists have warned that extremely strict rules could stifle electric vehicle sales, and they have urged the administration to strike more trade deals to secure supplies of scarce battery minerals. But Paul Jacobson, chief financial officer of General Motors, said the company had structured its electric vehicle operations to be successful regardless of the federal rules.

“We’re not anchoring the business on saying this has to happen” with regard to regulations, Jacobson told reporters Thursday. If regulations change, he added, “it’s not a backbreaking thing for us.”

Over the past year, companies have invested US$213 billion in the manufacturing and deployment of clean energy, clean vehicles, building electrification and carbon management technology in the United States, according to tracking by the Rhodium Group and the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology. That is a 37 per cent increase from a year earlier.

Still, the global electric vehicle industry remains heavily anchored in China, which is the world’s largest producer and exporter of electric vehicles. China produces about two-thirds of the world’s battery cells and refines most of the minerals that are key to powering an electric vehicle.

The rules also restrict automakers from sourcing nickel used in their batteries from Russia, which is one of the world’s largest nickel producers.

One of the challenges for automakers will be developing systems to track all the components of their battery through a long and often opaque supply chain.

Vehicles that are reported incorrectly will be subtracted from an automaker’s eligibility for tax credits, Treasury said, and automakers that commit fraud or intentionally disregard the rules could be declared ineligible for the credit in the future. NYT