Leading the Charge: EV Battery Supply Chains

The vertical dominance of Chinese companies

Practical implications of the dominance of Chinese companies in the EV sector

Chinese companies lead the market in the development and implementation of advanced battery technologies and production. These companies are important contributors to the competitive and dynamic nature of the wider EV industry, driving advancements in technology, infrastructure and consumer adoption. Competition between those companies, as much as with foreign manufacturers, has helped to decrease technology costs and improve affordability. These are, of course, important factors in encouraging adoption of the technology and assisting countries with achievement of their green goals.

Contra to the US government’s implicit ban (via the Inflation Reduction Act) on critical minerals originating from China for use in the US EV industry and tightened controls on exports of semiconductors to China (by stopping sales of Nvidia’s advanced artificial intelligence chips[29]), China, as the world’s top graphite producer and exporter, now requires special export permits for certain types of graphite (the raw material essential for EV battery anodes)[30].

Under these new restrictions, China will require exporters to apply for permits to ship two types of graphite which are used in EV batteries: high purity, high-hardness and high intensity synthetic graphite material and natural flake graphite and its products. These curbs are like those implemented by China in August 2023 on gallium and germanium which are key metals used to make semiconductors and electronics[31].

Seeking energy sovereignty

In light of the above, we see an underlying trend in the EV industry as it experiences a wave of collaboration and cooperation. Companies and governments are investing in domestic battery manufacturing and expanding global supply chains to ensure their own energy security (and cushion their heightened energy security concerns):

• Initiatives like the European Battery Alliance and proposed investments in the US are driving the development of competitive battery manufacturing industries.
• Automakers are adopting new business models to control supply chain margins and secure access to minerals supply. For example, Volkswagen and Stellantis have invested in mining companies to acquire mines in Brazil, while Ford, General Motors and Tesla are building their own battery plants and lithium refineries.
• China is expanding manufacturing presence abroad, while strategic partnerships like the Minerals Security Partnership aim to accelerate diverse supply chains.
• Efforts are also being made to diversify sources of critical minerals and explore alternative technologies.

All in all, the industry is evolving rapidly, driven by collaboration, diversification and emerging technologies.

US supercharges local supply chains

The Inflation Reduction Act (IRA)

Signed into law on 16 August 2022, a key focus of the IRA is to amplify the US government’s financial support to the clean energy sector and improve domestic EV supply chains. It does this by encouraging procurement of critical raw minerals supplies domestically or from free-trade partners as well as critical materials processing, refining, and recycling and incentivising domestic production.

Notably, consumers can receive a Clean Vehicle Tax Credit of up to US$7,500 if they buy a new qualifying EV or plug-in hybrid vehicle and up to US$4,000 for a used EV[32]. Eligibility requires a ‘local’ aspect:

• certain critical raw minerals used in the EV battery extracted, processed or recycled in the US or a free trade partner of the US[33], and/or
• battery components manufactured or assembled in the US.

EVs containing minerals extracted, processed or recycled by ’foreign entities of concern’ (FEOC) (which refer to North Korea, China, Russia and Iran) and EV battery components manufactured or assembled by these FEOCs will not qualify for the tax credit. The FEOC rules came into effect in 2024 for completed batteries and will come into effect in 2025 for critical minerals used to produce them.

China has filed a formal complaint with the World Trade Organisation (WTO) against the IRA, saying the legislation is discriminatory and has distorted the global EV supply chain[34]. The US in response has accepted China’s request to hold WTO dispute consultations which are expected to take place in the near future. The US has repeatedly asserted that the IRA is a tool to help the country realise its climate ambitions and transition to a clean energy economy. If no resolution is reached then the last resort would be adjudication by a WTO panel which can result in monetary penalties, trade and/or economic sanctions.

Under the Proposed Guidance[35], a foreign entity is a FEOC if it is…

New business ties forming in response to the IRA

Chinese companies are expanding their presence in the form of joint ventures with American automakers.

• Ford is building a US$3.5 billion plant in Michigan that will build batteries using technology from China's CATL.
• Foxconn, which makes the iPhone in China for Apple, is building electric pickups in Ohio after forming a joint venture last year with Lordstown Motors.
• China EV maker BYD is getting serious about building a battery plant in Mexico to establish a foothold in that region[36].

On the international stage, Chinese companies have linked up with Korean firms to take advantage of Korea’s FTA with the US. EV batteries made in Korea then installed in US-assembled EVs will qualify for IRA tax breaks. Five battery materials plants worth about US$4.4 billion have been announced this year by Chinese companies and local partners in South Korea.

• Zhejiang Huayou Cobalt Co agreed to launch a 100,000 ton precursor plant with LG Chem Ltd and a separate high-purity nickel material and precursor plant with POSCO Future M Co.
• China’s GME Resources agreed to build a 50,000 ton precursor plant in partnership with SK On, to start production in 2024.

It remains to be seen whether the Department of Energy (DOE) will allow credits for the resulting EVs. 

In any case, noting the DOE guidance that any minerals processed or extracted within China will not be eligible, regardless of ownership, there is uncertainty over how the IRA might impact on the operations of foreign companies in China.

• US company Albemarle is set to complete construction of a 50,000 tonne lithium hydroxide conversion plant in Sichuan province by early next year.
• Chile’s SQM and US company Arcadium Lithium have also both invested in new lithium processing plants in China.

The crux of the issue...

• If the US government deems any form of involvement with Chinese partners on battery-related ventures falls foul or is at risk of falling foul of IRA legislation then it will be difficult for countries other than China to diversify their supply chain (that fulfills US demands for batteries free of Chinese ownership of key components) especially since the majority of upstream production and processing is controlled by Chinese companies.
• The IRA may end up being counter-productive to its stated goal of spurring green transition if no country can qualify. South Korea recognises that Chinese companies control almost the entire EV supply chain so a strict application of the IRA would mean few companies involved in EV manufacturing in the US qualify for the incentives[37]. It may be the case that EV manufacturing firms determine that the cost advantages of Chinese technologies are worth more than IRA tax incentives. 

Investing in America initiatives

To further drive innovation and research and secure the domestic battery supply chain, the DOE offers financial incentives including:  

• more than US$131 million in funding for projects and an advanced battery consortium to advance research and development in EV batteries that accommodate the needs of EV manufacturers and battery suppliers[38] (announced in January 2024).
• a US$165.9 million loan to finance American Battery Solutions’ production of lithium battery packs. This is just one example of the many private sector investments made by the DOE’s Loan Programs Office, leveraging additional loan authority provided by the IRA to strength domestic supply chains.
• a US$15.5 billion package of funding and loans to enhance the EV value chain, primarily focused on retooling existing factories[39]. This includes...

Policies targeting the Chinese EV and battery industry

US drive to diversify supply chains

Over the past few years, US international policies have steadily grown in scope and intensity to better protect its domestic industries.

The Uyghur Forced Labor Prevent Act (UFLPA)

• The UFLPA came into effect on June 2022 with the aim of preventing companies from profiting from products manufactured using forced labour in the Xinjiang-Uyghur Autonomous Region (XUAR) in China.
• The law pursues this objective by prohibiting the importation into the US of goods with ties to forced Uyghur labour.

Ultimately, automakers may face a hard choice: continue with the more cost-effective upstream supply chain in breach of the UFLPA or take the more expensive foreign route of diversifying away from the XUAR. The latter option is easier said than done considering the world’s largest steel and aluminium producers have shifted to the XUAR hence implicating the steel and aluminium used to make practically every major car part.

US tariffs on imported Chinese EVs

• Most recently, in May 2024 the Biden administration raised tariffs on Chinese EV imports from 25% to 100%, as it intensifies efforts ahead of the US election to protect the American industry from Chinese manufactured vehicles before they can gain a foothold in the US market[40]. The sharp rise in the levies comes amid mounting concern that China could flood the US market with cheap EVs, threatening the American car industry.
• Practically speaking, the IRA restrictions combined with fresh tariffs aim to alleviate market oversupply. This is the same case in Europe with the ports of Antwerp and Zeebrugge inundated with Chinese EVs[41]. On this point, there is no mutual benefit to a trade war which runs counter to both countries’ agreement to advance climate cooperation[42], notably collaborating on greenhouse gas reduction as part of collective net zero emissions targets.

The EU builds alliances and competitiveness

The Critical Raw Materials Act

The EU unveiled its own Green Deal Industrial Plan in February 2023 to promote the competitiveness of EU countries. The Critical Raw Materials Act, as part of the Green Deal Industrial Plan, is currently under deliberation by the European Parliament and the Council of the EU. Both initiatives are meant to address the EU’s dependency on imported critical raw materials by diversifying and securing a domestic and sustainable supply of critical raw materials. This would be achieved by funding projects that aim to scale up the EU manufacture of key carbon neutral or ‘net-zero’ technologies to ensure a secure, sustainable and competitive supply chain for clean energy. The scope of projects funded cover mineral exploration activities and the identification and designation of strategic projects for critical raw materials[43].

The European Commission also now publishes an updated list of EU Critical Raw Materials every three years.

The European Battery Alliance

The European Battery Alliance (EBA) was launched in 2017 by the European Commission. It entails industry players from Europe actively collaborating with research institutes, public bodies, national authorities and the European Investment Bank to build and sustain a complete domestic battery cell manufacturing value chain.

The EBA developed the Strategic Action Plan on Batteries in 2019, which sets out a comprehensive framework of regulatory and non-regulatory measures to support all segments of the battery value chain. These measures include:

• securing access to raw materials
• supporting European battery cells manufacturing at scale and a full competitive value chain in Europe
• strengthening industrial leadership through stepped-up EU research and innovation to advanced and disruptive technologies in the batteries sector
• developing and strengthening a highly skilled workforce
• supporting the sustainability of EU battery cell manufacturing industry, and
• ensuring consistency with the broader enabling and regulatory framework in support of batteries and storage deployment.

In January 2024, EIT InnoEnergy (the innovation engine for sustainable energy supported by the European Institute of Innovation & Technology which is a body of the European Union) and Demeter Investment Managers (a major European private equity and venture capital firm) launched the Strategic Battery Materials Fund with the primary goal to invest in early-stage upstream projects focused on the mining and recycling of critical minerals including lithium, nickel, cobalt, manganese and cobalt[44].

At least 70% of investments from the EBA Materials Fund will be dedicated to projects increasing EU domestic production from mining, processing, refining and recycling in EU and neighbouring countries. The remaining 30% will focus on increasing raw material supply from EU Raw Material Partnership countries, such as Canada, Namibia and Argentina.

Subsidiary investigations into Chinese-made EVs

In protecting the car manufacturing and EV-related sectors, the European Commission is currently investigating Chinese EV imports into the EU for suspected breach of EU competition rules – the EU’s suspicion being that Chinese EV companies are benefitting from significant state subsidies derived from the country’s trade and industrial policies to sell their EVs at an unfairly low price in the EU hence distorting the EU market[45]. The EU probe is expected to conclude in the second half of 2024.

Less than a month after the US announced plans to increase tariffs on Chinese EV imports from 25% to 100, the European Commission in June 2024 announced it would combat the aforementioned excessive subsidies with additional tariffs of up to 38.1%[45] on imported Chinese EV to take effect from 5 July this year. Both sides are currently in talks to resolve this dispute…

Notwithstanding the above developments, Chinese automakers appear undeterred. BYD and Geely-owned Volvo announced new investments in EV production in Europe to shift closer to final demand. Unlike in the US, where Chinese EV investment has been heavily scrutinized, EU member states have so far been eager to receive Chinese EV investment. In fact, EU member states are competing against each other to offer incentives to Chinese firms.

The EU is faced with a potential dilemma of its own making. One of its stated goals is to completely phase out the internal combustion engine in favour of EVs by 2035, supported by rapidly increasing mandatory EV sales quotas. The availability of cheaper Chinese EVs is arguably an important factor in the viability of these targets. The potential adverse impact would be greater again if we assume that tariffs would apply equally to western automakers importing Chinese-made EVs into Europe.

Efforts by other countries to build sustainable supply chains

Other countries are ramping up their strategies for identifying and securing a sustainable supply of critical minerals.

• The United Kingdom (UK) published its Critical Minerals Strategy in July 2022 and its Critical Minerals Refresh on 13 March 2023.
• The UK is considering whether to launch a similar investigation into Chinese-made EVs to that running in the EU. This is because Chinese EVs are expected to be diverted into the UK market from the EU if the EU imposes tariffs on imports as a result of its investigation[46].
• Australia, Japan and Korea each maintain a list of critical minerals identified as essential for the country’s energy security.

The global shift: cooperation and innovation

Growing investment in domestic and in-house manufacturing

In addition to new and improved regulatory frameworks, governments and companies are investing heavily in expanding their domestic battery manufacturing capabilities.

Automakers worldwide have replicated the vertical integration model popular in China, in a shift from their previous business models, so as to control their supply chain margins and secure access to minerals supply.

• Upstream, Volkswagen and Stellantis have each invested US$100 million in mining company ACG’s efforts to acquire two mines in Brazil from private equity group Appian Capital. Volkswagen views its investment as a “prepayment for future nickel supplied by the mines”[49], primarily to bring down the cost of battery cells and meet the demand from its own operations.
• Downstream, Ford and General Motors are building battery plants.
• Tesla is breaking ground on its lithium refinery in Texas to produce its own battery-grade lithium (in turn reduce sourcing from China’s lithium refineries, responsible for producing the majority of refined lithium[50]).

As localisation grows for some nations, for others it’s a story of internationalisation

Companies in the EU and US are among those that have announced domestic plans for new mining, refining and cell production projects to help meet demand, such as the creation or expansion of battery factories. These companies are also exploring new business models for the recycling segment. By recycling raw materials primarily found in one location, companies and countries can reduce their dependency on others. Taken as a whole, these activities aim to increase the localisation of battery supply chains.

On the other hand, China’s EV companies are increasingly internationalising, expanding their manufacturing presence abroad, with most new investments planned in Europe, Brazil and Southeast Asia. Chinese battery manufacturers are bringing more of the supply chain with them in their overseas expansion, likely in response to growing market demand and re-shoring pressures.

Some countries have proactively tried to attract investment, with China manufacturers the key target of Thailand’s goal to lure US$28 billion of foreign investment by 2027[51]. Chinese companies have responded in kind to Thailand’s suite of tax incentives and subsidies, committing to invest US$1.44 billion in new production facilities and the establishment of the China Automotive Technology and Research Centre in the country[52].

Global cooperation diversifying supply chains and driving innovation

Though we see reasonably strong themes of protecting national interests, there are also examples of strategic partnerships used to mitigate risks in the rebalancing and development of supply chains.

• Multi-country effort to build supply chains

One example is the Minerals Security Partnership (MSP). The MSP is an ambitious new US-led partnership to accelerate the development of diverse and sustainable critical energy minerals supply chains. Comprising of 15 states including Australia, Canada, Korea, the UK and the US, it aims to do this by collaboration between host governments and industry to facilitate targeted financial and diplomatic support for strategic projects. The MSP considers projects along the full clean energy value chain. A recent statement confirmed that 23 undisclosed projects covering mining, extraction, and secondary recovery, to processing and refining, then finally recycling, are in motion[53]. Although this global initiative is a step in the right direction to secure a stable supply these critical minerals, it cannot eliminate the supply chain vulnerabilities that members of the MSP are facing. Certain critical minerals are not found in extractable quantities within the member countries[54], and so a dependence on China or other third countries will still exist.

• Trade deals to secure critical minerals, products and components

Countries are considering new avenues for procurement of critical minerals (or products and components developed from them later in the supply chain). So far, the US has made just one critical minerals trade deal, with Japan in 2023 (the US-Japan Critical Minerals Agreement), allowing Japanese companies to leverage US tax incentives as they supply EV battery materials[55], a positive development from this agreement being Mitsubishi Chemical’s plans to establish a new production base for anode materials in the US with an annual capacity of 10,000 tonnes (enough material for 100,000 EVs)[56]. The US is also in talks with the UK, the EU and nickel-rich Indonesia, but these talks are in the preliminary stages and will take time.

• US encourages efforts in Australia

The members of the MSP further co-operate amongst themselves. The US has recently designated Australia as a domestic source under the Defense Production Act, allowing Australia to benefit from the Inflation Reduction Act’s clean energy incentives. On that basis, Australian-based businesses will be eligible to receive loans, grants and purchasing contracts direct from the US Government to support priority sectors, such as critical minerals supply chains and advanced capabilities[61].

• Japan and Canada cooperate on supplies

Following Korea’s lead, in response to China’s new restrictions on graphite exports, Japan has been looking to Canada and Africa for EV and chip materials. In return for financial, scientific and technical help, the Canadian government is subsidising new Japanese investments to develop Japan’s own EV battery supply chain. Japan has further announced plans to work with several African countries including Namibia and Angola on joint mineral development and support the entry of Japanese companies into African nations to secure important mineral resources[62].

• Companies collaborate to share knowledge

We see these collaborative endeavours fostered not just on a national level but between EV companies as well. And, consistent with some of the examples of encouraging Chinese foreign investment, partnership and knowledge sharing already mentioned, some of this collaboration is occurring across what might be regarded as geopolitical lines.

In July 2023, Volkswagen entered a technology partnership with Xpeng Motors to release two EVs in China.

More recently, Tesla partnered with Baidu to use Baidu’s mapping and navigation function for Tesla car’s self-driving feature on Chinese roads.

The China Plus One Strategy: Growing industries in low-cost economies – including across Southeast Asia

China Plus One (or China+1) is a business strategy to channel investments into manufacturing in other promising developing economies such as India, Thailand and Vietnam.

When this strategy first emerged, the goal was to move manufacturing and production to lower-cost developing countries to reduce expenditure. In more recent years, the strategy has also been about securing diversification of supply chains. To benefit from the IRA, a potential supply chain restructuring plan under evaluation is to source raw materials from South America and Australia, ship them to Mexico or Canada to be processed and finally assemble the EV batteries and EVs in the US[63].

How we predict this strategy to play out in the EV industry here in Southeast Asia[64]:

Chinese companies have refined this strategy. The aim is to build business ties with new regions by transferring parts of the company’s industrial supply chain and, in the process, diversify and build resource bases to eventually enter new markets in those regions.

Apart from Congo where Chinese companies procure a majority of their cobalt supply, there has been a recent billion-dollar wave of Chinese lithium deals in Africa where many Western investors have not yet fully ventured into[65]. Zhejiang Huayou Cobalt Co. bought a lithium mine in Arcadia, Zimbabwe for US$422 million in 2021 and spent a further US$300 million to build Africa’s first Chinese-owned lithium concentrate plant. The plant has now started trial production in Arcadia and is expected to produce 50,000 tonnes of lithium carbonate equivalent lithium concentrate annually[66].

The early move to tap new sources of lithium supply across Africa has paid off[67] with mines across the continent forecasted to increase production of lithium raw material volumes more than 30-fold from 2023 to 2027. Africa will account for 12% of global supply by then, compared with 1% in 2022[68] and Chinese positions in the market have positioned it to continue as the world’s leading lithium refiner with control over a significant portion of the lithium supply chain.

Conclusion: Establishing a truly global EV battery supply chain

In the quest for clean energy in transportation, EV batteries are pivotal. Securing their supply chains is critical, especially given the global EV market's explosive growth. The current prominence of Chinese companies in the EV battery supply chain is undeniable. The benefits brought by Chinese companies in EV and battery technology sectors are also difficult to deny, given their advancements in EV and battery technology, and overall scale of their operations in these sectors.

Equally, certain players have actively pursued a diversification strategy to ensure a more inclusive global effort. While recognising the different (and possibly competing) concerns, it is ideal for stakeholders (countries and commercial entities alike) to align their foreign and domestic economic interests with international climate commitments to propel the clean energy transition effectively.

Though the goal is ambitious, advancing towards net-zero emissions is a challenging journey and one which is a truly global effort, where EV and related battery technologies have the potential to play a crucial role.

Key takeaways for businesses

• Diversify supply chains and audit vulnerabilities: Reduce reliance on single sources, particularly for critical raw materials like lithium, cobalt, manganese, nickel and graphite.
• Reassess manufacturing locations: Consider the feasibility of manufacturing in alternative locations that offer cost advantages or strategic benefits.
• Explore recycling opportunities: Investigate recycling raw materials from used batteries to reduce dependency on raw material imports and support sustainability.
• Monitor regulatory changes and trade agreements: Stay abreast of regulatory shifts towards sustainability and be prepared to adapt to new policies, such as bans on ICE vehicles and incentives for EV adoption, as well as international trade agreements.
• Form strategic partnerships: Consider forming strategic partnerships to mitigate risks and ensure a stable supply of critical materials.
• Seek government support: Explore opportunities for financial support from government initiatives aimed at boosting domestic EV battery production.

For more on the energy transition, subscribe to our ESG updates and see:

• KWM Critical Minerals Series - The central role of copper to AI and net zero
• Indonesia’s Nickel Rush – Riding the Waves of the EV Battery Revolution
  
• Navigating The Net Zero Transition: Spotlight on Southeast Asia, Japan and the Republic of Korea
• Flying carbon-free: Aviation’s green transformation