The United States is trying to break China’s influence in the American electric vehicle industry and establish its own supply chain. According to reports, on December 1, the US government released proposed new rules on tax incentives for electric cars. It mentioned that to strengthen the security of the US supply chain, from 2024, electric vehicles eligible for tax incentives may not contain battery components manufactured or assembled by “foreign entities of concern”; starting in 2025, eligible electric vehicles may not contain any key minerals extracted, processed, or recycled by FEOC.
The proposed new rules aim to implement the relevant requirements of the US “Inflation Reduction Act.” The definition of FEOC in the bill includes all companies owned or controlled by countries such as China, Russia, or Iran. According to reports, if a company is registered or established in the above-mentioned countries, or if a government department of those countries owns 25% of a company, the company may be considered an FEOC. Industry insiders analyze that the new rules may promote a shift in the US automotive supply chain. Currently, the US electric vehicle supply chain still heavily relies on electric vehicle materials and components provided by China. US automakers also face significant cost pressures when trying to retool factories to produce electric vehicles.
To change this situation, the US government mentioned in the 2022 climate bill that consumers of electric vehicles using domestic materials and manufactured in the US will receive a $7500 tax credit per vehicle. However, whether it is the inflation bill, climate bill, or new rules for electric vehicle subsidies, they have not completely blocked all paths. For example, companies in the electric vehicle industry chain, as long as the Chinese government does not own 25% of the shares, or if a Chinese company operates overseas, they can still receive tax credits. Therefore, even though the current US restrictions on Chinese electric vehicle industry chain companies are already strict, some conservatives are still not satisfied.
For example, they believe that Ford’s car factory in Michigan recently obtained a technology license from CATL, so the electric vehicles produced by this factory should not receive tax credits. Some Republican lawmakers say the new rules issued by the US Treasury Department are not enough to reduce America’s reliance on Chinese electric vehicle components and raw materials. “As China is using massive subsidies to weaken US manufacturers and stifle the global market for battery components, the Treasury Department’s naive new regulations will open the floodgates for US taxpayer money to flow to Chinese companies engaged in trade violations and forced labor,” they said. In the third quarter, electric vehicles accounted for about 8% of new vehicle sales.
Car manufacturers and battery makers say they are still reviewing the rules and need time to determine how many models are eligible for tax credits. Tesla said that starting in January 2024, its two cheapest versions of the Model 3 sedan will only be eligible for half of the $7,500 subsidy because they use batteries from Ningde Times. The Model Y may also not be eligible for full tax credits. The Model 3 and Model Y are the two best-selling electric cars in the US. Under the previous US electric vehicle subsidy rules, at least 40% of the battery’s essential minerals had to come from the US or a North American free trade partner for manufacturers to qualify for the subsidy.
This proportion will rise to 80% by 2027. Reports on the new rules did not mention the specific changes in this ratio and the implementation year. John Bozzella, CEO of the Alliance for Automotive Innovation, wrote in a blog post that if the US government bans all Chinese parts from entering the supply chain, no models may be eligible for tax credits next year. Currently, only about 20 of the over 100 electric cars sold in the United States meet the criteria for the federal tax credit. In addition, non-American car companies such as Hyundai, Nissan, and Hyundai are now excluded from the federal tax credit because they have not yet produced electric cars in North America.
Most car companies oppose the new regulations, but some suppliers seem to have a different view. Siyu Huang, CEO of battery technology company Factorial, believes “this is actually good news for us.” The company is developing next-generation electric car batteries with the support of Mercedes-Benz, Hyundai, and Stellentis. “The new rules will encourage American suppliers to accelerate technological progress.” John DeMaio, CEO of battery graphite processing company Graphex Technologies, said that while the rule may make it harder for electric cars to qualify for tax credits and temporarily slow down sales, in the long run, this move will encourage the growth of domestic American suppliers.
According to the research of the Massachusetts Institute of Technology Energy and Environmental Policy Research Center, the United States invested $213 billion in clean energy, clean vehicles, building electrification, and carbon management technology manufacturing and deployment in the past year, a 37% increase from the previous year. However, the global electric vehicle industry is still deeply rooted in China, which is the world’s largest producer and exporter of electric cars. China produces about two-thirds of the world’s batteries and refines most of the metal raw materials that power electric cars.
Some researchers have raised a question, saying that some companies may deliberately conceal their relationship with China in order to obtain a $7,500 subsidy – a “American-style subsidy fraud”. However, if the product is good enough, consumers will still choose it even without the $7,500 subsidy. Therefore, the impact of the new subsidy rules and inflation bills on Chinese electric cars is still within a controllable range.