Electric vehicle (EV) imports from China will account for 25% of EV sales in Europe in 2024.
Now China-based EV and battery firms are on the verge of coming to North America and there is no such thing as batteries without content from China. This is the context for U.S. protectionist legislation.
What follows is a most comprehensive plethora of reasons on why 1) protectionism won’t work and 2) North American and European EV manufactures are vulnerable to disruptive market threats from inexpensive Chinese EV alternatives.
China’s EVs in North America and Europe
The electric vehicle (EV) and battery industry in China is on the verge of invading North America and is already present in Europe.
China’s BYD, the world largest EV manufacturer, now selling more EVs than Tesla, is about to take on North America.
In December 2023, the BYD Seal, intended to compete head on with the Tesla Model 3, was introduced to Mexico. By the end of 2024, BYD intends to construct an EV manufacturing plant in Mexico.
In April 2024, there were indications that Mexico, under pressure from the U.S., would not allow BYD and other Chinese automakers to benefit from Mexican incentives. A source from the Office of the United States Trade Representative is quoted as stating that the United States-Mexico-Canada Agreement (USMCA) should not “provide a back door to China and others who may be seeking to access our market without paying … tariffs.” BYD has no intention to change its Mexican project plan.
In Europe, 19.5% of EVs sold in 2023 were imported from China. For 2024, the percentage may go as high as 25%.
U.S. protectionism barriers
With an election coming up, the U.S. trade barriers on China’s EV are being placed on steroids, to increase tariffs to 100%, up from the current a 27.5%. New tariffs will likewise apply to replacement battery components and eventually solar panels. Similarly, tariffs for semiconductors from China are to be incrementally doubled from 25% presently to 50% by 2025.
Republican Senator Marco Rubio wants a flat tariff of US$20,000 on China’s EVs.
Hence, BYD and other EV manufacturers based in China view current and potential barriers as an “incentive” to manufacture their EVs in North America. The planned BYD facility in Mexico would bring the tariff down to 2.5%.
The Alliance for American Manufacturing fears inexpensive Chinese EVs could lead to an “extinction-level event” for US automakers.
The flip side is competition with cost-friendly Chinese EVs would quickly bring down median prices of all EVs in the U.S., as well as in other global markets, thus accelerating a reduction in world oil consumption.
The European Union faces an analogous dilemma.
But the U.S. protectionism doesn’t stop at tariffs.
U.S. Inflation Reduction Act (IRA) rules on eligibility for investment tax and consumer credits, and Bipartisan Infrastructure Law (BIL) battery manufacturing and recycling grants, require North American battery content to rise from 30% in 2023 to 80% in 2027. The idea is to severe battery dependency on China.
Currently, EVs must be assembled in North America with 40% of battery critical minerals extracted or processed in North America.
Furthermore, eligibility requirements for both IRA and BIL set additional restrictions on for EV battery content from China. Specifically, the subsidies do not apply should a battery contain content from a firm which has 25% or more ownership from a Foreign Entity Of Concern (FEOC). China is a FEOC.
As of 2024, the IRA and BIL rule out subsidies for EVs with batteries manufactured or assembled by a FEOC.
Beginning 2025, exclusion rules apply to critical mineral components extracted, processed or recycled by a FEOC.
What follows are a plethora of reasons why U.S. restrictions on EVs from China are unlikely to derail disruptive threats to other EV and battery manufacturers.
Ditto for European EV stakeholders.
Purchase price of EVs from China
In 2021, the average price of a 100% electric vehicle in China was $26,500. This suggests China’s EVs will come in at much lower prices than many internal combustion engine (ICE) vehicles.
Indeed, ICE facilities in China seem to be headed towards stranded assets. For example, a Hyundai, ICE factory in China, built in 2017, is up for sale at less than 25% of its $1.15 billion original investment.
This particularly endangers North American EV manufacturers since, the North American auto industry has been concentrating on high-priced models.
China’s battery producers: Domination and 5-10 Years Ahead
Currently, it is impossible to manufacture a battery in North America without components from China.
First, with China representing 80% of global battery production, Chinese battery components are already in North America.
Second, China’s supply chains are able to produce batteries at a much lower cost than the rest of the industry. China-based CATL and BYD control 50% of the global battery manufacturing. Together, these two firms have accumulated enough experience to minimize battery production costs.
Third, EV manufacturers outside China, must draw upon battery technological innovation developments from China. This is so because the rest of the world is more than 5 years behind China.
One next generation battery is the lithium iron phosphate battery (LFP). China has the LFP lead.
CATL is producing LFP batteries.
LFP batteries are cheaper to manufacture and easier to recycle. On the downside, LFP batteries have a lower density than lithium-ion, meaning a bigger LFP battery is needed to provide equivalent storage to that of a lithium-ion one. But this does not tell all.
LFP batteries can be charged to 100%, while it is recommended that lithium-ion batteries not be charged more than 80-85%. Thus, autonomy can work out to be similar for both battery types.
On performance, LFP batteries are not as good as lithium-ion ones.
All considered, LFP batteries, for now, will be dedicated to standard range EVs, a clientele seeking the less expensive models.
Further on the horizon, are sodium-ion batteries. This battery type is produced with sodium and iron, abundant natural resources, while not requiring lithium, nickel, cobalt and graphite.
The main drawback of sodium-ion batteries are they are less dense and the lifespan tolerance of charging cycles are fewer than lithium ones.
These challenges have not stopped BYD from beginning construction in January 2024 of a $1.4 billion sodium-ion gigafactory in Xuzhou, the world’s first commercial scale sodium-ion gigafactory. The facility will initially serve mobility sectors not needing lots of storage capacity, specifically scooters and micro vehicles.
The U.S. and Canadian laggards
Announced March 20, 2024, the new Environmental Protection Agency (EPA) emission rule, calls for a 56% reduction in fleet-wide emissions by 2032. The EPA rule is projected to result in a U.S. EV market share of 35-56% by 2032. Automakers could comply with the 2032 targets with fully electric vehicles representing 56% of sales, and plug-in hybrids 13%.
Not impressive when compared with China and Europe.
EV sales in China will come in at 50% of the market by the end of 2024.
And Europe will likely hit 50% EVs by 2025.
Canada too has timid objectives with targets for zero emission vehicle percentages of total sales set at 20% for 2026 and 60% for 2030.
Notwithstanding, the EPA rule pleases some, like John Bozzella, president of the Alliance for Automotive Innovation.
Stellantis and Toyota think the new EPA rule goes too far.
Circumventing U.S. protectionism
To work around tariffs plus IRA and BIL restrictions on battery content and assembly originating in China, Ford clinched an innovative circumvention LFP battery deal with CATL. Under this arrangement, Ford owns the land and the building under construction west of Marshall, Michigan, plus will operate the plant through a 100% Ford-owned subsidiary. CATL will provide Ford with a license for CATL LFP technology and furnish some permanent staff.
This Ford-CATL package is a two-fold precedent. 1) It will lower the cost of batteries in North America, hence the median price of EVs on the continent. 2) It will benefit from IRA and BIL subsidies and consumer credits for North American content with technology from China.
As of November 2023, Ford production goals comprise batteries for 230,000 EVs/year. The anticipated cost is $2 billion, with 1,700 jobs created and a production start-up 2026.
Not unexpected, the Ford arrangement with CATL has drawn fire from Republicans. Especially annoying for them, is a Chinese company would benefit from U.S. subsidies and could endanger national security.
Meanwhile, Tesla is planning a new Nevada battery factory for 2024 that may use CATL technology.
The BYD Seal to be made in North America, Mexico, also evades the tariffs, while featuring LFP batteries too.
Another excellent example of by-passing U.S. protectionism is the U.S. market entry plans for the made in China all-electric Volvo EX30. With a price below that of the median of competitors, the Volvo EX30 will exploit two loopholes for sales in America.
One loophole is legislation dating back to the 1700s that refunds tariffs should the manufacturer have manufacturing facilities in the U.S. Volvo has a plant in South Carolina.
The other loophole is the IRA consumer rebate eligibility criteria exempts commercial vehicles that are leased. Purchasers, by acquiring the vehicles under leases and subsequently buying out their leases, can qualify for the government credits/rebates.
Response of China to U.S. IRA and BIL
China is challenging U.S. IRA North American content provisions on renewables and EVs at the World Trade Organization (WTO) asserting that these provisions violate General Agreement on Tariffs and Trade (GATT).
The WTO dispute takes aim at the manufacturing tax credits and 100% U.S. steel and iron requirements, all estimated to provide $400 billion of incentives for American clean tech manufacturing and projects.
This WTO filing by China extends to EV consumer credits and FEOC rules.
Getting around battery content from China is tricky.
China represents 85% to 90% of global rare earth element mining and processing, refines 60% of the lithium, 65% of the nickel and 68% of the cobalt required for EV batteries. As well, China manufactures of 65% of battery components, 71% of battery cells and 57% of the world’s EVs.
The majority of these battery raw materials are mined elsewhere. China only has 10% of the world’s lithium sources.
In many cases, the importation of raw resources are controlled by Chinese companies, including ones that are not owned by the government.
Third party content standards have yet to be developed.
Controlling the participation of China-owned battery firms will ultimately get more blurred as more than 150 additional battery plants are planned for China by 2030.
The Takeaway
China’s plan to overcome all trade and subsidy barriers is that of saturating clean tech sectors to exceed current world demand and thereby generate new demand for China’s lower priced clean tech.
The North American and European clean tech manufacturers and their respective governments are overwhelmed with the pending ubiquitous presence of low cost China clean tech, EVs and batteries included. This messes up their EV green economy plans.
Will China’s EV innovation lead and substantially lower EV purchase prices triumph over legislated protectionism?
