[why&next] $558 Trillion US-Origin 'Dollar Tsunami'... Inflation Reduction Act Shaking K-Industry

Electric Vehicles Still Have Time Before US Factory Production
Battery Investment in North America Expected to Increase Further
Renewable Energy: Domestic Companies Benefiting from Leading US Market

U.S. President Joe Biden held a press conference on the Inflation Reduction Act at the White House in Washington, D.C., on the 28th of last month (local time). [Image source=Yonhap News]

[Asia Economy Reporters Kiho Sung, Hyungil Oh, Donghoon Jung] As the United States moves to exclude China not only from semiconductors but also from batteries and renewable energy, a major transformation of the global supply chain is anticipated. Starting in 2024, electric vehicle subsidies will only be granted if battery materials and components are sourced from countries other than China. The U.S. prioritization strategy aims to break away from China’s battery supply chain, which controls up to 80% of the global market, and establish an independent ecosystem. This is expected to inevitably impact major global companies, including those in South Korea.

In South Korea, sectors such as batteries, electric vehicles, and solar panels are expected to benefit, but significant challenges remain. While increasing production in North America, dependence on raw material supplies from China must be reduced. Given that South Korea’s reliance on China for battery minerals exceeds 90%, considerable difficulties are anticipated. Automakers like Hyundai and Kia now face the challenge of competing in the U.S. market at higher prices than their global rivals.

Significantly Raised ‘Made in USA’ Standards... Opposition Voices Even Within the U.S.

According to industry sources on the 10th, the U.S. Senate passed the Inflation Reduction Act on the 7th (local time), which aims to exclude China from the battery supply chain?a key element of energy transition?through subsidy policies. The $430 billion (approximately 558 trillion KRW) legislation stipulates that tax credit benefits provided by the government when purchasing electric vehicles apply only to vehicles produced in the U.S. This essentially means halting the use of electric vehicle batteries manufactured in China.

Specifically, to receive half of the $7,500 (8.9 million KRW) electric vehicle subsidy, key battery materials (lithium, nickel, cobalt, etc.) must be sourced from the U.S. or countries with which the U.S. has a Free Trade Agreement (FTA). This ratio will increase from 40% in 2024 to 80% by 2026. The other half of the subsidy requires that over 50% of the battery’s major components (cathode, anode, electrolyte, separator) be manufactured in North America, with this ratio expanding to 100% by 2028.

Additionally, starting next year, subsidies will only be granted for electric vehicles that are finally assembled in North America. The U.S. automotive and battery industries, for which the U.S. market is critical, now face the difficult task of completely restructuring their material and component supply chains.

The U.S. automotive industry has immediately voiced opposition. Given the high dependence on Chinese raw materials, emphasizing ‘Made in USA’ alone is considered premature. John Bozzella, president of the Alliance for Automotive Innovation representing GM, Ford, Hyundai, Toyota, and others, stated, "Under these standards, 70% of the 72 electric vehicle models currently available in the U.S. will be excluded from subsidies," adding, "No electric vehicle will be able to receive the full subsidy." He further explained, "To qualify for subsidies, electric vehicles must be assembled in North America, but as soon as the law takes effect, some manufacturers will lose eligibility. This is not something that can be done overnight."

Professor Pilsoo Kim of Daelim University’s Department of Automotive Studies pointed out, "The U.S. has taken a politically risky step to lead the renewable energy market. According to the U.S. government’s current plan, it will be difficult even for the U.S. to manufacture electric vehicles, which is why opposition voices are emerging domestically."

[Image source=Yonhap News]

"Electric Vehicle Factory Won’t Be Completed Until 2025"... Hyundai and Kia’s Dilemma

On the surface, the U.S. Inflation Reduction Act is expected to be favorable for domestic automakers like Hyundai, as it blocks the rapidly growing Chinese electric vehicle exports to the U.S.

Analyst Seonjae Song of Hana Securities said, "South Korea is an FTA partner with the U.S., and Korean automakers are now building factories in the U.S. Since key battery suppliers are accelerating factory expansions in the U.S., it will be easier to comply with related regulations, so overall this is seen as an opportunity."

However, upon closer examination, domestic companies face similar difficulties. Hyundai Motor Group must also resolve the issue of final electric vehicle assembly in North America. Currently, Hyundai models receiving U.S. tax benefits include the Ioniq 5, Kona EV, and Ioniq EV. Kia’s Niro EV, Soul EV, and EV6 also benefit. Hyundai plans to locally produce the electrified GV70 within this year and the EV9 in 2024, but local production plans for the most popular Ioniq 5 and EV6 in the U.S. have yet to be established.

Securing electric vehicle production lines takes time, which is a concern. Hyundai Motor Group plans to invest 6.3 trillion KRW to build an electric vehicle factory in Georgia, but construction will only begin in the first half of next year and is expected to be completed in 2025. In the worst case, from the law’s enforcement next year until the Georgia plant’s completion?about two and a half years?Hyundai and Kia will have to sell electric vehicles in the U.S. without tax benefits. In November this year, the Genesis GV70 electric SUV will be produced at the Alabama plant, but as a luxury model, it is unlikely to significantly boost sales.

For the Ioniq 7 and EV9 scheduled for release next year, decisions on U.S. production require agreement with domestic labor unions, a process likely to involve conflict. Hyundai’s collective bargaining agreement states that "matters affecting employment due to transfer of vehicle models to overseas plants or confirmation of overseas production plans for the same models produced domestically shall be deliberated and resolved through a joint labor-management committee." Kia has similar provisions. The Kia union, currently negotiating this year’s wage and welfare agreement, plans to hold a press conference in front of Hyundai Motor Group’s headquarters in Yangjae-dong, Seoul, demanding withdrawal of overseas investments and expansion of domestic plant investments.

Experts emphasize the need to diversify key electric vehicle components that have been overly dependent on China through this opportunity. Senior Research Fellow Hanggu Lee of the Korea Automotive Technology Institute said, "The U.S. has long been discussing with countries like Canada and Australia to break away from China’s supply chain. Considering the risk of being controlled by China due to excessive dependence, this is the time to diversify supply chains."

Professor Pilsoo Kim advised, "We need to closely observe the stance of U.S. automotive unions regarding this law. Since persuading the U.S. in a way favorable to us is not easy, leveraging opposition forces within the U.S. is the best approach."

Battery Industry’s Expected Windfall... "Supply Chain Diversification Needed"

South Korea’s battery industry is also expected to benefit from the U.S. Inflation Reduction Act. By expanding production facilities already secured in North America, they can also enjoy financial support from the U.S. government. If partnership offers continue for the three major battery companies locally, North American investment is expected to increase further.

The core of the Inflation Reduction Act is that vehicles released or registered after December 31, 2024, will be excluded from benefits if certain minerals in their batteries are extracted, manufactured, or recycled in foreign countries of concern.

This is devastating news for Chinese battery companies like CATL, the world’s largest electric vehicle battery manufacturer, which had been rushing to enter the U.S. market. However, South Korea’s three major battery companies are expected to enjoy a windfall.

LG Energy Solution is expected to secure an annual production capacity of 1,245 GWh in North America by 2025. Of this, the joint venture with GM and Stellantis accounts for an absolute share of 215 GWh.

SK On is continuing investments in the North American market, securing two plants in Georgia with a total investment of 3 trillion KRW. It launched BlueOvalSK, a joint venture with Ford, and plans to operate joint production plants with a total capacity of 129 GWh in Tennessee and Kentucky between 2025 and 2026.

Samsung SDI, through a joint venture with Stellantis, plans to invest $3.1 billion (4.5 trillion KRW) to build a battery plant with an annual capacity of 23 GWh by 2025. The plant is planned to be expanded to 33 GWh in the future.

However, they also face the challenge of achieving supply chain independence from China. Reducing dependence on Chinese raw materials, which currently hold an overwhelming share, and directly sourcing raw materials from third countries inevitably increases costs. There are concerns this could negatively affect ongoing cooperative relationships with China.

If alternatives to Chinese raw materials are not secured by 2024, it will be difficult to expect increased electric vehicle demand driven by tax benefits.

South Korean battery companies’ dependence on Chinese raw materials and intermediate goods is overwhelming. According to the Korea Institute for Industrial Economics & Trade, last year’s import dependence on China for finished secondary battery products was 92.3%, with anode materials at 85.3%, semi-finished products at 78.2%, cathode materials at 72.5%, and separators at 54.8%, all exceeding 50%. However, it is estimated that a significant portion of these materials are produced in China by domestic companies and supplied to South Korea.

In this context, battery companies are accelerating their entry into North America, making it urgent to devise measures to reduce import dependence on Chinese raw materials.

The International Energy Agency (IEA) recently reported, "Although the U.S. and Europe are promoting the development of domestic battery supply chains, most supply chains are likely to remain in China until 2030," and emphasized, "To promote sustainable investment and knowledge sharing, cooperation between producing and consuming countries must be strengthened."

South Korea’s three major battery companies also find it difficult to abandon cooperation with China. Their competitiveness in materials and raw materials remains weak; for example, they rely on imports of over 90% of battery precursors from China.

If Chinese raw materials are no longer used in the future, conflicts between companies from both countries may arise. Currently, LG Energy Solution has a production plant in Nanjing, Jiangsu Province, China, and is promoting the establishment of a battery recycling joint venture with China’s Huayou Cobalt. Cooperation is increasing not only in raw materials but also in battery recycling. SK On has secured four battery production bases in Changzhou, Huizhou, and Yancheng, with production capacity expected to reach 77 GWh.

An industry insider said, "To gain windfall benefits, it is necessary to proactively establish supply chain diversification. While securing a variety of customers, we must explore ways to source raw materials from third countries including local sites and respond accordingly."

South Korea Faces Solar Power Boom Amid Inflation Reduction Act and Supply Chain Restructuring

The Inflation Reduction Act has raised expectations among domestic solar and wind power companies. Following the law’s intent to reduce dependence on China and increase local production in North America, domestic solar companies that have secured a foothold in the U.S. market are expected to benefit. Hanwha Solutions, the top solar module company in the U.S., is a prime example.

Hanwha Solutions operates a solar module plant in the U.S. with an annual capacity of 1.7 GW. Starting from the second quarter of next year, it will add another 1.4 GW capacity. Hanwha Solutions is also expanding renewable energy development projects in Europe. Its European energy subsidiary, Q Energy, is collaborating with German solar development specialist ENVIRIA on a 500 MW solar development project.

Following the global supply chain restructuring that began in earnest last year, the benefits to domestic companies are reflected in figures. Hanwha Solutions’ renewable energy division recorded sales of 1.2343 trillion KRW in the second quarter this year (consolidated basis), a 22.6% increase compared to the same period last year, and operating profit turned positive at 35.2 billion KRW after seven quarters. Hyundai Energy Solutions, a solar module manufacturer and seller, saw second-quarter sales rise 80.5% to 264 billion KRW, with operating profit surging 719.1% to 23.7 billion KRW. OCI’s energy solutions division, which produces polysilicon?a basic material for solar panels?also escaped losses with sales and operating profit of 140 billion KRW and 5 billion KRW, respectively.

The Biden administration claims the law will help curb inflation. While it may not dramatically reduce inflation in the short term, combined with other elements of the law, the government argues it can reduce deficits and ease inflationary pressures, thereby lowering the risk of recession.

The issue is that this green infrastructure investment coincides with supply chain restructuring involving China. China dominates the value chains of green industries such as batteries and solar power. It has achieved economies of scale across most processes, from raw material mining to processing and finished product manufacturing. If the U.S. embarks on large-scale investment in green infrastructure, Chinese companies are likely to benefit under the current circumstances.

Even domestically, there are concerns that the value chain has been disrupted due to the volume offensive by Chinese solar companies. Forty percent of polysilicon production facilities are concentrated in China’s Xinjiang Autonomous Region, and the top 10 Chinese companies control 98% of the market for ingots (metal or alloy cast into molds) and wafers (thin semiconductor slices used in solar cells for integrated circuit manufacturing).

Calls are growing for government support to develop next-generation high-efficiency solar cells. Senior Researcher Jo Euyun of the Korea International Trade Association said, "Government support for low-power, low-cost wafer and ingot manufacturing is urgently needed," and added, "Targeting the U.S. and Indian markets, which are in conflict with China, is also a viable strategy." There are also views advocating for encouraging the use of domestically produced solar power. Last year, 65% of solar cells distributed domestically were Chinese-made, while domestic products accounted for only 22%.