[Complete Battery Mastery]⑭ "Ford-CATL Joint Venture is a Blessing"... Hidden Loophole in China's Containment Network

Opportunity but burden like equity adjustment
Large funds needed to secure additional shares
Possible establishment of US Ford-China CATL joint venture interpreted

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American electric vehicle manufacturer Tesla recently posted a notice on its website stating, "Certain models may see a reduction in federal tax credits starting in 2024," urging customers to "take delivery of vehicles by the end of this year." This move reflects awareness of the Foreign Entity of Concern (FEOC) guidelines announced by the U.S. government on December 1. Following the announcement, Ford officially confirmed that its Mustang Mach-E electric vehicle will no longer be eligible for government subsidies starting next year.

Under the U.S. Inflation Reduction Act (IRA), up to $7,500 in subsidies (tax credits) are provided for eco-friendly vehicles such as electric cars. However, electric vehicles that source battery components (from 2024) or critical minerals (from 2025) from FEOC-designated entities will no longer qualify for these subsidies. Some Tesla models and Ford Mustang Mach-E use lithium iron phosphate (LFP) batteries produced by China's CATL.

The FEOC guidelines reveal the U.S. government's intent to curb China's influence in the electric vehicle supply chain. From this perspective, there may be opportunities for Korean companies. However, domestic companies that have maintained various cooperative relationships with China now face additional burdens to reorganize supply chains and adjust equity stakes.

Tesla homepage capture (December 6, 2023). It informs at the top that subsidies for some models may be reduced starting next year.

Children of Senior Chinese Officials Also Classified as 'Concerned Government'... 'Effective Control' Is the Criterion

When the U.S. government enacted the IRA in August 2022, it stipulated that electric vehicles containing critical minerals and components sourced from FEOC-designated entities are ineligible for tax credits. However, the delay in releasing detailed FEOC guidelines increased uncertainty in the automotive and battery industries.

Various groups, including the Alliance for Automotive Innovation representing U.S. automakers, and Autos Drive America, which includes Hyundai Motor and Toyota, have been lobbying behind the scenes. Korean government agencies have also met multiple times with U.S. officials to convey the Korean government's position.

The recently announced FEOC guidelines are considered stricter than expected. The industry had hoped that, considering the Biden administration's emphasis on promoting eco-friendly electric vehicles and the high dependence on Chinese battery materials and components, the FEOC guidelines would be more lenient than the CHIPS Act for semiconductors.

However, the final guidelines impose stringent measures on China comparable to those in the semiconductor sector. This reflects political pressure in the U.S. to pressure China in advanced industries rather than merely promoting electric vehicle adoption. Democratic Senator Joe Manchin and others have argued that IRA subsidies should not flow to Chinese companies.

The FEOC guidelines were jointly issued by the U.S. Department of Energy and the Treasury Department. The Department of Energy clarified key legal terms such as 'foreign entity,' 'concerned government,' 'jurisdiction,' and 'ownership, control, or direction' in its 'Interpretation of Foreign Entity of Concern' guidance. The Treasury Department issued procedural guidelines related to the practical application of the DOE's FEOC definition. Under U.S. law, 'Entity' encompasses both natural persons and legal entities, translated as 'institution' or 'group' in Korean.

First, the DOE defines a foreign company as an FEOC if it is established, located, or has its main business operations under the jurisdiction of a concerned foreign government. Entities owned, controlled, or directed by a concerned government are also considered FEOCs. 'Ownership, control, or direction' primarily means ▲ the concerned government owns 25% or more of the equity, or ▲ the concerned government secures 'effective control.'

'Concerned government' is defined as central and local governments, their agencies and organizations, ruling and dominant political parties of the concerned country, and current and former senior politicians (including immediate family members). The concerned countries are China, Russia, Iran, and North Korea, with China being the primary focus regarding the electric vehicle battery supply chain.

The guidelines explicitly state that the Chinese government includes the Chinese People's Political Consultative Conference, current members, the Politburo Standing Committee, the Central Political Bureau, the Communist Party Central Committee, and current and former members of the National Congress of the Chinese Communist Party. Immediate family members (spouses, parents, siblings, children, and spouses' parents and siblings) of these senior officials are also classified as part of the 'concerned government.' Even Chinese private companies may be significantly affected by these regulations.

The U.S. government considers an entity to be 'owned, controlled, or directed' by a concerned government if that government holds 25% of board seats, voting rights, or equity. This also applies if a parent company indirectly holds more than 25% equity through subsidiaries.

Even if the concerned government does not hold equity, it is considered to 'own, control, or direct' an entity if it exercises 'effective control' over the entire production process (mining, processing, recycling, manufacturing, assembly) of critical minerals, battery components, or materials through licensing or other contracts. This clause allows broad application of FEOC designation even without direct or indirect equity ties.

The guidance also specifies FEOC implementation methods. Automakers must establish systems to trace critical minerals by the end of 2026. Until then, tracing supply sources is difficult, and trace certification for minor minerals with low added value (up to 2%) is excluded. The list of minor minerals will be disclosed later.

FEOC regulations apply to battery components from January 1, 2024, and to critical minerals from January 1, 2025. There will be a 30-day public comment period on the FEOC definition and guidelines starting from the Federal Register publication date (December 4), and a 45-day comment period on implementation methods.

Loopholes Found... Could Ford-CATL Joint Venture Be Possible?

Although the FEOC detailed guidelines appear meticulously designed to exclude China from the electric vehicle battery supply chain, close examination reveals several loopholes.

Source: Korea International Trade Association Trade Issue Brief, US IRA 'Foreign Concerned Entity' Interpretation Guidelines (Draft) Content and Implications

First is the 'concerned government owning 25% or more equity' clause. If the Chinese government indirectly controls a subsidiary but holds less than 50% equity, proportionality rules apply, allowing equity adjustments to circumvent FEOC designation.

The U.S. Department of Energy provided scenarios on applying the 25% threshold. For example, if Company A (a concerned government) owns 50% of Company B, and B owns 25% of Company C, both B and C are considered FEOCs because A and B are treated as the same entity.

If concerned government A owns 25% of B, and B owns 50% of C, both B and C are FEOCs because ownership exceeding 50% means they are considered the same entity.

However, if A owns 25% of B, and B owns 40% of C, A and B are FEOCs, but C is not, since B's ownership of C is below 50%, and A's indirect control over C is recognized as only 10% (25% × 40%) under proportionality rules.

The 'effective control' clause also invites various interpretations.

To be considered an FEOC, the concerned government must hold 'effective control' through licensing or contracts. The DOE specifies this includes ▲ decision-making authority over production volume and timing (including production suspension) of critical minerals or battery components, ▲ authority to decide which entities use the produced products, ▲ access rights to production sites, and ▲ exclusive rights to maintenance, repair, and operation of key products.

Additionally, even if export controls or intellectual property restrictions are imposed by the concerned government, if essential equipment is independently operated or there is access to intellectual property and information necessary for production, the entity is considered an FEOC.

This implies that if such rights are fully transferred to the partner company, the entity may not be classified as an FEOC. The DOE stated that many contracts and licensing agreements, if properly demonstrated, would not raise FEOC concerns.

U.S. media attention on this clause centers on the planned joint venture between Ford Motor Company and CATL. Earlier this year, CATL planned to establish a joint venture in the U.S. with Ford by providing licenses without equity participation. However, due to political concerns, the plan was put on hold until the FEOC guidelines were released.

In this context, some analysts in the U.S. interpret the new guidelines as opening the possibility for a Ford-CATL partnership. If Ford is deemed to have effective control over the joint venture, it may not be classified as an FEOC.

Bloomberg columnist Liam Denning noted, "Ford has no choice but to utilize CATL's expertise, and the new guidelines implicitly endorse this." Republican Senator Marco Rubio also interpreted, "These guidelines seem to qualify agreements between Ford and CATL." The Wall Street Journal (WSJ) suggested, "This decision may reassure automakers that have or plan to have cooperative relationships with Chinese companies."

Similar analyses have emerged domestically. Samsung Securities analyst Jang Jeong-hoon said, "While these are measures to check China, they also indicate ways for Chinese companies to enter the U.S. supply chain." Ford has not yet issued an official statement.

As demand for affordable lithium iron phosphate (LFP) batteries grows in the U.S. electric vehicle market, if the Ford-CATL joint venture is established, similar contracts may follow. If political controversy intensifies, the guidelines may be revised.

Korean Companies Partnering with China Face Inevitable Equity Adjustments

With the U.S. government's clear intent to exclude China from the battery supply chain through the FEOC guidelines, there are long-term opportunities for Korean battery companies. However, in the short term, the domestic battery industry faces the challenge of reducing excessive dependence on China. Especially companies that have formed or plan to form joint ventures with Chinese partners will likely need to adjust equity stakes.

If the Chinese side holds 25% or more equity in a joint venture, it may be classified as an FEOC. Korean companies such as LG Chem, EcoPro, and POSCO Group have announced plans to establish joint ventures with Chinese firms.

In June, POSCO Group agreed to establish a nickel refining corporation with China's CNGR. POSCO Holdings will hold 60% equity, and CNGR 40%. The precursor joint venture between POSCO Future M and CNGR has a Chinese equity ratio of 80%. POSCO Group also plans to build precursor and anode material plants in Pohang with Huayou Cobalt. POSCO Holdings is investing in Chinese companies in Indonesia to procure nickel matte and nickel intermediate products (MHP).

SK On and EcoPro plan to build a precursor joint venture factory in Saemangeum with China's GEM. SK On and EcoPro will hold 51% equity, and GEM 49%. The three companies also plan to establish a joint venture in Indonesia to produce nickel MHP.

LG Chem also plans to establish joint ventures with Huayou Cobalt to produce precursors, cathode materials, and lithium. LG Energy Solution plans to establish a joint venture with Huayou Cobalt in China for used battery recycling.

Jeong Won-seok, a researcher at Hi Investment & Securities, said, "Although the U.S. government's FEOC detailed regulations have resolved uncertainties, domestic companies are expected to face increased burdens to prepare follow-up measures," adding, "They may require large-scale funds to acquire additional equity in joint ventures." However, it remains uncertain whether Chinese companies will easily relinquish their stakes.

Bloomberg, US Sets Limits on Chinese Content to Receive EV Tax Credits, 2023.12.1
Wall Street Journal, Biden’s EV Subsidy Rules Leave Room for Chinese Suppliers, 2023.12.1
Reuters, US to limit Chinese firms, battery parts from winning EV tax credits, 2023.12.2
Ministry of Trade, Industry and Energy, Announcement of U.S. IRA Foreign Entity of Concern (FEOC) Interim Guidance, 2023.12.2
Korea International Trade Association, Trade Issue Brief: Interpretation Guidelines (Draft) and Implications of U.S. IRA 'Foreign Entity of Concern (FEOC)', 2023.12.4
Federal Register, Interpretation of Foreign Entity of Concern, 2023.12.4
Federal Register, Section 30D Excluded Entities, 2023.12.4
Bloomberg, You Don’t Get ‘Made in USA’ EVs Without China, 2023.12.5
Shinyoung Securities, Disclosure and Implications of FEOC-related Content, 2023.12.4
Hi Investment & Securities, Announcement of Detailed U.S. IRA FEOC Regulations, 2023.12.4
Samsung Securities, Era of Secondary Batteries 12-FEOC Korea-China Joint Venture Calculations, 2023.12.5