[Bojo, Battery] Trump-Originated 'Subsidy Cuts' Becoming Reality? ... South Korea's Battery Response Strategy

Trump Transition Team Pushes for Reduction of Subsidies

Donald Trump's second administration is pushing to cut subsidies and tax credits under the Inflation Reduction Act (IRA), which it pledged during the election campaign. Reports have emerged that the energy policy team of Trump's transition team is seeking to abolish electric vehicle purchase subsidies and the Advanced Manufacturing Production Credit (AMPC). If these plans materialize, short-term damage to Korean electric vehicle and battery companies will be inevitable, drawing attention to whether the IRA subsidies will actually be implemented and how companies will respond.

According to industry sources on the 17th, the transition team of President-elect Donald Trump plans to abolish the electric vehicle subsidy of up to $7,500 based on the U.S. Inflation Reduction Act (IRA). Additionally, one media outlet cited a U.S. Senate official saying that the Republican side is pushing for adjustments rather than outright repeal of the IRA bill, with AMPC also being a target. During the election campaign, Trump frequently criticized the IRA and repeatedly pledged to end the Biden administration's 'electric vehicle mandate (EV mandate)'.

The U.S. IRA bill provides three major tax credit benefits: ▲consumer electric vehicle tax credits ▲investment tax credits ▲production tax credits (AMPC). Among these, the investment tax credit offers up to 30% tax credit benefits on the investment amount to companies investing in battery and renewable energy sectors in the U.S. AMPC provides tax credits specified by item when battery and renewable energy companies produce and sell within the U.S. For battery companies, a tax credit of up to $45 per 1 kWh (kilowatt-hour) of battery capacity is provided. Unlike electric vehicle subsidies that benefit end consumers, AMPC incentives go directly to production companies.

Subsidy Cut of 10 Million KRW... Will U.S. Electric Vehicle Growth Slow?

Before Trump's election, research firms forecasted continued growth in the electric vehicle market despite a 'chasm' (temporary stagnation in growth industries). Market research firm BNEF projected in July this year that by 2027, electric vehicles would account for 30% of total vehicle sales in the U.S., a threefold increase from last year's 10% share. During the same period, total electric vehicle sales are expected to rise from 1.5 million units last year to 4.5 million units. These forecasts assume that the electric vehicle subsidy, approximately 10.47 million KRW, will continue to be provided.

If purchase subsidies are reduced and electric vehicle prices rise, demand will inevitably decrease. For electric vehicle and battery companies that have invested in anticipation of the market's full bloom around next year, this could negatively impact performance by preventing them from increasing factory operating rates for the time being. Some adjustments to factory construction and operation plans are also expected. Automakers have already been delaying electrification plans, and

price competition in the electric vehicle and battery industries is expected to intensify further. Since consumers will be reluctant to choose electric vehicles that are over 10 million KRW more expensive than before, prices of battery cells and materials, which account for about 40% of the electric vehicle cost, are likely to face downward pressure. Kim Jang-woo, Vice President and Head of Management Support at Ecopro BM, said, "(If subsidies are reduced) the pressure to lower costs will intensify."

However, even if federal government policies change, local governments' electrification plans will need to be monitored. In the U.S., each local government sets different electrification goals. Especially in regions like California, electrification plans are progressing rapidly. California is pushing to ban the sale of internal combustion engine vehicles by 2035. To this end, the state government encourages the transition to electric vehicles through purchase incentives, funding for charging infrastructure, and fuel efficiency standards. Last year, 25% of vehicles sold in California were electric vehicles, and the state government plans to increase electric vehicle sales to 65% by 2030.

The Future of 'AMPC' That Directly Affects Battery Companies' Performance

The policy change that battery companies are most sensitive to is whether AMPC will be reduced. AMPC originated from the Biden administration's strategy to attract eco-friendly industries such as batteries and solar power to the U.S. to secure a global market lead. Due to this policy, Korean battery companies currently operate six factories, and from next year, 16 factories will be completed and sequentially start operations. The production capacity of the three major battery companies will reach 610.5 GWh annually after 2027, enough to be installed in more than 7.6 million high-performance electric vehicles (based on 80 kWh).

Despite the industry-wide downturn caused by the electric vehicle chasm, AMPC has played a significant role in expanding the operating profits of battery companies. As of the third quarter this year, LG Energy Solution received 466 billion KRW, and SK On received 60.8 billion KRW in AMPC. Without AMPC, they would have posted losses, but reflecting AMPC in their results led to profitability. Samsung SDI is also expected to see a significant expansion of AMPC benefits starting next year.

Securities firms have predicted that subsidies Korean battery companies will receive through AMPC until its expiration in 2032 could reach tens to hundreds of trillions of KRW. Hi Investment & Securities projected in a report last year that the total AMPC amount for the three battery companies would reach 179 trillion KRW by 2032: 94 trillion KRW for LG Energy Solution, 45 trillion KRW for SK On, and 40 trillion KRW for Samsung SDI. Samsung Securities also estimated the value of AMPC LG Energy Solution would receive by 2032 at 32.4 trillion KRW.

Reduction of AMPC benefits is expected to directly impact battery companies' performance. Although there have been reports that Trump's transition team might push for the abolition of AMPC, the credit is intertwined with complex calculations involving regional economies, so domestically, the possibility of AMPC reduction is considered more likely than abolition. Battery factories are built across the Rust Belt and Sun Belt regions, which played a significant role in Trump's election, and a full repeal of the IRA could lead to economic contraction in those areas. Currently, Korean battery companies have invested over 50 trillion KRW to build battery factories in Ohio, Michigan, Indiana, Kentucky in the Rust Belt, and Arizona, Georgia, Tennessee in the Sun Belt.

Lee Seok-hee, President of SK On, also recently said after a meeting between the Ministry of Trade, Industry and Energy and the battery industry to assess the impact of the Trump administration's inauguration, "I believe it will be difficult for AMPC, which has the greatest impact on battery companies, to undergo drastic changes if the Trump administration is re-elected," adding, "Among the 18 Republican lawmakers who signed a petition opposing the IRA repeal, 15 were re-elected this time."

As the possibility of subsidy reduction grows, Korean companies face an increasing need to diversify their portfolios. It has been pointed out that they should diversify battery supply sources beyond the electric vehicle industry to spread risks, including ESS (energy storage systems) driven by rising AI power demand, robotics, and the space industry. In fact, LG Energy Solution and Samsung SDI have recently secured consecutive ESS contracts in North America, and LG Energy Solution has agreed to supply batteries for power supply to SpaceX's space shuttle next year.