[Energy-topia] If the Greenhouse Called the IRA Disappears

"Fortunately, the Inflation Reduction Act (IRA) is buying time for our secondary battery companies." When asked about the competitiveness of domestic secondary battery companies during a meeting with a senior venture capital industry official last year, this was the response. It came with a chilling warning that without the IRA, a significant portion of the market might have already been taken over by Chinese companies.

The IRA, which allocates a total of $369 billion (approximately 516 trillion KRW) in government funding for energy security and climate change response, was signed into law by President Joe Biden in August 2022 and immediately implemented. Despite its name, the IRA is the largest clean energy support law in U.S. history. It provides massive subsidies for electric vehicles, solar power, wind power, and more. However, the conditions are very stringent. Subsidies are limited if components are sourced from Foreign Entities of Concern (FEOC) such as China. Tax credits are available if advanced production facilities like battery plants are built in the U.S. The implementation of the IRA has made it considerably difficult for Chinese secondary battery companies to enter the U.S. market, benefiting Korean companies.

The IRA, which has acted like a greenhouse for Korean battery companies, now stands at a crossroads. Donald Trump, elected as the 47th President of the United States, has openly advocated for the repeal or reduction of the IRA. The nominee for the next Secretary of Energy is someone who claims "there is no climate crisis." If the IRA is repealed or reduced, Korean secondary battery companies that have depended on the U.S. market will inevitably suffer. Some express hope that reducing the IRA will not be easy, citing that the regions where domestic companies have invested are Republican constituencies. It is not good to be overly pessimistic. It could confuse investors. However, simply saying "it will be fine" and doing nothing is not the answer either.

How has China, which fiercely competes with us in the global market, responded? Even though the path to the U.S. market was blocked, the market share of Chinese secondary battery companies did not decrease. On the contrary, their market share has steadily increased, surpassing Korea to take first place in markets outside China. The gap with Korean companies is widening. While the huge domestic market in China is one major factor, it cannot explain everything.

Chinese electric vehicle and battery companies, finding it difficult to enter the U.S. market, turned their eyes to Europe. Following Southeast Asia, they are rapidly expanding into Latin America as well. According to Bloomberg NEF, 9 out of 10 electric vehicles sold in Brazil in the first half of this year were Chinese-made. Chinese companies diversified their markets and turned the crisis into an opportunity. China overcame the low energy density issue, a weakness of LFP (Lithium Iron Phosphate) batteries, through innovative Cell-to-Pack (CTP) technology.

We were able to buy some time while the IRA was in effect. We needed to reduce excessive supply chain dependence on China and release products that can compete in the mid-to-low price electric vehicle market. It is unclear how much progress has been made so far. We hope there is a secret trump card hidden away.

Following Trump's election, reports have emerged that CATL, China's largest battery company, may negotiate with the U.S. to build a factory there. I believe this scenario is not entirely impossible. It is time to give up the expectation that other governments will protect Korean companies.