US EV clampdown will mean shake-up for Asia’s battery makers

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Tax credits on electric car purchases in the US just became much harder to score. The number of electric vehicle models qualifying for a bung of up to $7,500 is down from 43 to 19 after new battery sourcing rules took effect on Monday. The ramifications will reach far beyond the newly excluded automakers.

EVs whose battery components are built or assembled by a country identified as a “foreign entity of concern”, which includes China, no longer qualify for a tax credit. That leaves a long list of popular models ineligible, including the Tesla Model 3 Rear-Wheel Drive, BMW X5 xDrive50e, Audi Q5 PHEV 55, Volkswagen ID. and the Nissan Leaf. Some automakers are still confirming eligibility.

Getting back on the approved list will come at a cost — one that is likely to increase in the near future. Chinese EV battery makers account for more than two-thirds of the world’s supply. The world’s largest maker, China’s Contemporary Amperex Technology Co (CATL), has a 37 per cent share of the market. Its 50 per cent plus growth in capacity last year means it is one of the few suppliers that can produce batteries at the scale and price needed to keep up with the rapidly growing EV market.

The restrictions will get tougher, with rules on the source of crucial battery materials such as refined lithium set to tighten further in 2025. China has about two-thirds of the world’s lithium refining capacity.

But switching battery suppliers to South Korean and Japanese rivals, which charge more, could mean higher costs for automakers. Those are likely to rise further as capacity constraints and higher demand bite.

The tax credits, which allow buyers to claim the credit at participating dealerships at the point of sale, had succeeded in cutting the price of popular EV models to levels comparable to petrol counterparts. For Nissan, say, that has been crucial. Net sales in the US, its biggest market, are more than double levels at home.

Longer term, more battery manufacturing should move to the US. But building capacity is expensive and takes years. Automakers fighting a war for market share in the US EV market will need to overhaul supply chains at the expense of short-term margins.

Shares of CATL are down a third in the past six months, underperforming peers. Despite CATL’s dominance in the sector, shares trade at 13 times forward earnings, less than a third that of South Korean LG Energy Solution. That gap should persist as long as tensions between the US and China remain high.