Impacts of U.S. Inflation Reduction Act on global cell supply chain

Electric vehicle tax credit reform

The Inflation Reduction Act (IRA) was passed by the U.S. Senate on August 7  and the House of Representatives on August 12, and then signed into law by President Biden on August 16. One of the major parts of the bill includes a $7500 tax credit for new electric vehicles. To qualify for the tax credit, EVs must be assembled in North America. The Act removed the 200,000-unit-per-manufacturer cap on sales, meaning that Tesla and General Motors (GM), both already producing more than the threshold number of EVs in North America, will once again eligible for the tax credits.

As shown in Table 1, the $7,500 credit is composed of two halves: 

• Batteries with more than 40% of the critical mineral extracted or processed in the U.S. or in countries with which the U.S. has a free trade agreement (FTA) will receive the $3,750 credit. 

• Batteries with 50% of their components sourced in the U.S. or countries with which the U.S. has an FTA will receive a credit of $3,750. Minimum acceptable levels will increase by 10% points annually until hitting 80% in 2027.
   

In addition, EVs using battery components from a list of “foreign entity of concern” will not be eligible for the credits starting 2024. Also, batteries using critical mineral sourced, processed or recycled from the list of “foreign entity of concern” will not be eligible for the credits starting 2025. 

Against these backdrops, the passage of the Inflation Reduction Act will inevitably impact the global cell supply chain.

Table 1. Impacts of the IRA on EV tax credits

 

Increasing localization of the global battery supply chain

Figure 1. Global cell supply chain distribution

Source: International Energy Agency (IEA), 2022

Figure 2. Capacity distribution and forecast for Korean anode material manufacturers

Source: InfoLink Consulting

According to the Global Supply Chains of EV Batteries report by the International Energy Agency (IEA) released in July 2022, as shown in Figure 1, battery metals are mostly extracted in Australia and Indonesia, while precursors, battery components and cells manufacturing is concentrated in China. This results in significant longer time required to assess, design, build plants and achieve target capacity outside of China due to the lack of key raw materials supply. For example, it takes less than a year for CATL to build a cell plant in China, while it takes more than three years in Germany.

The $7,500 credit covers about 20% of the price of a general affordable electric vehicle that costs about $40,000, which will be a significant factor in the decision to purchase a vehicle in the U.S. The bill also imposes restrictions on battery materials and precursors processed in China, making the trend toward localization of the global battery supply chain even clearer. The Inflation Reduction Act is expected to accelerate the establishment of battery material supply chains outside of China, particularly in the U.S. or countries that have signed a FTA with the U.S.

As South Korea has signed a FTA with the U.S.; Korean cell companies such as LG Energy Solution and SK Innovation have been investing in the U.S. market for years. As shown in Figure 2, Korean battery material manufacturers Posco Chemical, LG Chem, and Ecopro BM are planning to have more than 50% of their anode material production capacity in the U.S., Europe and South Korea by 2025, InfoLink expects that Korean cell and battery material companies to benefit the most. 
 

Time pressure from policy

Source: InfoLink Consulting
 
InfoLink’s estimate of U.S. cell capacity and demand suggests that the IRA only partially restricts the battery supply chain from China during 2023 to 2024 and will not have a significant impact on the overall supply chain development. Assessment and planning of raw material mining and processing of cells, as well as plant construction and manufacturing activity takes a long time, while the subsidy restriction bans anode and cathode materials from China from 2024. This allows  companies to import a certain amount of precursors from China until 2025, when battery metals that are extracted, processed, and recycled in China will be completely banned. This will force manufacturers in the cell supply chains that wish to receive credits to be fully independent from Chinese supply. 

Such Act is likely to change the situation in which China dominates precursor processing as well as battery and cell materials. The reshuffling of the regional proportion of the global cell supply chain as a result of the establishment of supply chains under time pressure is intriguing.