In order to further curb the development of China's power battery industry chain in the United States, the United States has made another "big move".
On December 2, the U.S. Department of the Treasury, the Internal Revenue Service, and the Department of Energy issued Guidance for Sensitive Foreign Entities under the Inflation Reduction Act (the "Guidance").
Beginning in January 2024, EVs containing battery components manufactured or assembled by sensitive foreign entities will lose their eligibility for tax credits provided by the Inflation Reduction Act;By 2025, it will be extended to critical minerals such as lithium, cobalt and nickel required in battery manufacturing, i.e. vehicles cannot contain key raw materials for batteries extracted and processed by sensitive foreign entities, otherwise they will also lose their eligibility for subsidies.
Sensitive foreign entities are defined under a number of U.S. laws to include entities owned, controlled, or governed by China, Russia, North Korea, and Iran. Specifically, the entities that "own" and "control" refer to ** and local**, and state-owned enterprises, and there is ambiguity as to how to define "jurisdictional" entities.
China dominates the smelting and processing of raw materials in the battery industry, and data shows that China produces about 78% of the world's battery cathode materials and about 91% of the anode materialsThe production capacity of battery cells accounts for 70% of the world's total. Among the key raw materials for battery production, China's lithium, cobalt and nickel refining output accounts for % and 69% of the world's total, respectively. Therefore, this bill can also be said to be "tailor-made" for China.
The Inflation Reduction Act, released in August last year, provides a $7,500 federal tax credit for electric vehicles assembled in North America, but has strict standards for critical minerals, components, and more** in car batteries.
Starting this year, EVs must have more than 50% of their battery components and materials manufactured or assembled in North America to qualify for the $3,750 per vehicle tax credit. Since then, it will increase year by year, reaching 100% after 2029. Another $3,750 in tax incentives is related to critical minerals for batteries. Also starting this year, 40% of the battery-critical minerals for electric vehicles will need to be extracted, processed, or ** in North America or countries that have signed a free ** agreement with the United States. The proportion of raw materials localized will grow at a rate of 10% per year to reach 80% by 2027.
Currently, eligible countries include Australia, Bahrain, Canada, Chile, Colombia, Japan, and more. This means that if you use batteries from Korean and Japanese battery companies, you can get a full tax credit of $7,500 per vehicle, and if you switch to batteries from Chinese companies, you will not be eligible for tax credits, and car companies may be forced to abandon the products of Chinese companies due to cost pressure.
According to the definition given in the Guidelines, taking China as an example, a foreign sensitive entity includes "all production capacity in China and more than 25% of the production capacity controlled by state-owned enterprises overseas." So, how do you define the key "25% control"?
Scenario 1: If Entity A holds 25% of the equity of Entity B, A directly controls Entity B, and if Entity B holds 50% of the voting interest in Entity C, Entity B and C will be regarded as the same entity, and Entity A and Entity C form an indirect control relationship. That is, if A is a Chinese enterprise or owned by Chinese, both B and C are considered FEOC.Scenario 2: If Entity A holds 50% of the equity of Entity B, A is regarded as the parent company of B, and A and B are regarded as the same entity, and if B holds 25% of the equity of C, C is deemed to be directly controlled by B and indirectly controlled by A. That is, if A is a Chinese enterprise or owned by Chinese, both B and C are considered FEOC.
Scenario 3: If Entity A holds 25% of the equity of Entity B cumulatively, but B cumulatively holds 40% of the equity of C, then B directly controls C, but A is deemed to only hold 10% of the equity of C, which does not meet the threshold of "25%". That is, if A is a Chinese enterprise or owned by Chinese, B is considered FEOC, but C is not considered FEOC.
For Chinese battery companies, the impact is clear. There have been a number of companies that have entered the U.S. market before. In February, CATL partnered with Ford Motor to build a plant in the U.S., which Ford owns, while CATL provides preparation and operation services, as well as licenses for patented battery technology. In September, EVE also announced the construction of a joint venture in the United States, with partners including Daimler and Paccar, two truck giants. EVE only holds a 10% stake in the joint venture company, providing battery technology licenses for the joint venture plant and charging license fees.
Another Chinese battery company, Gotion Hi-Tech, is building a battery and materials plant in the United States, and its majority shareholder is a 24-percent shareholder74% of the Volkswagen Group, but most of Gotion High-Tech's other shareholders are Chinese companies or individuals, so it is unclear whether Gotion High-Tech's operating entities in the United States are designated as foreign sensitive entities.
According to the United States**, the guidelines are too restrictive, and only a small number of electric vehicles can receive a $7,500 tax credit. According to an analysis by the International Energy Agency, the United States has almost no mining or processing capacity for minerals such as lithium, nickel and cobalt, and the output of battery cathode and anode materials is less than 5% of the world's. In the absence of a complete EV industry chain, the Guide could drive up the cost of EVs in the United States. Ford said it was evaluating the impact of the rules.