Making EVs without China’s supply chain is hard, but not impossible
Ho-Yin Mak, Georgetown University; Christopher S. Tang, University of California, Los Angeles, and Tinglong Dai, Johns Hopkins University
Two electrifying moves in recent weeks have the potential to ignite electric vehicle demand in the United States. First, Congress passed the Inflation Reduction Act, expanding federal tax rebates for EV purchases. Then California approved rules to ban the sale of new gasoline-powered cars by 2035.
The Inflation Reduction Act extends the Obama-era EV tax credit of up to US$7,500. But it includes some high hurdles. Its country-of-origin rules require that EVs – and an increasing percentage of their components and critical minerals – be sourced from the U.S. or countries that have free-trade agreements with the U.S. The law expressly forbids tax credits for vehicles with any components or critical minerals sourced from a “foreign entity of concern,” such as China or Russia.
That’s not so simple when China controls 60% of the world’s lithium mining, 77% of battery cell capacity and 60% of battery component manufacturing. Many American EV makers, including Tesla, rely heavily on battery materials from China.
The U.S. needs a national strategy to build an EV ecosystem if it hopes to catch up. As experts in supply chain management, we have some ideas.
Why the EV industry depends heavily on China
How did the U.S. fall so far behind?
Back in 2009, the Obama administration pledged $2.4 billion to support the country’s fledgling EV industry. But demand grew slowly, and battery manufacturers such as A123 Systems and Ener1 failed to scale up their production. Both succumbed to financial pressure and were acquired by Chinese and Russian investors.
China took the lead in the EV market through an aggressive mix of carrots and sticks. Its consumer subsidies raised demand at home, and Beijing and other major cities set licensing quotas mandating a minimum share of EV sales.
For the U.S. to scale up its own production, it needs to rely on strategic partners overseas. The Inflation Reduction Act allows imports of critical minerals from countries with free trade agreements to still qualify for incentives, but not imports of battery components. This means overseas suppliers like Korea’s “Big Three” – LG Chem, SK Innovation and Samsung SDI – which supply 26% of the world’s EV batteries, are shut out, even though the U.S. and Korea have a free trade agreement.
The Korea Automobile Manufacturers Association has asked Congress to make an exception for Korean-made EVs and batteries.
In the spirit of “friend-shoring,” the Biden administration could think of a temporary waiver as a stopgap measure that makes it easier for Korean battery makers to move more of their supply chain to the U.S., such as LG’s planned battery plants in partnerships with GM and Honda.
The 2021 Infrastructure Act also provided $5 billion to expand charging infrastructure, which surveys show is critical to bolstering demand.
