Will US Battery Mandate Slow Down EV Adoption?

The recently passed Inflation Reduction Act (IRA) is an ambitious climate bill that invests hundreds of billions in America’s energy transition. Yet its ambition is also what begets competing goals, especially when it comes to accelerating the adoption of electric vehicles (EVs) in the United States.

At issue is the EV consumer subsidy in the form of a $7,500 tax credit that comes with strings attached. To qualify for this subsidy, the bill has tied it to meeting local content requirements and supplier origin in a bid to build from scratch a US-based battery supply chain. This is, of course, aimed at reducing reliance on China’s battery supply chain.

More specifically, for an EV to qualify for the full tax credit, it must meet these conditions by 2025: 1) the EV must be manufactured in North America; 2) 60% of the battery minerals’ value must be extracted or processed in the United States or from a country with which it has a free trade agreement (FTA); 3) 60% of the battery components’ value need to be manufactured in North America; and 4) no battery minerals or component can come from a “foreign entity of concern” (i.e. China, Russia, Iran, and North Korea).

Meeting the last three conditions on battery supply chains will pose considerable challenges. For one, America does not mine many of the critical minerals needed for batteries nor does it produce any of the battery components at scale. America is left with only one choice in the near term: rely on investment from allies to support its battery supply chain effort to compete with China’s.

And South Korea ticks all the boxes as a capable and realistic alternative to Chinese battery manufacturers because it is the one ally country that has major battery and EV manufacturers. Yet in a twist of irony, some of loudest complaints about the IRA has emanated from Seoul.

That’s because none of the Korean EV models meet the first condition of “made in North America” to qualify for the tax credit—even though models like Hyundai’s IONIQ 5 are in high demand in the United States. For example, the Nissan Leaf is the only Asian EV model currently eligible for the tax credit.

Seoul is not alone in its consternation. From Brussels to Tokyo to Detroit, industry has been grumbling louder over the nearly impossible task of qualifying for these EV credits under the aggressive timeline.

In fact, the IRA renders nearly three-quarters of EV models unqualified for the consumer subsidy, leaving US consumers with few choices. For consumers on the fence about switching from gasoline to electric, having that tax credit will be material in making a decision given the sticker price of cars today.

That is at the heart of what has irked South Korea. The IRA’s EV provisions appear to protect the market share of US EV manufacturers at the expense of Korean ones, even as Washington hopes to lean on Korean battery makers to support its supply chain diversification effort.

This begs the question of whether the twin goals of building a US battery supply chain and promoting the sale of EVs are incompatible. To examine this question in detail, the case of LG Energy Solution (LGES) is of particular relevance.

LGES will likely become the biggest battery supplier in North America, having pledged to invest in at least 240GWh of battery production capacity and having already struck supplier agreements with GM, Ford, Stellantis, and Honda (see Table 1).

If the South Korean company cannot faithfully meet the IRA’s mandates by 2025, then it’s not clear that even US companies such as Ford, which is pouring billions into an EV unit, will qualify for the credits if they use Korean instead of Chinese batteries.

Table 1. LGES Plans to Produce 240GWh of Battery in North America by 2025
Note: *LGES is currently reconsidering its plan to build a plant in Arizona.
Source: LGES; Honda.

Upstream: Can LGES Meet the Critical Minerals Mandate?

Let’s begin by looking at whether LGES can realistically meet the critical minerals requirements to supply its intended 240GWh of capacity in North America by 2025. The key commodities examined are lithium, nickel, cobalt, manganese, and graphite, which make up the commonly used NCM battery chemistry (see Figure 1 left side).

Figure 1. Key Materials in an NCM Battery Supply Chain
Note: Blue are critical minerals and gray are battery components as defined in the IRA, with the exception of cathode foils and separators.
Source: Roland Berger; SNE Research; author interpretation of the IRA.

For the sake of this case study, we make a few assumptions. One, because mining and processing of aluminum are geographically dispersed and less of a concern, we do not take it into account even though it’s categorized as a critical mineral under the IRA. Two, because data limitations and fluctuating metal prices make it difficult to determine the total value of these criticial minerals, we examine whether each mineral can be sourced from the United States or its allies. Three, we assume that US subsidiaries of Chinese companies will be designated a “foreign entity of concern,” even though they technically should be considered US entities.

As such, this means that LGES must meet the IRA’s 60% critical mineral sourcing requirement without any Chinese suppliers. Based on the company’s binding and non-binding agreements, our estimates show that the only critical mineral for which LGES can meet the mandate is lithium, while cobalt and nickel fall far below the 60% threshold (see Tables 2 & 3). When it comes to manganese and graphite, LGES will likely be heavily dependent on Chinese suppliers.

Table 2. LGES Can Meet 91% of Its Lithium Hydroxide Needs from US and Its Allies
Note: Assuming the average lithium carbonate equivalent per kWh of 0.9kg and the conversion factor from lithium carbonate to lithium hydroxide of 0.65, LGES needs 140,000 tons of lithium hydroxide per annum to satisfy its 240GWh battery production capacity. GM’s sourcing deals with Livent and Controlled Thermal Resources are not included as the volumes were not disclosed. It is assumed that LGES will use 58% of the lithium that Stellantis secured as Stellantis also has a JV with Samsung SDI in the United States.
Source: press releases; author calculations.

Table 3. LGES Can Meet 20% and 23% of Its Nickel and Cobalt Needs from US and Its Allies
Note: Assuming a 60kwh NCM811 battery requires 39kg of nickel and 5kg of cobalt, LGES would need 156,000 tons of nickel and 20,000 tons of cobalt to satisfy its 240GWh capacity. Cobalt is typically co-mined with copper or nickel, so most offtake agreements and equity investments include both nickel and cobalt.
Source: press releases; author calculations.

When it comes to manganese and graphite, LGES hasn’t secured long-term supplies and is unlikely to avoid sourcing from China. Although estimates vary, China’s dominance in refined manganese could be as high as 90%. No surprise, then, that South Korea currently meets 99% of its manganese demand by Chinese imports. For graphite, the main material for the battery anode, Chinese suppliers have a grip on both the upstream and midstream—China is some 80% of global graphite mining capacity and has nearly as much market share in graphite processing. 

While it is possible to use synthetic graphite as a substitute, it is more expensive, energy-intensive, and harder to scale. For example, South Korea’s POSCO Chemical, a main cathode and anode material supplier for LGES, makes synthetic graphite. But it also had to acquire a stake in a Chinese graphite company and a 15% stake in an Australian graphite mine in Tanzania to meet all of its graphite demand.

Midstream: Can LGES Meet the Battery Components Mandate?

Now let’s look at whether LGES can meet the “60% made in North America” mandate on battery components by 2025 (see Figure 2 right side).

Figure 2. Key Components in the NCM Battery Supply Chain
Note: Cathode foils and separators are not defined in the IRA but are main components of a battery cell.
Source: Roland Berger; SNE Research; author interpretation of the IRA.

Again, our assumption is that even US-based subsidiaries of Chinese component suppliers, for example Semcorp, will be designated “foreign entitities of concern” and therefore cannot be used by LGES to qualify for the tax credit (this might change depending on the eventual US government definition).

Using LGES’ mid- to long-term sourcing targets, we estimate that it will be able to manufacture just under 50% of the value of battery components in North America, falling short of the 60% mandate (see Figure 3).

Figure 3. LGES Plans to Generate 47.4% of Battery Cell Value in North America
Note: Based on available information, LGES plans to source just 30% of cathode and anode materials, 60% of separators, and 100% of electrolyte in North America over the medium to long terms. Multiplying these targets with the material cost % of each component provides estimates of the actual value that will be made in North America for each component. It is assumed that components in the “other” category, such as housings, will be 100% locally manufactured in North America.
Source: LGES; IBK Securities.

This is largely consistent with the investment plans of LGES’ North American suppliers, which are geared toward cathode active materials and electrolytes production (see Table 4). Localizing electrolyte production near battery cell plants makes commercial sense because liquid electrolyte is heavy and has a short shelf life of just six months.

Table 4. LGES Suppliers Plan to Make Cathode Active Materials and Electrolyte in North America
Note: These are likely North American suppliers of LGES. But because suppliers have multiple clients, it is difficult to ascertain precisely what portion of their production capacity has been committed to supply LGES. Umicore’s production capacity is estimated based on its claim that its production could power one million EVs.
Source: press releases; author calculations.

Notably missing from the plans are anode active materials and separators, with China dominating 85% of global anode material production. For separators, it may be a bit easier to avoid Chinese inputs as Japan and South Korea have a combined 47% market share in separators. However, it will still require Japanese and Korean companies to make separators in North America to meet the midstream mandate.

Downstream: The Easiest Part

The Biden administration has set an ambitious target of having half of US car sales in 2030 be EVs, which translates into an estimated 8.5 million EVs requiring 517GWh of batteries. By then, that battery demand should be easily met by South Korean and Japanese manufacturers’ plants in North America (see Figure 4).

Figure 4. South Korean and Japanese Companies’ Battery Production Exceeds US Battery Demand (in GWh)
Note: Demand estimate is based on US car sales of 17 million units, which is the five-year average of car sales through 2019, as well as 60kWh battery per EV. This is likely a conservative estimate since US consumer preference for larger vehicles like SUVs and trucks will require larger batteries.
Source: LGES; SK Innovation; Samsung SDI; Nikkei Asia; author calculations.

Friend-shore Batteries Okay, Friend-shore Inputs Impossible

As it currently stands, the IRA appears to prioritize where the midstream inputs to those batteries come from rather than where those batteries are made. On that front, a company like LGES simply cannot reduce sourcing from Chinese suppliers to the extent mandated in the IRA provisions, and certainly not within the timeline given. And if LGES can’t meet the requirement, it is unlikely any other company can.

On the critical minerals front, it’s easier to source metals like lithium, nickel, and cobalt from US allies or FTA partners, such as Australia, Canada, and Chile through long-term offtake agreements or equity investments in mines. But securing sufficient supplies of graphite outside of China will be hard, if not impossible, by 2025.

When it comes to battery components, localizing the production of anode active materials seems to be particularly challenging, given China’s market dominance and the lack of North American production in the pipeline. It took South Korea’s POSCO Chemical two full years to build an anode plant that can produce 12.7GWh of battery in its home base. Without investment plans already in place, onshoring sufficient production capacity by 2025 is unlikely.

What this all means is that (1) LGES, which will account for 43% of the US battery production capacity in 2025, is unlikely to make tax credit-eligible batteries; (2) many EV models that will use LGES batteries won’t be eligible for any of the $7,500 credit; and (3) EVs will remain significantly more expensive than ICE vehicles (when EVs already cost $15,000 more than the average gasoline car).

As such, this could well affect consumer behavior on switching to EVs and slow down the pace of America’s EV adoption, particularly in the current inflationary environment. In other words, the mandates tied to building a battery supply chain in America appears to be at odds with America’s other espoused goal of having 50% EV sales in eight years.