South Korea Steps into US EV Supply Chain

During US President Joe Biden’s recent visit to South Korea, Hyundai Motor Group announced that it would invest $5.5 billion, and receive about $1.6 billion in state-level incentives, to build an electric vehicle (EV) plant in Georgia. On top of that, the Korean company pledged to invest an additional $5 billion in the United States by 2025 on advanced mobility technologies.

On face value, Hyundai’s announcement seems political in nature, given the timing and the fact that new Korean President Yoon Suk Yeol has clearly tilted towards the United States. But that assumption attributes more to politics than is warranted and skirts over a more complicated reality for South Korean companies operating in the China market.

Instead, the main driver for Hyundai’s pivot to the US market has more to do with the souring business environment in China. Of course, it doesn’t hurt that what is mainly a matter of business strategy for Hyundai can also be notched as a “political win.”

A quick look at Hyundai’s performance in the US and Chinese auto markets makes its strategic pivot a fairly obvious choice (see Figure 1). The company’s share in the world’s largest auto market declined from 9% to 2.3% over the last decade, forcing it to sell one of its Beijing plants and temporarily shut down its Chongqing plant. Meanwhile, Hyundai has been gaining market share in the United States since 2018.

Figure 1. Hyundai Market Share Loss in China Offset by Gains in USSource: Statista; Hyundai; Kia; author calculations.

While it is tempting to attribute Hyundai’s worsening fortunes to Beijing’s economic retaliation in 2017, when Seoul agreed to the deployment of a US missile shield, these trends have been ongoing nor were they exclusive to the automaker.

In fact, only 2.3% of Korean companies surveyed in 2021 attributed US-China tensions as the main culprit of their China market woes. More than 60% blamed local competition and lack of demand for their lackluster sales (see Figure 2). That same survey found one-third of Korean companies operating in China saw a decrease in sales from ten years ago.

Indeed, Korean companies seem to consistently perform worse than other foreign players like Volkswagen and Toyota, both of which enjoy respective market shares of 14.2% and 7.7% in China. Moreover, Samsung is near the bottom of China’s smartphone segment, with less than 1% of the market share compared to Apple’s whopping 15.3%.

Figure 2. Local Competition and Lack of Demand Hurting Korean Companies in ChinaSource: Federation of Korean Industries.

Beijing’s retaliation against Korean companies may have accelerated a shift that was already under way, as companies like Hyundai realized that competition will grow even fiercer in the already crowded Chinese EV segment.

When it comes to the EV supply chain, for example, the Chinese government once mandated foreign manufacturers to use domestic battery suppliers in order to qualify for subsidies. Such domestic content requirements have limited Korean battery maker LG Energy Solution to a meager 4% market share in China, while it accounts for 20% of battery capacity globally.

In comparison, the American EV market is a virtual white space with a single dominant player and other auto manufacturers still in catch-up mode. So now that Hyundai has launched several EV models for the US market, it simply makes more economic sense to build a fuller supply chain close to the end consumer market.

That appears to be the rationale behind the rush of Korean battery manufacturers to set up shop in the United States. Based on announced plans, South Korean suppliers combined could be producing 340GWh of batteries in the United States by 2025, more than the entire installed EV battery capacity in 2021 (see Table 1).

So, the challenges of competing in the Chinese market, and a changed political climate in the United States, have conspired to make the US market a better bet for a company like Hyundai.

Table 1. South Korean Battery Suppliers Rushing into US Market
Source: Reuters; Korea Economic Daily; electrive.com; InsideEVs; Nikkei Asia.

The South Korean EV industry’s doubling down on the US market certainly aligns with the Biden administration’s desire for more “friend-shoring” of crucial supply chains in the United States. But these major, multi-year investments are driven by much more than just geopolitical considerations.

Factors such as production costs, financial incentives, and market proximity are all important considerations for foreign investment. For instance, Korean companies’ announced battery plants are mainly spread across southern states and a few midwestern states, with Arizona also being the site of a major TSMC investment in chip fabrication.

The speed and scale with which Korean battery makers are putting down stakes in the US market make for a challenging environment for late entrants, including Chinese manufacturers CATL and Gotion High-Tech that are also seeking investments in the United States. These dynamics could make Chinese players increasingly look to the EU market.

Hae Jeong Cho is a research associate at MacroPolo. You can find her work on energy, transportation, and other topics here.