Last week, the Biden administration released long-awaited proposed guidance for how it plans to enforce one of the most complex and controversial aspects of the electric vehicle incentives created by the Inflation Reduction Act: the requirement that the country’s fast-growing EV and battery industries avoid using materials supplied by China, a geopolitical rival that has so far dominated clean energy manufacturing.
Now, the companies that have spent more than $100 billion establishing U.S.-based EV and battery factories since the law was passed last year are striving to adapt to the coming restrictions — and confronting the reality that, under the proposed rules, virtually none of the EVs they are currently manufacturing will still be eligible for the law’s $7,500 federal tax credit as of 2025.
Under the proposed guidance from the U.S. Treasury Department, electric vehicles containing any battery component “manufactured or assembled by a foreign entity of concern” will no longer be eligible for the tax credit starting next year. In 2025, electric vehicles that “contain any critical minerals that were extracted, processed, or recycled” by a foreign entity of concern will no longer be eligible for the credit.
“The U.S. really has owned its own EV transition already. The vast majority of EVs on the road today are made here,” said Albert Gore, executive director of the Zero Emission Transportation Association, a trade group that includes automakers, battery manufacturers, mining companies, charging manufacturers and electric utilities. Now that the new guidance gives EV manufacturers clear incentives to secure battery supplies outside of China, “we ought to be putting policies in place that accelerate that, while putting the U.S. on a trajectory of owning all the upstream pieces” of the EV battery industry as well.
The prospects for U.S. manufacturers to secure sources outside of China for the processed minerals and components that go into lithium-ion EV batteries remain murky. “That is something the industry has been working on resolving since IRA was enacted,” said Nick Nigro, founder of research firm Atlas Public Policy. But once the proposed rules go into effect, “it’s going to be very hard to get an EV with a $7,500 tax credit in the U.S.”
Atlas Public Policy has tracked $67 billion in announced investments in U.S. battery manufacturing and another $11.7 billion in domestic critical minerals and processing since the law was passed. It also forecasts that the U.S. will receive $210 billion of the $860 billion in global EV and battery investment it expects to see through 2030.
Still, China has built a commanding lead in every step of the global EV supply chain, from the refining of minerals to the production of cathode and anode materials and the manufacture of battery cells and EVs. Today, it’s very difficult to find a lithium-ion EV battery that doesn’t contain some portion of minerals or components processed or made in China or by a Chinese-based company.
And while U.S. companies and partners from Europe and Asia are quickly building domestic EV and battery manufacturing capacity, they remain largely reliant on mineral and materials supply chains controlled by Chinese firms.
Friday’s proposed guidance from the Department of Energy doesn’t single out China. But of the four countries on its list of foreign entities of concern — China, Iran, North Korea and Russia — the latter three don’t really play a role in the global EV industry. China, by contrast, dominates it.
DOE’s guidance designates any company based in one of the countries on its list as a foreign entity of concern. The label would also apply to companies at which 25 percent or more of board seats, voting rights or equity interest are cumulatively held by officials of those governments or companies based in those countries, “whether directly or indirectly via one or more intermediate entities.”
The proposed rule would also require scrutiny of joint ventures, licensing agreements and other cooperative ventures with companies based in China (or other countries on the list). Any such agreements that would give those companies “effective control over the extraction, processing, recycling, manufacturing or assembly” of “critical minerals, battery components, or battery materials” will render the resulting products ineligible for the tax credit.
Just how these guidelines will impact the cooperative relationships being formed between U.S. and Chinese companies in the fields of battery manufacturing, materials processing and mining remains unclear, noted Pavel Molchanov, managing director and equity research analyst at Raymond James & Associates.
But these U.S.-Chinese EV partnerships have already sparked a backlash from U.S. politicians demanding a harder line against China — most notably in the form of attacks on Ford’s plans to build batteries in Michigan using technology licensed from Chinese-based lithium-ion battery giant Contemporary Amperex Technology Co., Limited, or CATL.
“The geographic aspect of all this is basically clear-cut,” Molchanov said. “Where I think the DOE guidance will run into some controversy is in trying to define which individual companies fall into the category of being government-controlled. This gets into dicey questions of relationships between businesses and officials, which can be quite opaque and subject to differing interpretations.”
The same rules could complicate how companies qualify for a $6 billion federal grant program created by 2021’s Bipartisan Infrastructure Law to boost domestic battery production, which imposes restrictions on manufacturers that source battery components from foreign entities of concern.
Earlier this year, DOE canceled a $200 million grant to Texas-based battery manufacturer Microvast after Republicans attacked it for appearing on a 2022 U.S. Securities and Exchange Commission list of companies suspected of intellectual-property violations in China.
A tightrope walk: Boosting the U.S. EV industry without hobbling it
There’s an inherent tension in the EV policy goals of the Inflation Reduction Act, which aim to both greatly expand EV manufacturing and at the same time limit the use of products and minerals from China. As John Bozzella, president and CEO of the automaker trade group Alliance for Automotive Innovation, explained in a Friday statement, the overarching strategy has been to “first, localize automotive supply chains, including battery production, from China to the U.S. and our allies. Second, support the current EV transition in the form of consumer tax credits and other market incentives.”
China’s dominance of the EV supply chain has ratcheted up these tensions in Washington, D.C. The Biden administration sees the $7,500 tax credit it made available to U.S. consumers who purchase new EVs as a key incentive that will help it meet its goal of making half of all new car sales EVs by 2030, and it has been in continual conflict with Republicans in Congress who have accused the administration of weakening U.S. competitiveness with China by favoring domestic EV production.
Republicans have had an ally in Senator Joe Manchin, the West Virginia Democrat who played a pivotal role in crafting the tax credit and shepherding the Inflation Reduction Act’s passage. Manchin criticized the Biden administration for a Treasury Department decision in March that relaxed some restrictions on EV battery domestic-production guidelines so that more vehicles would qualify for tax credits.
On Friday, Manchin accused the Biden administration of knuckling under to automakers by offering exceptions to the foreign entity of concern rules for certain trace minerals that make up less than 2 percent of the critical minerals used in batteries.
But Gore said that this trace-minerals provision, as well as another that would give automakers until 2026 to develop tracking standards for other “low-value materials” in batteries, are reasonable in light of the challenges that automakers and battery manufacturers face.
“There are many, many challenges ahead,” he said. “The best you can ask for is a rule that’s easy to understand, that’s rational, and that’s defensible.”
At the same time, automotive analysts have been predicting for the past year that the foreign entity of concern rules represented the highest bar yet for EV makers seeking to ensure that their vehicles would be eligible for the tax credit — one that may be insurmountable given China’s lock on key parts of the supply chain.
The Treasury Department’s rules on domestic and free-trade partner manufacturing requirements, released in March, narrowed the list of vehicles eligible for the full $7,500 tax credit to about 20 all-electric and plug-in hybrid models, out of more than 100 for sale in the U.S., Bozzella noted. But those previous rules allowed vehicles to claim at least a partial tax credit if they contain a majority of materials and components from U.S. or free-trade partner sources.
The foreign entity of concern rules are far more restrictive, essentially disqualifying any EV with a battery that can’t prove it is completely untouched by association with a company that falls under its designations.
