The Biden administration on Friday proposed new rules aimed at shifting more production of electric vehicle batteries and the materials that power them to the United States, in order to develop a strategic industry currently dominated by China.
These rules aim to limit the role that Chinese companies can play in supplying materials for electric vehicles that qualify for federal tax credits. They will also discourage companies seeking federal funds to build battery factories in the United States from sourcing materials from China or Russia.
The rules could cause consternation among automakers, which continue to rely heavily on China for materials and components for electric vehicles. They also face significant cost pressure as they attempt to modify their factories to build electric cars; China offers some of the most advanced and cheapest battery technologies in the world.
The Biden administration is trying to use billions of dollars in new federal funds to change this dynamic and create an American supply chain for electric vehicles, using both carrots and sticks.
The climate law that President Joe Biden signed in 2022 provides tax credits of up to US$7,500 for consumers who buy electric vehicles built in the United States with mostly local materials. The law also provides for a general ban on Chinese products. Lawmakers also prohibit vehicle manufacturers benefiting from these tax advantages from sourcing certain materials from Chinese, Russian, North Korean or Iranian companies.
The law, however, left several questions unanswered, including what is a Chinese or Russian company. The Biden administration has just ruled that these definitions include any entity incorporated or headquartered in China or Russia, as well as any company in which 25% of board seats or ownership interests were held by Chinese or Russian governments.
Chinese companies expanding into countries other than China – like Gotion, which plans to build a battery factory in Michigan – appear to be able to benefit from these rules, provided the Chinese government is not a major shareholder.
Some conservative lawmakers had challenged Ford Motor Co.’s plan to license technology from the Chinese battery giant known as CATL for a factory in Marshall, Mich., saying such a partnership should not be permissible to federal tax credits.
The rules will come into force in 2024 for battery components and in 2025 for essential minerals such as lithium, cobalt and nickel. They will be subject to public comment for several weeks and could be modified based on industry advice.
These rules could have a profound effect on the rapidly growing U.S. electric vehicle market; battery-powered vehicles accounted for about 8% of new cars sold in the third quarter. Car and battery makers said Friday morning that they were reviewing the 62 pages of rules released by the administration and that it would take time to determine how many models could qualify for tax credits.
John Bozzella, CEO of the Alliance for Automotive Innovation, wrote in a blog post Friday morning that the rules struck “a pragmatic balance,” including exempting materials just present in trace amounts. If the administration had banned all minor Chinese parts from the supply chain, no car models would have been eligible for tax credits next year, he pointed out.
Many cars have already been excluded from purchase credits due to other rules, such as the requirement to assemble vehicles in North America. Just about 20 vehicles are currently eligible for the program, out of more than 100 electric vehicles sold in the United States.
The rules also raised new questions about whether stricter requirements for supply chains could reinforce the trend among more buyers to lease, rather than buy, vehicles.
Jack Fitzgerald, president of Fitzgerald Auto Malls, which operates dealerships in Florida, Maryland and Pennsylvania, says he’s seen an increase in customers renting electric vehicles. But he adds that concerns about the range of electric vehicles and the availability of chargers are a bigger obstacle to the sale of electric vehicles than their price.
“That’s the main problem,” says Mr. Fitzgerald.
Auto industry lobbyists warn that extremely strict rules could dampen sales of electric vehicles, and they are urging the administration to strike more trade deals to ensure supplies of rare minerals for batteries. But Paul Jacobson, General Motors’ chief financial officer, believes the company has structured its electric vehicle business in such a way that it’s confident it will succeed, regardless of federal rules.
“We don’t anchor our business by saying this has to happen” on a regulatory level, Mr. Jacobson told reporters Thursday. If the regulations change, he added, “it’s not a deal breaker for us.”
Over the past year, companies invested $213 billion in the manufacturing and deployment of clean energy and vehicles, building electrification and carbon management technologies in the United States, according to monitoring by the Rhodium Group and the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology. This represents a 37% increase from the previous year.
However, the global electric vehicle industry remains heavily anchored in China, which is the world’s largest producer and exporter of electric vehicles. China produces about two-thirds of the world’s battery cells and refines most of the minerals essential to powering an electric vehicle.
China’s dominance over supply chains for essential minerals is such that there are fears that Beijing could bar American companies’ access to materials essential not only for building cars, but also for building engines. aircraft and munitions manufacturing.
Others are concerned about poor working conditions, the use of child labor and the poor environmental record of supply chains for critical minerals that pass through countries like Congo and Indonesia.
Todd Malan, director of external affairs for Talon Metals, which is seeking approval to operate a nickel mine in Minnesota, says strict rules could help prevent “mineral laundering” schemes in which Chinese minerals or Russian would be transported through facilities located in more welcoming countries.
Rules should be enforced through audits and by clawing back subsidies if companies fail to comply, and companies should also adopt “know your supplier” systems to track inputs from mines to programs recycling, Malan said.
In its announcement, the Treasury Department clarified that improperly reported vehicles would be removed from an automaker’s eligibility for tax credits and that automakers that commit fraud or intentionally ignore the rules could be declared ineligible for tax credits in the future.
