HONG KONG, Sept 6 (Askume Breakingviews) – China’s electric vehicles have entered a new era of battery power. Now, BYD’s (002594.SZ) Seal and Great Wall Motors’ (601633.SS) Funky CatModels such as the 2016 model are facing international criticism. The United States will increase tariffs on electric vehicles imported from China by four times , reaching more than 100%, while the European Union will impose total tariffs on some brands.rose to almost 50% . Chinese-made batteries that power cars are the obvious next target for trade sanctions. But this battle will be more difficult for the West to win.
China is a battery powerhouse. Bernstein analysts estimate that contemporary new energy technology companies are worth $115 billion(300750.SZ) and its smaller peers will hold a two-thirds share of the global electric vehicle power battery market by the first half of 2024. Chinese companies are also growing fast: Honeycomb Energy Technology’s installed capacity more than doubled between January and June, while rivals AVIC Lithium (3931.HK) , Guoxuan Hi-Tech (002074.SZ) , CATL and BYD’s installed capacity will increase by more than a fifth compared to 2023. They are also profitable, with CATL earning more than 40 billion yuan ($5.6 billion) last year.
Much of that production is exported: The total volume of lithium battery packs leaving China is set to nearly double between 2015 and 2023, according to the International Trade Centre. The United States and Europe have become the main buyers of Chinese batteries, squeezing out local players such as Sweden’s Northvolt.
strongly opposed
Now Western policymakers are retaliating. President Joe Biden in May announced plans to raise import duties on batteries and their parts to 25% from the previous 7.5%. His flagship Inflation Reduction Act provides subsidies of up to $7,500 for electric vehicles starting in 2025, specifically excluding vehicles in which battery materials are extracted, processed or recycled by “ foreign entities of concern .” The term includes companies headquartered or incorporated in China, as well as companies in which the government holds 25% or more of the equity, voting rights or board seats. Chinese manufacturers are also excluded from $6 billion in credits for batteries and critical minerals needed to make them under bipartisan infrastructure legislation.
EU policymakers in Brussels are erecting similar barriers to Chinese-made batteries. They imposed no additional tariffs, but a series of guidelines on local and responsible sourcing would make the trade increasingly expensive and complex. The same would be true of the EU’s proposed carbon border tax, which would tax emissions-intensive imports from 2030 , including cars and related parts.
These efforts are likely to intensify as political relations become more strained. The United States’ efforts to reduce dependence on its main strategic rivals have broad bipartisan support. Officials are also concerned about the presence of Chinese technology in so-called dual-use products with military applications. Batteries are crucial for submarines and drones.
While the IRA is one of Biden’s signature policies, he may be hesitant to completely reverse it if Donald Trump returns to the White House. Battery-related investment spurred by the tax credit program is concentrated in Republican-leaning states, said UBS analyst Tim Bush.
leap of faith
However, to successfully diversify away from Chinese suppliers, Western countries will need to develop alternatives. South Korean battery giants such as LG Energy Solution (373220.KS) , SK On and Samsung SDI (006400.KS) collectively hold 23.5% of the global market share and are expanding into the United States and the European Union. However, there are disadvantages to relying on these three companies, as they lag behind the technological capability of their larger Chinese rivals. For example, so far no company has been able to scale up mass production of the increasingly popular lithium iron phosphate batteries.
Advances in battery technology may allow upstarts to overtake established leaders. The most promising prospects are solid-state batteries, which use a solid electrolyte through which ions pass during charging. This provides higher energy density, allowing the battery packs that power a car to become smaller and lighter.
Pioneers are struggling to get the science out of the lab, but no one has a clear lead. Benchmark Minerals estimates that by 2030, the United States and China could account for about one-third of the market for this chemical. Leading Chinese companies such as CATL and BYD are exploring solid-state batteries. Toyota Motor (7203.T), the world’s largest automakerIt says vehicles using these products could be on the road in just three years. Volkswagen (VOWG_p.DE) is working with New York-listed QuantumScape (QS.N) to make this happen .
physical strength and brain
However, outcompeting Chinese battery makers is a tricky proposition. Solid-state products still use lithium, and some versions also require graphite, nickel and cobalt. Although China has only about 7% of global lithium reserves, it controls about 80% of lithium chemical production and also dominates nickel and cobalt, according to the China and Asia Research Group. The People’s Republic of China controls graphite so tightly that the United States recently had to lift a ban on foreign supplies . Askume reported last week that battery makers including Ford Motor Co. (FN)The US Trade Representative is urging the Office of the Secretary to ease proposed tariffs on imports of the material .
If engineers invent new cathode and anode recipes, it may still be cheaper to process the necessary materials in China. Batteries currently produced in the country cost about three-quarters of those made elsewhere. Research and development is also cheaper in the People’s Republic of China. Researchers accounted for 80% of BYD ‘s record hiring last year .
A large domestic customer base provides Chinese companies with a vast testing ground, allowing them to scale and commercialize new ideas quickly and inexpensively. Nearly two-fifths of the world’s solid-state battery-related patent applications come from China, according to local media reports.
State support further covers the costs. According to the Nikkei Shimbun report, CATL was the company that received the highest government subsidy last year. According to the Center for Strategic and International Studies, the company’s revenue is set to exceed $800 million in 2023 , double the 2022 figure.
There is no room for complacency
Chinese stakeholders do not take the status quo lightly. In January, a professor at Tsinghua University warned that China could lose its lead in the battery sector if it is not prepared for the risks posed by the rise of new technologies. In May, Askume, citing sources, reported that the state was coordinating a solid-state technology incubation scheme involving six companies and investing more than 6 billion yuan.
It is too early to declare victory in the battle for next-generation battery technology. However, it is currently hard to imagine China losing its advantage in mass production and innovation. The exit from these products will make electric vehicles more expensive and less complex to manufacture. Beijing’s global battery assault looks hard to stop.
(Corrected description of solid-state battery components and chemistry in paragraph nine. The author is a Askume Breakingviews columnist. Views expressed are his own.)
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