According to Bloomberg, the Biden administration has released long-awaited regulations aimed at preventing electric vehicle manufacturers from sourcing battery materials from China and other competitive nations. However, the regulations also provide some flexibility for automakers.
The proposed regulations are part of an extension of the $7,500 tax credit signed by the Biden administration. According to the regulations, a company or entity with 25% or more ownership by geopolitical adversaries of the United States will be designated as a "Foreign Entity of Concern" (FEOC). These restrictions will apply to battery components next year and then to suppliers of key battery raw materials (including nickel and lithium) in 2025.
This definition has far-reaching implications because, starting in 2024, vehicles using battery components manufactured or assembled by FEOCs will no longer qualify for tax credits. When discussing these regulations, the Biden administration had two considerations: to free the U.S. industry from dependence on low-cost Chinese materials dominating the supply chain and to encourage the adoption of electric vehicles to address climate change.
In the weeks leading up to the effective date of the new regulations, most automakers were still analyzing them. Ford Motor Company stated that its analysis so far indicated that its Mustang Mach-E electric vehicle would no longer qualify for federal tax credits.
According to the new guidelines, any company governed by or controlled by the Chinese government (including companies in which the Chinese government owns at least 25% shares) will be considered a "Foreign Entity of Concern" (FEOC). These restrictions will also apply to all production within China. However, in non-FEOC countries (such as Australia or Indonesia), foreign subsidiaries of Chinese private companies will be allowed as long as they are not controlled by the Chinese government.
FEOC companies can contract or provide technical licenses. According to the new regulations, collaboration is allowed as long as the non-FEOC party has operational control over the factory, and contracts or technical licensing agreements are signed with the FEOC party. However, this will be assessed on a case-by-case basis.
The new regulations seem to support Ford's authorization deal at its Michigan-based Marshall Battery Factory, as the factory is owned and operated by Ford, but the authorized technology comes from the Chinese battery company CATL. Tesla had considered a similar collaboration with CATL earlier this year, but the progress of the negotiations is unclear.
John Bozzella, President and CEO of the Alliance for Automotive Innovation, an automotive lobbying group, praised the Treasury Department for finally clarifying the relevant regulations. He also commended the agency for exempting the requirement for the source of battery materials until 2026, calling this leniency "significant and wise." Bozzella stated, "Otherwise, tax credits for electric vehicles might exist only on paper."
Autos Drive America, an industry trade organization representing foreign automakers operating in the U.S. (such as Hyundai and Toyota), also welcomed the clear definition of the regulations. However, the organization urged the U.S. to allow more countries to provide critical minerals through free trade agreements. Indonesia has been lobbying U.S. officials for a free trade agreement to meet the requirements of the Inflation Reduction Act (IRA). The U.S. has also reached a free trade agreement with Japan.
To reduce dependence on China, the IRA passed last year has attracted over $100 billion in investments to the North American battery and electric vehicle supply chain industry. However, the dominant position of Asian countries in the global electric vehicle and battery industry means that only a few models qualify for IRA tax credits.
There will be a public comment period before the rules are finalized and take effect on January 1.
With the FEOC rules coming into effect over the next two years, the list of vehicle models that meet the requirements may further shrink. Once the rules on components and raw materials begin to be enforced, some models that received phase-one tax credits may no longer qualify.
The process of formulating these new regulations has triggered a year-long lobbying frenzy. Automakers have pushed for relaxed regulations, claiming that strict restrictions would significantly raise the cost of electric vehicles, and China's dominant position in the supply chain makes it almost impossible for the U.S. to exclude China. In contrast, U.S. mining and recycling companies have taken a tougher stance to protect and accelerate the production of domestic key battery manufacturing materials.
Senator Joe Manchin has repeatedly criticized the regulations when voting on the law, pointing out significant loopholes despite strict restrictions on China's ownership and influence in the IRA.
Manchin stated in a December 1st statement, "I will use every avenue and opportunity to reverse this unlawful and shameful proposed regulation, protect our energy security, including pushing the Treasury Department to make revisions, seeking a Congressional Review Act resolution, and supporting any litigation against the new rules."
Leased electric and hybrid vehicles will not be subject to local content requirements; they are classified as commercial vehicles. The Treasury Department has also made concessions, giving automakers more time to comply with the regulations, such as developing systems to more accurately track the origin of critical minerals and other low-value materials.
General Motors spokesperson Jeannine Ginivan said in a statement, "We are reviewing the Treasury Department's new guidance." She added, "Due to General Motors' long-standing investments in the United States and efforts to build a safer, more resilient supply chain, we believe GM is capable of maintaining full consumer incentives for many electric vehicles in 2024 and beyond."
However, Ford Motor Company stated that the Mustang Mach-E would no longer qualify for the federal tax credit. The vehicle is produced in Mexico and was previously eligible for a $3,750 tax credit. Ford stated in an email statement that its F-150 Lightning plug-in truck would continue to qualify for the full $7,500 tax credit.
The 25% ownership restriction in the new regulations also aligns with the provisions of the CHIPS Act, which aims to bring assembly operations of high-tech devices, including semiconductors, back to the United States. The act prohibits companies receiving CHIPS Act subsidies from partnering in joint projects with Chinese entities owning 25% or more ownership, among other restrictions.
A September research report by Goldman Sachs Group showed that China currently accounts for 85% to 90% of global rare earth element extraction and processing, refining 60% of lithium, 65% of nickel, and 68% of cobalt required for electric vehicle batteries. The bank also estimated that 65% of battery components, 71% of batteries, and 57% of electric vehicles worldwide are manufactured in China.
However, most of the raw materials required for battery production are mined elsewhere, often by Chinese-controlled companies or non-governmental companies. China's Greenstone Holdings Group, the world's largest nickel producer, and top cobalt miner Luoyang Molybdenum are both Chinese companies with international mining operations.
