industrial policy: The holes in America’s China-style industrial policy

US attempts to take on a Chinese-style industrial policy have left the world’s electric vehicle battery makers in a state of anxiety.
Signed into law last month, the Inflation Reduction Act, or the IRA, aims to overhaul electric vehicle tax credits and is designed to ensure that final assembly of powerpacks and EV happens in North America, while keeping Chinese materials for batteries out of the supply chain. To do this, the policy has addressed demand and supply by putting in place new incentives for advanced domestic manufacturing and revamping existing ones for buyers.
All of this pushes the US toward a greener future. But working to shut out the largest market and maker of EV batteries in the world is short-sighted. That’s because almost every manufacturer operating in the US, or elsewhere, leans on China — not just for raw materials, but for refining them and then ultimately making the powerpacks. In the value chain, the country dominates with 92% of processed materials, 71% of cell assembly and 65% of battery components.

Theoretically, the point of the IRA is to buildout a domestic supply chain as soon as possible, while reducing dependence on China, creating jobs and winning bipartisan support. That’s sensible, but it’s not based on what’s possible over a realistic time frame. Going cold turkey on essential processes means there will still be a cavernous gap between raw materials and the finished battery pack.
In cutting China out, costs will go up by about $30 to $35 per kilowatt hour and around $1,000 on other variable costs, according to analysts from Nomura Holdings Inc. Since the IRA subsidizes materials via tax credits, companies will have to be profit-making to begin with to benefit from that. Yet firms will tell you from bitter experience that making batteries profitably and at scale doesn’t happen quickly for most. Meanwhile, capital expenditure is the highest in the US compared to Europe and China. Costs for labor are surging across America and large disputes in railways and ports — key machinery in supply chains — are ongoing.
Most global EV and battery makers have found themselves in a bind: their production, at some point, ends up going through China. South Korea, for instance, has called on Biden administration representatives to reconsider measures like US production requirements and quickly ending reliance on China.
As it stands, the law doesn’t massively benefit companies that could actually help jump-start the build-out of a US supply chain, or those with the technology and ability to create a robust system for EVs and their batteries. Instead, it stands to boost the biggest American car companies, along with the maker of some of the most popular cars in the US, Toyota Motor Corp. — all of them well behind global manufacturers in the electric rush. It would have been smarter to incentivize a rapid build-out of factories, resolve labor issues and then get weaned off of China.
Although Korean battery makers with various partnerships and joint ventures with US automakers seem to benefit, the reality is that their hold on processed materials is limited and still dependent on China. Meanwhile, the IRA inadvertently keeps out the likes of Hyundai Motor Co. and its affiliate, Kia Corp., that comes in at number two behind Tesla Inc. in EV sales volume in the US, because they aren’t made there. Globally, too, they are one of the largest by shipments. Consumers clearly like their EVs but the IRA won’t subsidize them now.
Ensuring incentives trickle down the value chain is key and supporting suppliers — those who are integral parts of it, not just those with their brand on the final product — is even more important.
A June 2021 White House review of supply chains called China’s practices to stimulate its domestic industry “aggressive” and “well outside globally accepted fair trading practices.” But perhaps there is something to be learned from Beijing’s laser-focused policies. Instead of allowing national security and geopolitics to limit the IRA, legislators should try to understand how China produced some of the most successful battery companies, including the world’s largest, Contemporary Amperex Technology Co. , or CATL, and BYD Co. No wonder, then, that CATL will now supply Ford Motor Co. batteries through a recently announced a strategic cooperation, not the other way around.
China’s supply so far has withstood the rising costs of battery materials, power outages, rolling Covid lockdowns and regulatory pressure. Companies there have managed to keep EV battery installations rising across the country. That is no small feat. But subsidies alone don’t encourage that, nor do policies focused on keeping others out.
If the US really wants a share in this sector, it should take a leaf out of Beijing’s book. That means facing its industrial weaknesses and making them stronger.
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