Partnerships, Joint Ventures, Complex Ownership Structures
China is devising strategies to bypass the United States in both semiconductor and electric vehicle (EV) battery sectors. As the Joe Biden administration seeks to exclude China through the Inflation Reduction Act (IRA), Chinese companies are entering full-fledged efforts to neutralize the U.S. blockade by establishing joint ventures, relocating production bases, and engaging in technological collaborations.
According to industry sources on Sept. 6, Chinese battery and material companies are seeking production bases in Korea through joint ventures with Korean firms. This is because batteries produced in North America or countries with Free Trade Agreements (FTAs) qualify for IRA subsidies when assembled in American EVs.
China’s Huayou Cobalt is investing 1.2 trillion won each in LG Chem and POSCO ChemTech to build precursor and nickel raw material factories in Saemangeum and Pohang, respectively. China’s CNGR is partnering with POSCO HOLDINGS and POSCO FUTURE M to invest 1.5 trillion won in building a nickel refining factory in Pohang. Additionally, Green Eco Manufacture and SK on have agreed to establish a precursor factory in Saemangeum through a joint investment of 2.2 trillion won.
The materials produced by Chinese battery companies in Korea via joint ventures meet the IRA’s core mineral requirements, ensuring subsidy benefits when exported to the U.S. This maneuver enables Chinese companies to effectively bypass the U.S. efforts to exclude China from the battery supply chain by leveraging the Korea-U.S. FTA.
Moreover, there’s a noticeable effort by companies to penetrate the U.S. market either through establishing foreign subsidiaries or technology collaborations. Tinci Materials Technology, a Chinese battery electrolyte firm, announced earlier this year its plan to invest US$260 million based on an ownership structure that includes a Singapore-based subsidiary that owns a Netherlands-based subsidiary that subsequently owns a U.S.-based subsidiary to produce electrolytes in Texas and Louisiana. CATL, the world’s largest battery manufacturer from China, is entering the U.S. market through a partnership with Ford. Ford owns 100% of the factory shares, with CATL solely providing technology in exchange for royalties. Michigan’s state government approved a subsidy of US$123 million for the CATL-Ford joint venture.
Following the U.S.’s blockade against China, there’s an analysis indicating increased Chinese automotive investments in Mexico. According to the Mexican Auto Parts Association, 40% of the investments in Mexico last year were made by companies relocating from China. This reflects the various tax benefits available due to the U.S.-Mexico-Canada Agreement (USMCA). In fact, Chinese parts exported to Mexico last year amounted to US$300 million a month, double from five years ago.
In light of China’s responses, there is speculation that the U.S. may intervene to block these bypass strategies. The Korea Trade Association commented, “The U.S. Congress may deem it unreasonable to fund Chinese companies with American taxpayers’ money and might introduce measures to counter these bypass ventures.”