The U.S. Department of the Treasury is set to announce detailed regulations on “Foreign Entities of Concern” (FEOC), which excludes some companies from electric vehicle tax incentives under the Inflation Reduction Act (IRA), on Dec. 1 (local time). The South Korean battery industry is closely monitoring whether the FEOC inclusion will impact Sino-Korean joint ventures. Concerns arise as domestic companies could face potential losses of at least several tens of trillion won (US$768.64 billion) if there is a mandatory adjustment of China’s ownership stake in Sino-Korean joint ventures under the detailed FEOC regulations. It has been identified that the domestic battery industry has established or jointly invested in more than 20 projects with Chinese companies to produce key battery materials such as precursors and cathodes.
According to industry sources on Nov. 30, domestic battery and material companies are most concerned about the detailed regulations on the criteria for joint ventures eligible for IRA support, particularly the “ownership allowance ratio.” China is responding by establishing joint venture corporations not only with U.S. companies but also with Korean companies to exert influence in the U.S. market and qualify for IRA tax benefits.
Industry experts anticipate that the U.S. Department of the Treasury is likely to include provisions in the detailed guidelines for FEOC that restrict the ownership stake of Chinese companies in joint ventures and set limits on the allowance for Chinese-made components and minerals to a certain level. Given that the aim of FEOC under the IRA is essentially to exclude China from the battery component and mineral supply chain, there is a high possibility that the regulations will curb attempts by Chinese companies to enter the U.S. market in the form of joint ventures. The discussed ownership allowance for China ranges from a minimum of 25 percent to less than 50 percent.
The challenge lies in the potential increased burden on domestic companies as the ownership stake of Chinese companies in Sino-Korean joint ventures decreases. Notably, leading domestic battery and material companies such as LG Energy Solution, SK on, LG Chem, POSCO Holdings, POSCO Future M, and EcoPro have significantly increased their cases of establishing joint ventures or engaging in collaborative projects with Chinese battery companies since last year. This trend is driven by Chinese companies’ belief that they could be eligible for IRA subsidies by producing core materials like cathodes and precursors in countries that have signed free trade agreements (FTA) with the United States, such as South Korea and Morocco, and supplying these materials to North America. The interests of Chinese companies, which need to circumvent the IRA, have aligned with South Korean companies’ need for Chinese materials. It is estimated that the number of projects in which companies from both countries have jointly invested in the form of joint ventures exceeds 20, with the investment amount reaching tens of trillions of won.
A prominent example is precursors, components heavily reliant on China. Domestic companies have engaged in joint ventures with Chinese firms for collaborative development in response to this dependence. LG Chem, for instance, has invested 1.2 trillion won in a joint project with Zhejiang Huayou Cobalt. SK on has also joined hands with EcoPro Materials and China’s Green Eco-manufacture to establish a precursor factory in Saemangeum Industrial Complex in North Jeolla Province with an investment of 1.21 trillion won. Similarly, POSCO Holdings and POSCO Future M is planning to invest 1.5 trillion won in Pohang, North Gyeongsang Province, to produce nickel and precursors with China’s CNGR Advanced Material. Ningbo Ronbay New Energy Technology has received approval to establish an approximately 80,000-ton capacity ternary precursor battery factory in the Saemangeum region of North Jeolla Province.
A representative from the battery industry said, “In the case of Sino-Korean joint ventures, most investments are made in a 5:5 ratio, but there is a safety measure within the contract called ownership ratio adjustment,” adding, “As the Chinese investment stake decreases, the additional burden on domestic companies increases in this structure.” Production lines for battery materials like cathodes and precursors typically involve capital investments in the range of “tens of trillions,” and it is customary for both parties to share the investment equally. To increase the domestic ownership stake in joint ventures up to 75 percent, as per the detailed regulations in the U.S., South Korean companies may need to invest a minimum of several trillion won.
The question of whether a grace period will be granted for the detailed regulations on FEOC is also a matter of concern. There is speculation that there may be a grace period before actual implementation even if the U.S. Department of the Treasury includes numerous Chinese companies in the detailed regulations of FEOC and imposes restrictions on the ownership stake of Chinese companies in joint ventures. The domestic battery industry sees the potential for this grace period to alleviate uncertainties related to Sino-Korean joint ventures and provide time to diversify essential mineral import routes.
The industry has also suggested that the U.S. Department of the Treasury might announce detailed regulations only for FEOC related to battery components and delay the disclosure of regulations concerning core minerals used in batteries until a later date.
In its March announcement of the IRA regulations on battery components and minerals, the U.S. Department of the Treasury stated that starting in 2024 for battery components and 2025 for key minerals used in batteries, tax deduction benefits would not be provided if these components and minerals are sourced from FEOC.