If Chinese Stake Exceeds 25%
The U.S. government has clarified a regulation denying subsidies for electric vehicles with parts made by Chinese state-affiliated companies by stating that it includes joint ventures with foreign entities outside of China if the ownership stake of the Chinese company in the venture exceeds 25%. It is therefore anticipated that the calculation method for joint investments between South Korean and Chinese state-affiliated battery companies, a more common phenomenon lately in order to navigate around U.S. regulations, is anticipated to become more intricate.
On Dec. 1 (local time), the U.S. Department of the Treasury and the Department of Energy released tentative guidelines for excluding electric vehicle subsidies of US$7,500 under the Inflation Reduction Act (IRA) for “Foreign Entities of Concern” (FEOC). The guidelines define the FEOC as companies under the ownership, control, or jurisdiction of the governments of China, Russia, North Korea, and Iran. Vehicles with batteries containing a certain percentage of components and essential minerals produced by these entities are excluded from the subsidy.
In response, domestic battery companies that have established joint ventures with Chinese counterparts are expected to engage in equity adjustments. Companies such as LG Chem and POSCO Future M, where the Chinese side holds a relatively high stake, are likely to consider additional investments for the purchase of Chinese stakes in accordance with the equity adjustments.
According to industry sources on the 3rd, the number of memoranda of understanding (MOUs) from Chinese companies to invest in South Korean battery material companies, based on official announcements this year, stands at 8. Among these, the total investment for the confirmed seven cases amounts to 5.73 trillion won (US$4.41 billion). It is observed that there are five joint ventures where the Chinese company’s stake exceeds 25%.
LG Chem has decided to invest 1.2 trillion won in collaboration with China’s Huayou Cobalt, while SK on and EcoPro plan to invest the same amount with China’s Green Eco-manufacture (GEM) to establish a precursor factory in the Saemangeum Industrial Complex in North Jeolla Province. Earlier this year, LG Energy Solution entered into a MOU with Chinese lithium compound manufacturer Yahua for lithium hydroxide production in Morocco. In June this year, POSCO Holdings and POSCO Future M signed a joint venture agreement (JVA) with China’s CNGR Advanced Material for the production of nickel and precursor materials for secondary batteries, committing to a 1.5 trillion won investment.
Out of the mentioned cases, it has been identified that in five of the ventures the Chinese company’s stake exceeds 25%.
At present, the joint venture with the highest Chinese ownership stake is POSCO Future M, a precursor production plant in Pohang, where the Chinese company CNGR holds an 80% ownership. Following this, the ownership ratio in the joint venture between LG Chem and Huayou Cobalt, which operates a cathode material production plant in Gumi, falls within the range of 51% to 49%. For the nickel production plant in Pohang, jointly operated by POSCO Holdings and China’s CNGR, the ownership ratio is 60% for POSCO Holdings and 40% for CNGR. In the joint venture among POSCO Holdings, GS Energy, and China’s Huayou Cobalt, which focuses on a used battery recycling and manufacturing plant in South Jeolla Province, the ownership ratio also stands at 65% for South Korean companies and 35% for the Chinese side.
Due to the strengthened regulations under the IRA, however, companies with Chinese ownership exceeding 25% find themselves compelled to adjust their investment stakes to qualify for subsidy benefits. Consequently, plans are underway for LG Chem, POSCO Future M, POSCO Holdings, and other companies with Chinese ownership exceeding 25% to initiate stake adjustments to qualify for subsidies. Domestic companies are expected to consider measures such as purchasing additional stakes or making additional investments. Industry experts suggest that this could entail injecting additional funds amounting to hundreds of billions of won.
The precursor production plant in Pohang operated by POSCO Future M and CNGR, currently focusing on Europe, also holds a domestic ownership stake of only 20%. They have decided to explore stake adjustments to strengthen their position for future supply responses in the United States.
Negotiations are in progress for ownership stakes in LG Energy Solution’s lithium hydroxide plant with Yahua and POSCO Future M’s nickel and precursor production plants with Huayou Cobalt. Currently, these negotiations are at the MOU stage with Chinese companies. The goal is to align with the conditions required for qualifying for U.S. IRA subsidies. There is a likelihood that SK on and EcoPro Group, involved in a precursor plant venture with China’s GEM, where the Chinese side reportedly holds around 50%, will also consider adjusting their domestic ownership stakes.
Companies like POSCO Future M, LG Chem, POSCO Holdings, SK on, and EcoPro are expected to make additional investments in the range of hundreds of billions of won. This is in consideration of negotiations for additional Chinese ownership acquisitions, responding to the initially projected investment amounts and stake adjustments. However, the South Korean government has reportedly conveyed additional opinions to the U.S. regarding the FEOC 25% rule. It has been suggested that, in the case of joint ventures with non-governmental Chinese companies, it might be possible to receive subsidies even if the ownership stake exceeds 25%. This implies that the extent of ownership stake adjustments may vary depending on the ownership structure and governance of Chinese parent companies, such as GEM, Huayou Cobalt, and CNGR.
To circumvent FEOC regulations, Chinese companies have also included ownership stake adjustments in their negotiation conditions. The increase in Chinese investments in South Korea is considered partly due to the avoidance of U.S. IRA regulations. Given this, there is speculation that Chinese companies may adjust the government ownership stake in their parent companies to navigate through these regulations. Additionally, the current oversupply situation in the Chinese secondary battery market, leading to market restructuring, is seen as providing favorable negotiation conditions for South Korean companies.
Analyst Kim Hyun-hoo from Hana Securities has noted, “Companies like EcoPro BM and L&F, which are operating cathode material and precursor factories independently rather than through joint ventures with Chinese counterparts, are expected to see an increase in value. However, for companies that need to adjust their Chinese ownership stakes, short-term concerns are inevitable.”