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The East VS West EV Battery War: It’s Just Starting

BYD battery "Skateboard" for EVs
Image via NextBigFuture

Summary:

  • The US Federal Government has just announced that there will be new tariffs on imports from mainland China for EVs and EV parts
  • Full EVs will go from 25% to 100%, assembled batteries from 7.5% to 25%, and battery components from 7.5% to 25%
  • The rationale is to deny China cornering the supply chain for EV and hybrid parts, as well as promote local and friendly nation economies
  • Economically, this is intended to boost local jobs and investment, as well as encourage better trade between friendly nations and the US. It will, in the short term, likely see the rise of EV and hybrid vehicle costs by a significant amount.
  • We think that if all the “What if’s” line up correctly, this could actually drive down the price of EVs and hybrids once the supply chain reaches local and friendly saturation… if it does.

Despite the seeming disinterest in EVs by consumers as a whole in 2024, automakers are still engineering, designing, and releasing their battery powered vehicles. Importantly, these batteries are also often used in plug-in hybrids, allowing for a more streamlined supply stream.

Behind the scenes, however, there has been discontent, rivalry, and sometimes outright hostility between Western automakers and mainland China. The latest conflict, that of tariffs and imports, has just launched into a full scale economic “war.”

In today’s analysis, we’ll look at what the impacts of the newest rounds of tariffs are, how the industry is shifting where it sources its batteries from, and more.

Open Markets VS Protectionism

Part of the reason that EVs have come tumbling down in price, compared to even a few years ago, is due to the fact that enough suppliers now produce components to build them with have appeared. However, in a bid to corner part of the supply chain, mainland Chinese companies started offering shockingly low prices, and even started offering fully build vehicles for import.

While lowest-cost parts are generally a good thing, both the EU and USA are concerned by just how much companies in China are flooding the market. Their attempts to corner the market have been working, and many non-Chinese suppliers have started to lose supply contracts because of it.

Chinese EV batteries assembly
The objective is to remove as much Chinese influence in the Western EV market, all the way down to battery assembly like at this factory. Image via Canary Media

In this regard, the announcement from the Federal Government in May 2024 of increased tariffs on Chinese batteries and EVs was designed specifically to bring those “Friendly” suppliers back into the fold. The tariffs are laid out as such:

  • Tariffs on full EVs manufactured in China, which also crucially includes motorcycles, will rise from 25% to 100%
  • Tariffs on fully assembled EV-specific lithium-ion batteries will increase from 7.5% to 25%
  • Tariffs on battery parts, vital minerals, and alloys needed will also increase from 7.5% to 25%

These tariffs will go into effect August 1, 2024. A further tariff on natural graphite, manufactured graphene, and permanent magnets of 25% will also go into effect in 2026, to allow automakers to build relations with new suppliers for these parts.

They are being put in place to deny China an economic advantage in North America, and in the EU, tariffs of similar amounts are expected to be announced sometime over the Summer of 2024, after ratification by all members of the Union. It really will come down to using Chinese batteries at higher cost, or receiving tax credits for sourcing batteries elsewhere.

Rationale

The Federal Government, in a statement from the White House, has not hidden behind any fancy language or “legalese” political speak. The rationale for these tariffs is to protect the billions upon billions of dollars invested into US automakers to develop, produce, and sell EVs and locally produce the batteries and motors that drive them.

They also do have a stake in the economy of EV batteries, as the government has attracted those billions in investment through offering tax credits via the Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Law (BIL).

Chinese EV's ready to ship
This is the scenario that has the West concerned: Thousands of Chinese EV’s ready for global shipping, sometimes under other brand names. Image via Forbes Media

The more direct rationale that no one is really talking about behind these tariffs is that the USA has, as of January 2024, recognized that China is now a “Foreign Entity Of Concern,” or a FEOC. This disqualifies China from receiving any of the credits or reliefs allowed from the IRA or BIL, thus meaning their products, on top of being tariffed higher, will also not receive any kickbacks or price reductions.

Economic Impact

While concrete data on this is very difficult to source at the time of this analysis (May 31, 2024), what can be determined is that these tariffs will have an immediate and significant impact on the US market as a whole. What is not likely to be impacted as much, oddly, are EV prices themselves.

Looking at the available data, the US currently gets most of its lithium-ion batteries of any type from China, from AAA’s for the TV remote to the batteries in EVs. In terms of sheer GigaWatt hours (GWh) of battery demand for EVs, according to S&P Global Mobility’s study in 2022, fully 62% of it will be met by locally produced batteries, although those batteries will be assembled from parts imported from China.

EV battery sourcing USA
The objective of the tariffs in this opening salvo of the battery war is to reduce China’s share as a battery source while also increasing the USA’s, South Korea’s, and Japan’s share.

Chinese batteries, on the other hand, amount for fully 20% of the demand, while Japan and South Korea will supply 7% and 8% respectively.

By shifting the priority of sourcing from China to local North American (US, Canada) and/or economic partners in Asia (South Korea, Taiwan, Japan), the hope is to discourage Chinese influence in the Western mobility economy, while at the same time boosting jobs and investment in the emerging EV supply industry.

The converse effect, however, is that EV and hybrid prices are both looking to rise by a significant margin. Data on actual figures is difficult to find as these tariffs have just been announced, but most predictions see EVs rising by at least 10% to 15%, and hybrids receiving a hefty 6% to 8% increase in MSRP.

This Is Just The First Salvo

The reason that concrete data on price influence and economic impact is mostly educated guesses right now is that this news is less than a week old, having been announced on May 28, 2024. Actual data and real numbers are likely to start being seen and felt in Q3 2024.

However, we think that in the long run, this could actually drive down prices of EVs. The reasoning there is that a manufacturer that is still supplying mostly from China will have to pass the cost of the tariffs off to someone, and it’s almost guaranteed to be the consumer. Sourcing batteries locally or from friendly partners will not incur those tariffs, and thus, once those areas of supply reach saturation, supply costs should drop.

We do admit, however, that there are a lot of “ifs” in that thought process. If China feels the impact, if the local and friendly supply chain reaches saturation, if EVs go through their predicted recovery in sales. If it all goes well, we might see EVs and hybrids return to decent pricing.

We’ll just have to see, in this case.