“So, Chairman Chung, thank you again for choosing the United States. We won’t let you down.
These are the words addressed to Hyundai boss Euisun Chung by Joe Biden during a visit to Seoul in May, as the US president reveled in a new $10 billion investment in US manufacturing by the giant Korean car.
So there was consternation in the Korean capital last month when Biden signed into law a provision of his landmark Inflation Reduction Act that eliminates subsidies for electric vehicles assembled outside North America.
Hyundai’s $5.5 billion electric vehicle plant in the US state of Georgia, announced during Biden’s visit, is not expected to begin production until 2025, making it ineligible for subsidies until then , making US rivals more competitive over the period.
The resulting furor continues to rage, exposing growing tensions between South Korea and the United States over Washington’s use of tools ranging from legislation to export controls and investment screening to restrict the transfer. advanced technologies to China.
But Korea’s talk of “betrayal” has baffled some industry analysts, who point out that what amounts to a short-term setback for a single company pales in comparison to the benefits likely to accrue to Korea Inc as a whole.
Section 45X of the Inflation Reduction Act allocates $35 per kilowatt-hour in subsidies called “Advanced Manufacturing Production Credits” to battery cell manufacturers. This means that a 40 gigawatt battery factory in the United States would receive approximately $1.5 billion per year in tax credits by 2032. This amounts to a big subsidy for battery manufacturers present in the United States. United – and South Koreans are perfectly placed to take advantage of it.
In July, SK On launched a $7.8 billion joint venture with Ford to build three battery factories in the United States, while LG Energy Solution and GM announced a $2.6 billion investment earlier this year to build a third factory as part of their joint venture in Michigan. Samsung SDI has a similar partnership with Stellantis, the group behind Peugeot, Fiat Chrysler and Jeep.
“All global automakers will try to source from US-based battery makers, and Korean companies have huge capacity in the US,” said Nomura analyst Angela Hong.
According to Tim Bush, a Seoul-based EV battery analyst for UBS, by 2026 Korean battery makers will operate factories in the United States accounting for at least 200 gigawatt hours each year. This would mean an annual collective US taxpayer subsidy of more than $8 billion, likely to grow as capacity expands, from the peak manufacturing credit alone. Additionally, restrictions on Chinese components mean that the Koreans’ only serious competitors will soon be squeezed out of the US market.
“Given the amount of subsidy the electric vehicle supply chain is going to collect, I just can’t understand the complaints,” Bush said.
The potential benefits don’t stop there. There do not appear to be any restrictions on the export of US-subsidized batteries, suggesting that Korean battery makers may be on the verge of driving out their Chinese rivals not only from the US market, but also of the European market.
Used wisely, US grants could also fund the transition from graphite to next-generation silicon anodes. This could increase energy density, reduce costs, and reduce charging times.
“Before, there was no catalyst to produce silicon on a large scale, but the Inflation Reduction Act changes that,” Bush said. “With advanced manufacturing credit, you have money to make that investment. It will move from high-end to mainstream, which could give Korean battery makers a crucial advantage over the Chinese.
It’s not even clear that the US law will inflict significant damage on Hyundai. Restrictions on the supply of Chinese components that come into effect from 2024 mean that Hyundai’s rivals are unlikely to manage to steal a step before its Georgia plant is commissioned.
“Many European and even American automakers will not be eligible for these tax incentives, as there are still many conditions to be met,” Hong said. “There are no definitive winners or losers.”
Seoul has reason to feel aggrieved. According to Wendy Cutler, a former top US trade official, the provisions of the Inflation Reduction Act likely violate WTO rules and the free trade agreement between South Korea and the United States. But Korean leaders could also be pondering the wisdom of making such a fuss about short-term damage to a single company, while ignoring long-term benefits to an entire industry that can be measured in decades.