China, South Korea battery-makers drive growth despite capacity regionalization

South Korea-headquartered manufacturers are forecast to account for 49% of battery capacity in the US by 2030, homegrown US manufacturers for 18% and China-headquartered manufacturers for 13%. Uncertainty overhangs the future of these projects, however, due to heightened scrutiny reflected by Foreign Entity of Concern (FEOC) rules in the US. An entity is a FEOC if it is owned by, controlled by or subject to the jurisdiction of a government of a foreign country that is a covered nation — currently the list comprises China, North Korea, Russia and Iran. An EV becomes ineligible for the EV tax credit if a FEOC entity supplied any of the vehicle's battery components from 2024 and any of the applicable critical minerals from 2025. This means that the US EV tax credit will not be applicable to EVs that use the applicable inputs from China-based production, regardless of the location of the producing company's headquarters.

The subsidy will also not apply to EVs that use applicable inputs from China-headquartered companies that are controlled or owned by the Chinese government, regardless of the country of operation. There remains ambiguity over the classification of China-headquartered companies' operations abroad, including fully owned subsidiaries or joint-ventures, due to likely complexities in determining the extent of state involvement and ownership in these entities. This ambiguity risks delays in automaker timelines for launching more affordable, mass-market EVs in the US. To roll these out would require the widespread adoption of the more cost-effective LFP batteries, a technology in which China has a dominant share of both manufacturing and expertise. CATL had to scale down plans for a joint battery plant with Ford Motor Co., reducing it to a technical licensing partnership only. CATL and General Motors Co. are also discussing a similar arrangement. GM President Mark Reuss said in a recent interview that the automaker was now unsure which company it could partner with for less expensive LFP batteries. It will launch the next-generation version of its best-selling Chevy Bolt in 2025, powered by LFP batteries.

Homegrown battery-makers will dominate capacity in Europe, with a 53% share of the region's total by 2030. They will be led by the French company Automotive Cells Company SE with a planned total of 179 GWh capacity for five plants across Germany, France and Italy; followed by Sweden's Northvolt AB with a combined 160 GWh planned capacity for three plants in Sweden and Germany.

Automakers may still prefer to work with battery incumbents in China and South Korea for reliable battery supply, as small and mid-tier battery producers face scalability challenges. In June, BMW Group canceled a €2 billion contract for battery cells with Northvolt due to the latter's inability to scale up and deliver the contract on time, and is now turning to Samsung SDI instead. In reality, only some of the capacity announcements will come into fruition, with emerging players especially at risk of project delay and possible cancellation. In January 2023, Power by Britishvolt Ltd. — the UK battery start-up — went into administration as funding ran out before the company could complete gigafactory construction and begin production.

In Europe, battery-makers headquartered in China are forecast to be the second-largest category of operators by 2030, accounting for 20% of the regional battery capacity, spearheaded by CATL; they are followed by South Korea-headquartered producers, with a 14% share, led by LG Energy Solution.

China's international capacity buildout is concentrated in Europe, as the continent has remained largely open to investment from the country. CATL's planned capacity outside of China will rise eightfold to 24% from 3% of its total capacity between 2023 and 2030, led by a 100-GWh battery facility in Debrecen, Hungary, targeting production start in 2025. In contrast, the US has heightened scrutiny on all forms of involvement by China-based and headquartered companies in the EV supply chain. The designation of companies as FEOCs appears to be specifically targeted at China's involvement, as the other three covered nations — Russia, Iran and North Korea — are negligible players in the US EV supply chain today.

China-headquartered battery-makers are taking a multitargeted approach and setting their footprints in countries that could provide both a growth market in themselves and also a potential backdoor into the US market through having an FTA in place. Morocco has thus emerged as a midstream supplier. Located near the growing European market, Morocco can leverage Africa's role as a rising supplier of lithium and an established provider of cobalt, manganese and graphite. As a US FTA partner, Morocco's critical minerals value-add from refining can count toward the sourcing requirements under the US EV tax credit. Zhejiang Huayou Cobalt Co. Ltd. and LG Energy Solutions are planning a lithium refining facility and an LFP cathode plant in Morocco. Furthermore, Gotion High-tech Co.Ltd. is also planning a 20-GWh battery plant, expected to begin production in 2026. Volkswagen AG's China subsidiary — Volkswagen (China) Investment Co. Ltd. — is the largest shareholder of Gotion, with an equity share of just under 25% as of March 31.

Nickel-manganese-cobalt batteries to decline in share on more rapid growth in LFPs

Lithium-ion batteries (LIBs) will still account for 96% of capacity by 2030, while the share of alternative chemistries will edge up to 4%, helped by the commercialization of sodium-ion batteries in China, France and Sweden.

Among LIBs, nickel-manganese-cobalt (NMC) batteries will remain dominant through to 2030, but their share will fall to 44% as the LFP battery share rises to 24%, from 20% in 2023. Markets outside of China are increasingly embracing LFPs, as EV availability moves into the mass-market segment and the expiration in 2022 of the main LFP patents in ex-China markets have removed licensing costs. The elements used in LFP cathodes — lithium, iron and phosphate — are relatively abundant, making on- and near-shore production more feasible and easier to diversify production away from China. In comparison, NMC batteries contain cobalt and nickel; mined production of these two metals is concentrated in countries with both elevated ESG concern and significant China investments.

In Europe, homegrown battery producer ACC has temporarily paused the construction of new capacities in Germany and Italy since June. The company is considering options to shift to the cheaper LFP batteries from the NMC batteries currently planned.

South Korea-headquartered battery producers are also starting to embrace LFP and other iron-based chemistries, which paves a possible pathway to commercializing LFP batteries in North America. Up until recently, South Korea-headquartered producers have focused on high-nickel-based battery chemistries. They are trying to quickly acquire existing LFP knowledge from China-headquartered partners and avoid reinventing the wheel. For example, Samsung SDI is planning its first LFP battery plant in Ulsan, South Korea, and may use China-made equipment.

Indeed, South Korea-produced batteries will not qualify for the EV tax credit in the US. The legislation stipulates that the batteries need to be made in North America to count toward the local sourcing eligibility requirements, and the additional FEOC regulation further limits China's involvement. China also dominates battery cathode production. Therefore, the buildout of battery capacities in North America also needs to be concurrent with local expansions in cathode capacities. LG Energy Solutions is concurrently building US-based cathode-and-battery capacities predominantly for nickel-based chemistries, while also collaborating with China-headquartered partners for LFP supply and capacities for batteries destined for markets in Europe and China for use in energy storage and EV applications.

The question also remains where to source the cathode and raw material inputs for LFP production outside of China. LFP production requires iron units. In China, these come from relatively low-cost titanium dioxide by-products and scraps generated during iron and steel production, which are not readily available and may not be replicable in other countries due to environmental, social and governance (ESG) requirements. There will also need to be investment in purified phosphoric acid capacities. While the US is a big producer of phosphoric acid, the purified form is typically used as the phosphate source for LFP production. Canada has recently added high-purity phosphate to its list of critical minerals given its use in batteries and food security.

S&P Global Mobility forecasts the share of combined iron-based batteries — including LFP and lithium-iron-manganese-phosphate — of light-duty EV production will only reach 15% in the US by 2030, behind China's 65% and Europe's 30%, due to enhanced challenges in building out battery supply chains that exclude China.

What's next?

The LIB-dominated rechargeable battery industry has benefited from government interest and public and private investments worldwide. There is a strong battery capacity pipeline to meet automotive and broader energy transition demands. The industry has shown dynamism, in shifting battery chemistry choices to drive the transition to mass-market EVs, and adaptability, in addressing supply-security concerns of governments around the world. More countries will become battery producers, and more players will also emerge.

Competition among battery manufacturers remains fierce, however, given the current slowdown in EV demand and the expectation of a widening overcapacity. Capacity utilization fell for CATL — the world's largest battery producer — for two consecutive years, to 70.5% in 2023 from 95.0% in 2021, weighing on profitability and margins. The nascent LFP industry outside of China needs to overcome technical and supply chain hurdles to deliver the batteries that are essential for cheaper EVs.

Further upstream, Europe and the US also need to build more battery metals extraction and refining capacities to meet net new demand for EVs and batteries. It will be extremely difficult to shift existing trade flows and supply relationships due to inherent stickiness. This means Europe and the US need to overcome reserve limitations, long permitting times and address local resident concerns. For minerals used in battery cathodes, including cobalt and nickel, a large share of mine supply currently originates from operations with significant ownership by China-headquartered companies, making diversification extremely difficult. In the midstream refining stage, China-based production currently dominates production. An option could be to build refining capacities in North America and FTA partners, especially for minerals with limited local reserve availability, such as cobalt and nickel. The viability of this approach would still depend on the definition of FEOCs for the origin of the raw materials supplying to the refineries.

Battery capacity regionalization and supply chain diversification brings many questions — and also opportunities — for those players who can address the key bottlenecks while leveraging current policy support to the maximum.

^{S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}