The EV sector is currently going through somewhat of a step change. Unlike the smartphone evolution, which quickly transformed into a largely two horse race between Apple and Samsung, the emerging EV sector has hundreds of players vying for attention.
Following on from the early success of US-based Tesla, nearly every automaker globally is now progressing plans to electrify their offering, either as full electric or hybrid options. This fundamental shift into how the EV is made, sold and serviced has allowed new entrants to enter the market over the past decade with few barriers to entry.
Nowhere has this been more prevalent than in China. There are dozens of Chinese carmakers rapidly scaling up their EV offering, mainly for the domestic market, but some of the larger players are cracking the international market. Car brands like BYD, Geely, Chery and SAIC (through ownership of MG) are becoming more commonplace in Australia.
At the same time as China is ramping up EV production, the US and EU are going out of their way to restrict Chinese access to these markets, largely through regulations and tariffs.
The conundrum for these economies is that Chinese companies already control significant parts of the EV supply chain from the raw commodities that go into batteries and motors, through to battery technologies and manufacturing through to the EVs themselves.
We look at the measures being implemented by the US and EU and whether the horse has already bolted.
The US and EU are implementing new restrictions and tariffs on electric cars and components sourced from China, with investors needing to be acutely aware of how these changes will affect supply, demand, and the critical minerals market.
Before diving into the specifics of new policies, it’s essential to understand the backdrop of EV sales in the US and EU. In 2023, global electric vehicle sales soared, with the US and EU being key markets. The International Energy Agency reported that EV sales in the US doubled from the previous year, reaching over 1.3 million units. Meanwhile, Europe saw a significant increase as well, with sales surpassing 2.2 million units, positioning the region as a global leader in EV adoption.
In an effort to reduce dependency on Chinese components and bolster domestic manufacturing, the United States has introduced several legislative changes. Central to these changes is the Inflation Reduction Act (IRA), which offers substantial tax incentives for EV purchases but with stringent conditions on sourcing materials.
Key provisions of the IRA include tax credits and sourcing rules. The Act provides up to US$7,500 in tax credits for EV buyers. However, to qualify, a significant percentage of the critical minerals used in the EV batteries must be sourced from the US or its free trade partners. This effectively disqualifies many vehicles with Chinese-sourced materials.
There is a phased approach to implementing these restrictions, allowing automakers time to transition their supply chains. This includes a 10% allowance for non-compliant materials in 2024, gradually decreasing each year.
Despite the tough stance, automakers have secured a temporary extension to use Chinese graphite in EV batteries until the end of 2025, acknowledging the current lack of alternative supply sources.
Across the Atlantic, the European Union is also stepping up its trade defences against Chinese EVs. The EU’s latest measures are even more direct, targeting Chinese EV imports with heavy tariffs.
Recently, the EU announced the imposition of duties of up to 38% on Chinese electric vehicles, a substantial increase from the existing 10% tariff. As with the US measures, this move is aimed at protecting the European automotive industry from what it perceives as unfair competition due to China’s heavy subsidies to its domestic EV manufacturers.
The EU duties are more punitive. The duty increases are lower for companies that assisted with EU investigations and higher for those that didn’t.
The MG owner, SAIC, faces the top tariff of 38.1%. Geely, which owns a stake in Volvo, faces a tariff of 20%. A 17.4% duty will be applied to BYD brands, which include the Dolphin and Seal cars launched in the EU last year.
The charges come on top of the existing 10% levy on cars imported into the EU, meaning Chinese-made EVs face total tariffs of up to 48%.
The new duties are set to take effect from 4 July 2024, however there is a small window for the Chinese carmakers to comply with investigators and have the duties lowered.
For Chinese producers, higher tariffs and stricter material sourcing rules will make it increasingly difficult to export Chinese products to two of the world’s largest EV markets.
This could lead to a surplus of Chinese-made EV components and vehicles, pushing Chinese firms to seek new markets or adjust their production strategies. With Australia about to adopt stricter emissions standards, we could see even more lower cost Chinese-made EVs hitting the Aussie market.
For global supply chains, automakers in the US and EU are needing to pivot towards alternative suppliers for critical minerals such as lithium, cobalt, and nickel. This transition could drive up costs and lead to supply bottlenecks, particularly in the short term.
As a consequence of these policy changes, there will be heightened interest from US and European funds (and Governments) in investing in companies that explore and produce these critical minerals. Regions like Australia, Canada, and parts of Africa may see increased investment inflows as they ramp up their mining operations to meet the new demand.
The question comes as to how quickly these industries can adjust to an ex-China supply, particularly as battery technologies are rapidly changing. New investments in today’s technologies might become obsolete or cost uncompetitive before they even come online in several years’ time.
Whilst it is likely that the US and EU policies and tariffs will see a change in EV component sourcing, it will potentially take longer than expected with Chinese companies reaping the benefits in the meantime. With duties driving up the prices of Chinese cars in the EU, new car buyers are likely to be stung with higher prices for longer.
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Photo by Aditya Chinchure
