[IRA Reassessment] ① US Received Opinions from Korean Government and Companies... "Will Requests for Condition Relaxation Work?"

Unclear Detailed Regulations on Car Parts within IRA Cause Industry Confusion
Mineral-Producing Countries Should Be Expanded Beyond the US or US FTAs

US Demands All-Out Effort to Secure Supply Chains
Significantly Changed Mineral-Securing Countries in the Second Half of This Year

Editor's NoteThe United States has initiated the final procedures to establish detailed guidelines related to the tax credits under the Inflation Reduction Act (IRA), set to take effect next year. The IRA limits tax credits for electric vehicle (EV) buyers to those vehicles that are finally assembled in North America. Additionally, the minerals used as raw materials for EV parts must be mined and processed in the U.S. or countries that have free trade agreements (FTA) with the U.S., meeting certain thresholds. Korean automobile and battery companies now face the challenge of swiftly restructuring supply chains that have relied heavily on China. There are concerns that exclusion from tax incentives could lead to a loss of price competitiveness, posing a significant disadvantage. Conversely, some expect the IRA to serve as a stepping stone for proactive investments to capture market share. This article examines what domestic companies hope to see in the IRA’s detailed guidelines and explores strategies to gain an advantage in the North American market.

The United States' new supply chain policy, spearheaded by the Inflation Reduction Act (IRA), primarily aims to curb China's influence but fundamentally seeks to internalize future advanced industries such as semiconductors, batteries, and electric vehicles, nurturing domestic companies. The U.S. intends to dominate future industrial hegemony. If advanced industry supply chains are reorganized around the U.S., it will significantly impact not only the global market but also the Korean industrial sector.

As opposition and calls for amendments to the IRA continue from the European Union (EU) and domestically, the U.S. Treasury Department has been collecting feedback from governments and companies worldwide to finalize detailed regulations by the end of the year. Korean battery companies, independently from the government, have requested a delay in the IRA’s application and an expansion of the list of eligible mineral-producing countries.

◆ Clearer regulations on vehicle parts needed... Application delays necessary for supply chain restructuring = According to government officials and industry sources on the 7th, the U.S. Treasury Department conducted a public consultation from last month’s 5th to this month’s 4th on six areas related to clean energy incentives to establish sub-regulations (guidance) for IRA implementation.

The Ministry of Trade, Industry and Energy submitted its feedback to the U.S. Treasury Department on the 4th. The statement emphasized that the IRA’s requirements for eco-friendly vehicle tax credits negatively affect foreign eco-friendly vehicle manufacturers, including those from Korea, and may violate international trade norms such as the Korea-U.S. Free Trade Agreement (FTA) and World Trade Organization (WTO) rules. It urged the resolution of discriminatory elements by either applying the same eco-friendly vehicle tax credit requirements to Korean vehicles as those produced in North America or by granting a grace period for tax credit compliance.

Specifically, the ministry proposed a three-year exemption from eco-friendly vehicle tax credit requirements for companies planning investments in the U.S. Additionally, the statement requested that rental cars and short-term lease vehicles be included within the scope of commercial eco-friendly vehicles. Under the IRA, commercial eco-friendly vehicle buyers are eligible for up to $7,500 in tax credits without conditions.

A representative from Battery Company A said, "The publicly available IRA states that tax credit subsidies will be provided for electric vehicles produced in the U.S. and that producing EV parts can earn tax credits ranging from 6% to 30% of the investment amount. However, it is unclear which specific parts must be produced in the U.S. We have requested clarification on this point."

U.S. President Joe Biden is removing his coat while delivering a speech at the Inflation Reduction Act (IRA) legislative commemoration event held on September 13 this year (local time) at the South Lawn of the White House in Washington, DC.
[Image source=EPA Yonhap News]

He continued, "The IRA restricts the production of materials and minerals to the U.S. or countries with which the U.S. has FTAs, but we have submitted opinions requesting a broader application of eligible countries."

The IRA excludes tax credit benefits entirely if EV battery minerals or parts originate from "countries of concern" such as China or Russia. The law stipulates that battery minerals like aluminum, graphite, lithium, and nickel must be mined and processed in the U.S. or FTA partner countries or recycled within North America to qualify for up to half of the maximum subsidy ($3,750, approximately 4.91 million KRW). The required ratio starts at 40% next year and must increase to 80% by 2027.

Upon enforcement, key battery components such as cathode materials, anode materials, and electrolytes must be manufactured or assembled in North America to qualify for subsidies. The domestic manufacturing ratio must rise from 50% in 2023 to 60% in 2024-2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% thereafter.

There are also calls for exemptions for companies investing in the U.S. A representative from Battery Company B said, "Sudden supply chain changes raise concerns about increased costs for companies. We have requested a grace period for tax credit requirements for companies planning investments in the U.S." He added, "Battery companies also need clear tax credit provisions for joint ventures with local automakers."

◆ Battery industry’s all-out mineral procurement... IRA 'two-track strategy' = While demanding fine-tuning or exemptions to the IRA in the U.S., Korean battery companies recognize that the U.S.-centered supply chain restructuring is an unstoppable trend. Especially in the U.S. market, Chinese battery companies are excluded, presenting an opportunity for domestic firms. However, efforts to reduce dependence on Chinese imports for battery raw materials such as precursors, which are key to cathode materials, are necessary.

A representative from Battery Company C said, "The basic strategy to respond to the IRA is to diversify the supply chain for raw materials such as minerals," adding, "Supply chain diversification will likely be aligned within the scale of North American battery supply."

Reviewing supply chain procurement and changes in the second half of this year (after July) among seven major battery companies, only one out of ten new supply cases involved sourcing key battery raw materials or parts from China. Notably, seven out of ten recent supply chain changes occurred after the law’s enforcement on the 16th of last month. The most prominent trend is diversifying supply chains by sourcing raw materials from North America, Europe, Africa, and Australia (four cases).

There is also a noticeable distancing from Chinese supply chains. Samsung SDI sold 16,622,000 shares (approximately 180 billion KRW) of Ganfeng Lithium, China’s largest lithium company, on September 22. Samsung SDI plans to use the proceeds from this sale to diversify its supply chain.

This content was produced with the assistance of AI translation services.