Chinese EV Parts Factories Eye US Tax Credits Amid Trade Tensions

by | Jul 4, 2024

Following the United States’ implementation of new subsidies aimed at bolstering domestic electric vehicle (EV) production and diminishing Beijing’s dominance in the supply chain, Chinese manufacturers have turned their investment focus to an unexpected location: Morocco. Nestled in the rolling hills near Tangiers and within industrial parks by the Atlantic Ocean, Chinese companies have announced plans to establish new factories dedicated to producing EV components that could qualify for $7,500 credits to American car buyers.

Morocco is not alone in attracting such investments; countries with free trade agreements with the United States, such as South Korea and Mexico, have also seen similar announcements. However, Morocco has experienced a particularly notable surge in investment. Since the signing of the Inflation Reduction Act, a $430 billion U.S. initiative aimed at combating climate change, at least eight Chinese battery manufacturers have committed to new ventures in the North African kingdom, according to the Associated Press.

Chinese firms, which have historically held a commanding position in the battery supply chain, are now seeking to leverage their presence in U.S. trading partner nations like Morocco to tap into the burgeoning demand from American automakers such as Tesla and General Motors. Kevin Shang, a senior battery analyst at consultancy Wood Mackenzie, emphasized that these companies are keen not to miss out on this significant opportunity.

The United States and the European Union have both imposed substantial new tariffs on Chinese vehicle imports since May, coinciding with the U.S. finalizing eligibility rules for tax credits. These rules limit the involvement of companies with ties to U.S. adversaries and allow carmakers a window to reduce their dependence on China. To qualify for subsidies, carmakers must ensure that critical minerals or battery components are not sourced from manufacturers where China or other “foreign entities of concern” hold more than a 25% stake or board control.

Despite criticism that these rules favor China and perpetuate its EV industry dominance, the Biden administration maintains that the regulations will pave the way for significant investment in U.S. EV manufacturing. In Morocco, a predominantly agrarian economy with a median income of $2,150 per month, vast industrial parks housing American, European, and Chinese component manufacturers have emerged in rural areas near Tangiers, Kenitra, and El Jadida. These facilities aim to meet the increasing demand and navigate the regulations set forth by the Inflation Reduction Act, which is injecting substantial incentives into the U.S. car market.

The strategic move by Chinese producers to increase investments in countries with U.S. free trade agreements, particularly South Korea and Morocco, is a direct response to overcoming barriers imposed by the Inflation Reduction Act, as noted by the policy research firm Rhodium Group. Several new investments in Morocco explicitly cite the U.S. subsidies as a primary motivation. Many of these investments are joint ventures that can adjust board seats and governance structures to comply with U.S. regulations.

For instance, CNGR, one of China’s leading battery cathode producers, announced a $2 billion plan in September to establish a “base in the world and pan-Atlantic region” through a joint venture with Al Mada, the Moroccan royal family’s investment group. Despite CNGR holding slightly more than a 50% stake, Thorsten Lahrs, CEO of its Europe division, expressed confidence that their cathodes would qualify for the tax credits and that the company could modify its board composition if necessary. If compliance proves unfeasible, CNGR would pivot to other markets, including Europe, which has recently increased tariffs on Chinese EV imports.

Other notable investments include Gotion High-Tech, a Chinese-German battery maker that signed a $6.4 billion deal to construct Africa’s first EV battery factory in Morocco. Similarly, Youshan, a joint venture involving Korean giant LG Chem and China’s Huayou Cobalt, has indicated its intent to supply the North American market, with potential adjustments to ownership shares to comply with U.S. rules.

The influx of Chinese investment in Morocco’s automotive sector, which already hosts over 250 companies manufacturing cars or components, underscores the country’s strategic importance in the global EV supply chain. Moroccan officials have actively fostered relationships across the automotive supply chain, facilitating the presence of manufacturers from various countries, including Stellantis, Renault, and several Chinese, Japanese, American, and Korean firms.

As the global automotive industry transitions to electric vehicles, Morocco’s position as a key player in this evolving landscape becomes increasingly evident. However, there are concerns that protectionist policies, such as tariffs and subsidies, could complicate the country’s efforts to attract further investment. Ryad Mezzour, Morocco’s minister of industry and trade, cautioned that while new investments signal growth, the nation has also missed out on opportunities due to what he described as a “new age of protectionism.”

The intricate dynamics of the EV supply chain and the Inflation Reduction Act demonstrate the complexities in reducing reliance on Chinese manufacturers while fostering domestic production. The U.S. Energy and Treasury departments strive to balance these objectives, ensuring that enough vehicles qualify for credits without overly depending on Chinese inputs. Although the Department of Energy did not address specific questions about Chinese investments in free trade agreement countries, a spokesperson emphasized that the transition to electric vehicles is a global trend, with new policies aimed at enhancing U.S. energy security and competitiveness.

China’s extensive subsidies for battery mineral extraction and EV manufacturing highlight the challenge of fully decoupling from Chinese influence in the lithium-ion battery supply chain. This reality underscores that Chinese involvement in the industry will persist for the foreseeable future, as noted by Chris Berry, an advisor to battery companies and investors.