The U.S. Treasury Department issued a proposed guidance last Friday that would significantly restrict what battery parts and materials can qualify for incentives in the Inflation Reduction Act. The rules label China and several other countries as “foreign entities of concern.” These rules will prevent EVs made with materials and parts sourced from those countries from qualifying for some of the IRA’s electric vehicle tax credits, starting in the next few years.
The new rules are meant to push battery companies to develop supply chains outside the control of Chinese officials and companies, which today dominate much of the world’s battery industry. They come following a first batch of guidelines released this year by the Treasury Dept., which the IRA tasked with developing specific rules for implementing the law.
So what does the new guidance mean for battery supply chains?
This episode features two conversations with Sam Jaffe, senior director of business development at Addionics. The first is a short update on the proposed rules released last week, and the second is a longer conversation Shayle had with Sam in April about the first batch of rules, which focused on which battery ingredients count as “constituent materials” under the IRA. Both discussions are relevant to understanding what’s happening now.
In this update, they cover topics including:
- Defining what counts as a material controlled by a foreign entity of concern, such as percentage ownership in a joint venture.
- Key loopholes in the law, such as licensing arrangements and small percentages of low-value materials, like cathode binder and electrolyte salts.
- The parts of the supply chain most significantly affected by the rule, such as Chinese graphite, Indonesian nickel and Congolese cobalt.
- Upcoming deadlines in 2025 and 2026, and whether onshored or “friend-shored” facilities can begin supplying materials before then.
Recommended resources
- Canary: The US EV industry now faces a choice: Tax credits or Chinese batteries
- Heatmap: It’s suddenly a mystery which EVs will qualify for a tax credit in 2024
Transcript
Shayle Kann: I’m Shayle Kann, and this is Catalyst.
Sam Jaffe: Based on my expectations, it’s significantly restrictive. It is a pretty solid, bulletproof way of keeping China out of the US battery supply chain.
Shayle Kann: Well, I think we all knew that the United States government was going to try to make it difficult for Chinese companies to participate in the bonanza of the Inflation Reduction Act driven EV tax credits, but we didn’t know until now is just how hard they were going to make it.
I’m Shayle Kann. I invest in revolutionary climate technologies at Energy Impact Partners. Welcome. Okay, so 2023 has been the year of guidance from the US government around the actual rule-setting following the Inflation Reduction Act. One of the areas where the guidance has been most important and honestly most complex, has been in the electric vehicle tax credits, which provide up to $7,500 per vehicle for passenger vehicles if you qualify in a bunch of different ways.
Back in April, we had a conversation with Sam Jaffe, who’s my friend and a battery market guru, and also the Senior Director of Business Development at Addionics, to talk about all the complexities of the rules around the EV tax credits in particular, where you can source batteries from, where you can source critical minerals from and so on. It was complicated already at the time, but as we knew there was still more guidance to come. In particular, the thing that we were waiting on was how we were going to define foreign entities of concern, largely because it left open-ended the question of what role China could or could not play, and Chinese companies, I should add, in the EV supply chain. Well, that guidance finally came out late last week and it’s actually pretty monumental. I think the industry is still working through it, but it’s going to have significant implications for both qualification for the tax credits in the near term and also what the supply chain ends up looking like, both domestically and internationally.
So we brought Sam back on to do a quick update. The beginning of this podcast you’ll hear a quick conversation between me and Sam that we held this week to just talk about this foreign entities of concern guidance that just came out. Then you’ll hear the original conversation that Sam and I had in April, which is all still applicable today and speaks to the broader question of sourcing for EVs and EV batteries to qualify for the tax credits in the United States, and the implications that’s starting to have on manufacturing. This has all still been true since he and I had the conversation. You’ve seen more and more announcements and more and more factories being set up. So please enjoy two parts of a conversation with Sam Jaffe, one this week, one back in April. All on the topic of, where are we going to make all the batteries and where are we going to source all the minerals for the electric vehicles that we buy in North America. Sam, welcome back.
Sam Jaffe: Thank you very much.
Shayle Kann: Thanks for taking some time on short notice to talk about foreign entities of concern. So we’ve talked before about the EV tax credits that came in the Inflation Reduction Act and all the sourcing requirements, the complex set of sourcing requirements that come along with qualifying for them. The latest thing that happened is that last week we got additional guidance on, I don’t know, you tell me, but it feels like one of the biggest remaining open items here, which was how we were going to define rules around foreign entities of concern and battery sourcing they’re in. So I want to talk about what that latest guidance is and then what it portends about qualification for EVs for this credit and all the rejiggering of the global battery supply chain that comes with that. So let’s start with, what was the latest guidance?
Sam Jaffe: So essentially they’re defining the term foreign entity of concern for the purposes of the tax credits. They list out what makes a foreign entity of concern, which is essentially a company in China, Russia, North Korea or Iran. They go into some more detail about that, such as the percentage ownership of the Communist Party in China, or if it’s a joint venture, for instance, how much is owned by the Communist Party? How much is owned by the Chinese government and what would qualify? That number is now 25%. So it can’t be a Chinese ownership, Chinese company having an ownership of 25% or more or else it becomes a foreign entity of concern and therefore it disqualifies you for the tax credit.
Shayle Kann: So it’s obviously going to vary by different parts of the supply chain, but on its face at the high level, we know China’s pretty dominant in various Chinese companies and China, depending on what segment you’re talking about. It’s fairly dominant in various places within the battery supply chain at the highest level. Do you view this guidance as significantly restricting the ability for EVs to qualify for the tax credit for the next few years or do you think this is pretty easy?
Sam Jaffe: Based on my expectations, this is, it’s significantly restrictive. My expectations was there were going to be a lot of loopholes and a lot of ways for this to snake around the FEOC label, but it is a pretty solid bulletproof way of keeping China out of the US battery supply chain.
That’s not to say that there aren’t loopholes. There is a significant loophole which is a de-minimis ruling, which essentially says if there’s a small amount of material that does get its way into it from China, then that will, and specifically of materials that don’t have high value. That’s clearly talking about things like binder in the cathode and electrolyte salts and maybe electrolyte solvents also and maybe additives. Some of the very tiny amounts of material that go into the battery, that is still going to be able to come in at least for the next two years until 2026. So there is a loophole but there aren’t other loopholes. I think a lot of people were expecting there this to be a very, a spaghetti colander and it’s not. It’s a solid stainless steel bowl.
Shayle Kann: Let’s talk about where in particular this presents a real challenge. I mean I think of China in particular as being dominant in refining of a bunch of battery metals and minerals. So if you’re getting into both anode and cathode materials and the precursors to those materials, that feels like it’s, at least given the supply chain today, pretty tough to avoid going through China or at least going through Chinese owned entities. I know this is a big issue in nickel, for example, where the nickel production is in Indonesia, but it’s actually predominantly Chinese owned, right?
Sam Jaffe: Yeah. So I mean it gets really complex, but essentially there’s two tax credits. There’s one for battery components and one for strategic minerals. The minerals are not going to come into play until 2025, but the components, meaning the actual electrode material, the actual the separator, and where the battery itself is made, where the battery pack is put together, that comes into effect on January 1st, 2024.
So where this gets really complex is in the strategic minerals. So starting in 2025, you can’t have material coming from a 25% or more owned joint venture. So for instance, in Indonesian nickel, that’s going to disqualify some suppliers of nickel where the Chinese are majority shareholders in some of the joint ventures. It’s going to disqualify some of the Congolese cobalt where Chinese companies own a majority share of the cobalt producers. Graphite is of course going to be one of the most severely challenged areas of battery materials because today, all graphite essentially is coming from China. We now have essentially two years to make a North American graphite supply chain, which is possible, but I’m sure a lot of people would ask for a lot more time than that.
Shayle Kann: Yeah, and it even applies, I mean, even to lithium, right? I mean obviously a lot of lithium refining takes place in China, but even setting that aside, I think Greenbushes, which is if I remember right, is the largest lithium mine in the world, is 26% owned by Tianqi, which is a Chinese company.
Sam Jaffe: Right, so there’s one lithium mine that’s disqualified, as well as some of the Argentinian lithium salt extractions facilities also.
Shayle Kann: So I mean graphite is maybe the most extreme example as you said. Realistically speaking, are we going to build up enough graphite production in North America in a year, essentially, to be able to meet the North American market or is it just more realistic that unless this guidance changes, EVs are just not going to qualify for these tax credits for at least a few years?
Sam Jaffe: I think we’re going to see some challenge to, especially on the graphite side, definitely. I mean there are graphite facilities being built today that should happen very relatively quickly and have a chance to be producing significant amounts of graphite in 2026, but that’s going to be a tremendous challenge.
Shayle Kann: What about the other thing that has been in the news, setting aside the mineral sourcing stuff? There have been some JVs announced between auto OEMs and large Chinese battery manufacturers. I think the best known one is Ford and CATL. They were going to build a big factory, I believe in Michigan. There’s already been a bunch of pushback on that. I mean, this basically puts the nail in the coffin for doing that, I assume.
Sam Jaffe: It doesn’t actually. I think that the coffin might’ve already been built for that plant anyway, but actually there’s some tremendous gymnastics in the language of this guidance that goes around what happens if it’s a licensing play, which is what Ford is doing with CATL. They’re licensing technology from CATL. There’s going to be about 100 CATL technicians at the factory to make sure it’s done correctly. But what this language lays out in the guidance is that ensures that the licenser does not fully control the relationship, that the control remains with the US-based or free trade partner country-based company. It explicitly lays out an outline for how that might work and how you can ensure that it’s not. Essentially what they didn’t want to have happen is for the licensing relationship to just be a disguised joint venture, that it has to be a true licensing where you’re just paying for the IP license and that’s it, and it lays out the language for that to be allowed.
Shayle Kann: Can you think of this guidance in the context of winners and losers here? Is the winner basically anybody who’s producing any EV battery-related thing outside of China with no Chinese influence? Lose is anyone who is, is it as simple as that?
Sam Jaffe: I think that the winners are those companies that are trying to build a US supply chain, and if there were leaks that allowed the Chinese to come in through various side entrances or back entrances, it makes that job that much harder. So I think that that’s the significant winners. I think the car manufacturers are subtle winners, in the sense that there is a two-year timeframe to get this to work. They can build a tracing process and a way of ensuring that all of their materials come from the right sources. So I think the car manufacturers were afraid that if it was January 1st, 2024 when all of this started, then they wouldn’t have a chance. So I think they’re relieved from that perspective.
Shayle Kann: We’ve talked about the materials and the making of batteries themselves. What about buying equipment from China for factories that are being set up in the US or other free trade agreement countries? Does that come into play here?
Sam Jaffe: It does, yeah. So my company, Addionics, is building a factory in the US and we need to purchase Japanese and Korean equipment. But interestingly, there’s specific language in here about control software for that equipment, that the control software not be made in China, and you have to prove that that’s not coming from an FEOC either. So there’s very specific guidance on what is and isn’t allowed in a project that’s going to be partially funded by the DOE.
Shayle Kann: Awesome. Sam, thank you again for coming on on short notice to talk through foreign entities of concern.
Sam Jaffe: Absolutely, thank you very much.
Shayle Kann: Okay, so that was the update that I recorded with Sam this week about the Treasury’s new guidance about foreign entities of concern. But back in April, Sam and I talked about the broader set of Treasury guidance around the IRA’s EV tax credits. That conversation provides a lot of context to the update that you just heard, so it’s worth a listen. Again, here’s my conversation with Sam from April.
Sam, welcome back to Catalyst.
Sam Jaffe: Thank you very much, Shayle. Good to be here.
Shayle Kann: So we’re recording this in the afternoon of the day that Treasury released its guidance. Initial guidance? Final guidance? What is this?
Sam Jaffe: Final initial guidance.
Shayle Kann: Treasury released its final initial, partway done, totally done, baked and halfway baked guidance on how to qualify for the EV tax credits that were in the Inflation Reduction Act. I want to talk through the details of it and the ramifications of it.
But first let’s bring ourselves up to the present. So you and I chatted on this podcast some months back in the wake of the Inflation Reduction Act passing, where the bill had set all these rules for qualifying for up to a $7,500 tax credit for electric vehicles and complex set of rules. But despite the complexity of those rules, I think you at the time, and this was soon after the bill passed, you were pretty bullish on the impacts that it would have on the domestic supply chain in the United States for everything from battery minerals to battery manufacturing. So bring me up to speed from then to now. What have we seen happen?
Sam Jaffe: So we’ve had a lot of activity. On the guidance perspective we’ve had the Treasury department issue a white paper in December that talked about this concept of constituent materials. So it’s an interim step between strategic minerals, which is one half of the EV tax credit, and components, battery components, which is the other half of the EV tax credit. In between there’s this constituent materials, and they said, “We don’t know how we’re going to handle this. We’ll let you know by the end of March.” Then this morning they issued their full guidance on how constituent materials will be qualified. So that’s on the update and guidance of the IRA.
In terms of the actual progress of building out a supply chain in North America, there’s been enormous amount of activity and I still think there’s going to be another big jump in activity over the next six months with this guidance. So among that is the announcements of several large cathode production plants, most of which are going to be located in Canada. We have the Tesla factory in Mexico that was announced, and a new Gigafactory and car factory that will be built in Mexico. We have the CATL Ford battery plant. It’s really a Ford battery plant with CATL technology guidance, but that was announced. That’s going to be a 30-gigawatt hour plant making LFP batteries. Then just before this morning, late afternoon yesterday, news broke that it looks like Tesla and CATL also are talking about building a Texas-based LFP battery plant. So the announcements of this just been coming fast and furious throughout the entire supply chain.
Shayle Kann: Can we attribute that basically as a direct result of the IRA? Do you think any of those plants would have… I mean, presumably if you’re announcing a plant, it’s been in the works a bit longer or is it possible that folks woke up to the IRA nine, 10 months ago and said, okay, hyper speed, we need to cite and announce a new battery manufacturing plant?
Sam Jaffe: I think that companies throughout the supply chain have been planning on building plants regardless, but the location of those plants in North America and free trade partner countries is what’s new. We’ve actually seen a shift in some cases, a shift of battery plants that were planned for Europe where they said, we’re going to stop developing this and instead turn to building a plant in the US. FREYR did that, Northvolt did that, and a couple others have, and Volkswagen also talked about doing that.
Shayle Kann: So I think we could pretty safely say then that the indications over the nine months since the bill passed or that it was working as intended, right, because the point of having all these domestic content provisions in the tax credit was to attract manufacturing to the US predominantly, right? So it seems to have been working, basically.
Sam Jaffe: It seems to have been working and not just in building car factories, which I think probably would’ve been happening anyway, but also in building battery factories and the entire supply chain along there. It definitely is happening and it probably wouldn’t be happening. A very small proportion of this would be happening without the IRA.
Shayle Kann: So let’s talk about the controversy that caused then and in two categories. One is with our geopolitical allies in other countries who have generally not been super excited about all these domestic content provisions. The second being even domestically, whereas the guidance has started to come out, there’s been an internal fight in the United States about, are we taking this, the domestic content intent of the legislation seriously enough? So can you walk me through how you think about all the noisy fighting that has taken place about this?
Sam Jaffe: Yeah, I think internationally there’s certainly been a big disagreement coming, especially from Europe and Japan, from Western Europe and Eastern Europe, the UK and Japan, all of which strong US allies but do not have free trade treaties. Interestingly, Biden slipped in just before the shot clock went away, he slipped in a Japan battery materials free trade agreement through executive order. We can come back to that because I think there’s significance in that, but that clearly there are international disputes between allies that have to be, that are going to be handled and probably negotiated through. I think that the biggest winners though of the other countries that are involved, Australia, and Korea, and Chile, are by far the biggest winners. They all have free trade agreements with the US and are going to come out looking very good from this.
Shayle Kann: In particular because of lithium, I assume? I mean, Australia and Chile, or Chile is where most of the lithium and brines comes from. Australia is where most of the lithium and hard rock comes from. So that’s why those two and then Korea, because companies like LG can make batteries.
Sam Jaffe: Make batteries, and also there’s quite a big entire battery supply chain in Korea also. Nothing compared to what’s in China, but it is significant too.
Shayle Kann: All right, so I think we’ll come back to that because the significance of what the Treasury guidance today is impacted by these countries and what exists in these countries. Before we get to that, maybe let’s just do a quick refresher. Can you just walk through the two components of the EV tax credit and what it takes at the high level from the bill to comply with each?
Sam Jaffe: Sure. So there are two parts to the EV tax credit. One is battery components and one is strategic minerals. Strategic minerals are the minerals that are extracted from the ground and then processed into battery materials. The battery components are the finished electrolyte where the electrolyte slurry is put onto the foil, which happens at the battery factory, as well as the separator, the electrolyte, the foils themselves. In the case of the strategic minerals, there is a percentage requirement of the total value of all the strategic minerals that must come from the US or free trade partner countries. That percent starts at, for strategic minerals, it starts this year at 40% of the value has to come from the US or free trade partner countries. That goes up 10% a year till eventually you get to 80% requirement. For the components portion, it’s starting at 50% this year, has to be made in North America and it goes up 10% a year until eventually a 100%. So in other words, you have to make the battery cell itself, has to be manufactured in North America, US, Mexico, or Canada. The minerals have to come from the US or free trade partner countries.
Now interestingly, there’s a big gap. There’s a big hole in the donut there between minerals and components. That’s what today’s guidance really laid out was, they’re calling this constituent materials. So in other words, you take the lithium itself that’s been processed into let’s say, lithium hydroxide, and you turn it into… you combine that with the nickel and the cobalt, into a cathode active material, and that’s the powder that’s sent to the battery factory in North America. Now, according to this guidance, those constituent materials essentially fall under the category of strategic minerals. The cathode material can be made in a free trade partner country and then shipped to the US, and it will count towards that strategic mineral number.
Shayle Kann: Right, so that’s the crux I think of where most of the debate has been around this guidance. So before we get to it, critical minerals side of this always was US or free trade agreement countries. Within the list of free trade agreement countries includes the countries that happen to produce the most, at least lithium, which is Chile and Australia. So that makes lithium sourcing all else equal relatively easy, right?
Sam Jaffe: Right.
Shayle Kann: Not necessarily so for nickel, cobalt, manganese, et cetera, et cetera, et cetera, where the supply chains are a little bit different. But from a qualification perspective and from again, it comes down to the portion of the total value of those critical minerals that comes from a US or free trade agreement country. Is lithium a big enough piece of the stack that if you source your lithium from a free trade agreement country plus maybe some of your copper or something like that, then you’re in good shape? Or do you really need to go mineral by mineral and say, okay, every one of these, or most of these big ones, we need to get from one of these countries?
Sam Jaffe: So two things. One is, you’re talking about the lithium from the ground or the water in the ground, which is coming from Chile and Australia. However, in the case of Australia, they dig up the rock called Spodumene, and then they ship it to China to be processed into lithium hydroxide or lithium carbonate. That processing part of the supply chain is actually done outside of a free trade partner country, so that raises complexities.
In terms of your question about the value of the lithium as a proportion of overall, no, that’s a pretty small portion. By far the biggest for most of these electric vehicle batteries of all of the minerals is going to be nickel. Then lithium and cobalt probably fall in second, but the single biggest number to shoot for is the nickel itself, and that’s a problem because most nickel is coming from Indonesia, which is not a free trade partner country.
Shayle Kann: Okay, so then on balance, critical minerals component here, difficult to qualify for. How about let’s flip to the other side for a second then we’ll talk about this in between-er category, but how hard are we learning the battery components part is to qualify for? In this case, again, not free trade agreement country. So you need to be making the battery itself, or at least the battery components in North America, which presumably is why we’ve seen all these announcements that you described before about battery manufacturing in North America. Does it look like we are going to have sufficient domestic supply to meet the market in the near term?
Sam Jaffe: So let’s define near term. Over the next 12 to 24 months, we’re still going to be living in a world where most electric vehicles sold are luxury or near luxury vehicles, whether it’s a Hummer EV or even a Kia EV6, it’s still a 50,000 plus vehicle. In that environment, does $7,500 really matter that much to those buyers? This is all a little bit of a thought exercise more than a true economic harbinger.
However, we’re about to see the launch of a whole lot of mass market vehicles. Most, a lot of them coming from US manufacturers, both from Jeep, from Stellantis, and from the Blazer EV is coming out from GM. Those types of vehicles are going to fall into the $35,000 type purchase price car. When you get there, $7,500 really matters. So what’s going to really matter the most is when those vehicles come out in 2024 and really get pushed to large volume in 2025, what will be the state? At that point we’re going to have the LG, GM, Ultium joint venture making over 100-gigawatt hours of batteries throughout this country. LG, Stellantis will be making 35-gigawatt hours. Stellantis, Samsung STI, we’ll be making another 30. Then Ford will have its CATL LFP plant making another 30-gigawatt hour. So right there we’ve got almost 200 or maybe more than 200 gigawatt hours worth of production, which is going to satisfy 2025 needs.
Shayle Kann: Okay, now let’s get into the weeds. So this question, you mentioned constituent materials. It’s wonky but it has been controversial. I’ll read you a quote here from Joe Manchin as of, I think a couple of weeks ago because he has been… So there was this initial Treasury guidance, I think in December as you described, or at least white paper, sorry, the guidance was just now. The white paper laid out this middle category of constituent materials, which you can describe in just a moment.
The question is, do you classify those constituent materials as critical minerals or do you classify them as battery components? Turns out that’s very controversial. Joe Manchin said quote, “It seems that Treasury is yet again ignoring the will of Congress by looking to blatantly expand the definition of a critical mineral to include constituent materials.” He again, today after the guidance came out, blasted the guidance and said that Biden is ignoring the intent of the law. So it’s been controversial there from a political standpoint, but then also there’s been a bunch of reporting of companies who are trying to build domestic cathode manufacturing who’ve come out strongly with opinions about this as well. So let’s talk about what the controversy has been, and then where Treasury has landed on it. So what is a constituent material as Treasury has defined it, and why do we care which category it goes into?
Sam Jaffe: So in the battery supply chain, you go from the mine where you extract the minerals, to multiple steps of precursor materials, in most cases for each one of these minerals, to the battery component itself, to the battery cell, right? It’s that middle part of all those precursor materials that has not been clear where it falls. It’s different, a little bit different for each of these materials.
So for instance, with lithium, you start, let’s say you’re mining the hard rock in Australia, then you process it into lithium hydroxide. That’s the actual mineral that’s defined as a strategic mineral in the law, the hydroxide or the carbonate, the lithium hydroxide or lithium carbonate. Then you take that and you’re going to add it to a precursor cathode active material or PCAM, to turn it into a cathode active material. That’s the actual cathode powder that’s going to go to the battery factory. That PCAM is not a mineral, it is a chemical, it’s a precursor chemical. When you add the lithium to it and make the cathode active material, that, what is that? Is that a strategic mineral or a battery component? It’s not entirely clear from the language of the law itself.
You go into something like electrolyte and it gets even more complicated because now you have multiple finished chemicals such as the electrolyte salt like LiPF6 or LiFSI, which goes through multiple precursor steps before that and multiple processing steps before that, only to make a component of a component, the electrolyte. In each of those steps, how are you going to ensure that each of those steps is falling under, whether it’s the US and free trade partner countries or North America or the US itself? All of that has been up for definition, which finally we do have that definition. But it is, I mean, we can ridicule these politicians for making such an incredible octopus of difficult and complicated regulations, but I respect them because they’re trying to add a whole way of regulating and incentivizing an entire supply chain, and that’s incredibly hard to do.
So I think essentially what the guidance said was constituent materials, which is going to be any of these precursor steps up to the battery component itself, essentially falls under strategic minerals and the strategic minerals qualification. Now, they added this 50% rule, which says at each step of processing from extraction to each of the processing steps that this, whatever the material you’re talking about goes through, 50% of the value has to have been added by a free trade partner country or in the US itself. So in other words, if you make the… if the lithium is mined in Australia, that counts, that’s a free trade partner country. If it’s processed in China, boom, it doesn’t count because we don’t have a free trade treaty with China. What if it’s processed in Korea? That counts.
Then if… let’s go away from lithium because that’s the easiest one. That’s only one step to a shippable material, but something like manganese, which has four separate stages of processing and refining, it has to be mined and then it has to be processed into electrolytic manganese metal, and at least 50% of the value of that has to be done in a free trade partner country or the US. Then it has to be turned into manganese sulfate, again has to be done in a qualified country. Then it’s combined with the nickel and the cobalt to make the PCAM. It has to be done in the right country. Then it’s made into the cathode, it has to be done in the right country, et cetera. So each step along the way, you’re allowed to add some element of, something can be added from another country that’s not qualified, but as long as 50% of the value added to that product in that processing step counts, then it counts.
Shayle Kann: So let’s talk about Korea for a minute because I think this is where a lot of the controversy ultimately lies. So imagine that you are a cathode material producer. In fact, imagine you’re somebody like Redwood Materials who’s building cathode manufacturing in the United States. If you had been qualified, if cathode active materials, which is in this constituent materials category, had been considered as a battery component, then only North American production of cathode materials would count and clearly that’s a big advantage to you. But instead, because Treasury went the other direction and said constituent materials are more like critical minerals, it is US or free trade agreement countries. Critically, I think, Korea is a free trade agreement country. Correct me if I’m wrong, Korea is where a lot of cathode manufacturing or anode material manufacturing takes place. So does that basically remove the incentive for domestic cathode and anode material manufacturing that otherwise would’ve been there?
Sam Jaffe: I wouldn’t say it removes it, but it does place it on a level playing field with building a new plant in Korea or with Japan, in the case of the new treaty with Japan. So now if you are going to build a new cathode plant, you have to choose, do I do it in North America or do I do it in Japan or Korea? Basically. You could do it in any one of those 14 countries that we have free trade agreements with, but there’s not much advantage elsewhere to do it there.
What it does do is existing facilities in Korea and Japan will be able to qualify for this agreement, and that’s a big deal because if they had to rebuild that production capacity in North America in 2023, they wouldn’t have been able to do that. That goes back to the Japan agreement. Essentially, my conspiracy theory, is that essentially this was a bone that was thrown to Tesla because Tesla makes its battery cells in North America with Panasonic. It makes some of its materials in North America. The electrolyte is made here, the separator, the can, some other things are made in North America, but the cathode, which is by far the most expensive part of the battery, is made in Japan by Sumitomo Metals and Mining. By sneaking this free trade agreement in, they allowed Tesla to qualify for the components and the… I’m sorry, they allowed them to qualify for the strategic minerals portion of the EV tax credit that otherwise they wouldn’t have if Japan wasn’t allowed.
Shayle Kann: Okay, so that’s where this controversy has been. Clearly the administration or the Treasury at least, was trying to thread this needle, where on one hand the whole point of this legislation is to protect domestic manufacturing and build up a supply chain. On the other hand, there was clearly, they were getting pushed, I think both by our free trade agreement countries, possibly by auto manufacturers, maybe Tesla included on this. So they were trying to figure out what the right solution was. They fell on this side of it, and we’ll see what happens. This is guidance, is this what comes next? What’s left to be done here?
Sam Jaffe: So I think there is one big hole in what we don’t know, which is foreign entity of concern, and they did not give guidance on how they define foreign entity of concern for the purposes of the EV tax credit. They didn’t give any guidance. They were asked very specifically, is a country a foreign entity of concern? Do you have to name the company itself as a foreign entity of concern? They wouldn’t even say that. So they still have another six months or so to provide that guidance. That’s important because if you are today shipping your spodumene to China to be made into lithium hydroxide, then if China does turn out to be a foreign entity of concern, that will disqualify that material for the tax credit. So right now it is going to be qualified, but as soon as they name specifically what they mean by foreign entity of concern, that could change.
Shayle Kann: Is there realistically any possibility China is not a foreign entity of concern? I mean isn’t, again, to the point of the intent of the law, feels like pretty clearly a significant portion of the intent of the law is to shut China out of manufacturing of batteries for EVs in the US.
Sam Jaffe: So the question is, will they say China overall is the foreign entity of concern, or will they have to name specific companies within China as foreign entity of concern? Therefore, and then start playing the game of you’re in, you’re out. So that’s going to be difficult to do, but they could look at companies that have a financial relationship with the central government would be disqualified, and private companies might not be. We’ll see how that works out, or they could just say anything in China is off limits.
Shayle Kann: So putting back on your prognostication hat then, what is your sense of what this guidance does to the market over the next… until we get final clarity on everything? Everything proceeds apace as it had been? Does it divert any decisions, accelerate anything?
Sam Jaffe: I think it definitely… So the regulators are walking a fine line between, do we make this doable or do we make it too complex and take into account every little nuance, but then it’s just too hard to qualify for these things? Or, do we make some broad brush measures and make it doable for the car makers to qualify? What I see in what they’ve done is that they’ve erred toward the side of broad brush measures. By that I mean specifically identifying constituent materials as strategic minerals and therefore allowing for not just US production or North American production, but an alliance of countries that is going to be able to make this happen.
Shayle Kann: All right, Sam, as you said, it’s an octopus of, I don’t remember what you call it, but I like it. It’s an octopus of complex regulation, but so is the battery industry and that’s why we talk about it so much. Thank you for helping to illuminate it once again.
Sam Jaffe: All right, thanks very much. Shayle.
Shayle Kann: Sam Jaffe is a longtime battery industry analyst and is now Senior Director of Business Development at Addionics. This show is a co-production of Latitude Media and Canary Media. Head over to canarymedia.com for links to today’s topic. Latitude Media is supported by Prelude Ventures. Prelude backs visionaries accelerating climate innovation that will reshape the global economy for the betterment of people and planet. Learn more at preludeventures.com. This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquand, theme song by Sean Marquand. I’m Shayle Kann, and this is Catalyst.
