“Build it or else.”
That was the gist of U.S. Senator Joe Manchin’s discussions with the automotive industry regarding EV tax credits. Manchin, a Democrat from West Virginia, had grown increasingly concerned about China’s dominance of the lithium-ion battery market, and he told car companies that they needed to move vast swaths of the global battery supply chain out of China.
If they didn’t, they’d have to give up the lucrative tax credits in the Inflation Reduction Act that made their EVs more affordable for U.S. consumers.
The resulting law still grants consumers access to $7,500 worth of federal tax relief but drastically changes what it takes for vehicles to qualify. To be eligible for the full credit, EV batteries have to be manufactured in and made of materials mined and refined in the U.S. or free trade-agreement countries like Canada, Mexico, Australia and Chile.
“You want to get your $7,500, then build this industry,” Manchin said he told automakers, according to a Bloomberg report. “They thought I would cave on that. I said I’ll cave — I’m going to take everything away from you,” he added.
“They said: ‘We’ll take it.’ And that’s how we got to where we got to.”
Manchin’s ultimatum may still backfire — the pace of change could be too much, too quickly, forcing automakers to find workarounds — but it’s already looking like it’s having the intended effect. Tomorrow, Volkswagen and Canadian government officials are expected to announce a deal that would see the northern nation supplying the German automaker’s U.S. factories with minerals critical to EV batteries, including nickel, cobalt and lithium. The company already gets batteries for its U.S. ID.4 models from an SK Innovation plant in Georgia, and it’s reportedly looking for more domestic capacity.
The new law requires EV batteries to be at least 50% assembled in North America for a vehicle to qualify for half the $7,500 credit. The percentage increases annually until 2029, at which point 100% of the battery has to be made on the continent.
The cost structure of the EV battery supply chain would have likely pushed automakers at least partially toward domestic production anyway. Batteries are heavy, and shipping them is expensive. For Chinese factories to remain competitive, their manufacturing costs would have to be sufficiently low to offset the higher cost of shipping. That’s been pushing battery-makers to set up factories closer to where their cells will be used.
But the materials that make up batteries are another matter entirely. There, China has a greater lead, with 59% of the world’s capacity for processing lithium and a whopping 79% for cobalt, according to Benchmark Mineral Intelligence. While shipping costs still play a role, they’re not quite as significant because regulations around shipping battery materials are less stringent (they’re less volatile than completed cells). Barring a significant disruption, China has a strong lock on many of the key materials.
The Inflation Reduction Act might be that disruption. It requires EVs sold between now and 2024 to have 40% of their critical minerals from the U.S. or free trade nations. That amount ramps up 10 percentage points a year until 2027, at which point 80% of those minerals must meet the requirements.
The U.S. still faces an uphill battle to undo China’s market dominance, which it has been working toward for well over a decade. Without significant investment in mining and processing, tax credit-eligible supplies will probably fall short of demand in the U.S. Given current trends and investments through 2025, there won’t be enough cobalt, nickel and graphite mined or processed in eligible nations, according to Benchmark.
Beyond 2025, though, I think the picture starts to get murkier, in part because that’s when the market may start to transition to silicon anodes, solid-state chemistries and other innovative battery types.
While Chinese firms have been sinking R&D money into new technologies, U.S. startups are arguably in the lead. Sila already has a commercially available silicon anode in a fitness wearable, and it already has a deal with Mercedes to put its anode into the G-Class in 2025. Solid Power thinks its solid-state battery materials will be on the road in 2028. Other disruptive startups like Our Next Energy are rethinking the entire battery pack, an approach that would allow cells to be made with cheap and abundant metals like manganese.
Taken together, the end of the decade was already looking rosy for U.S. battery companies. The question was always what would happen in the intervening years. Until the IRA was passed, it looked like China was going to cement its dominance in traditional lithium-ion batteries, potentially flooding the market with cheap batteries that would have left startups chasing low-volume, high-margin vehicles.
Now, the new law is poised to rewrite everything. Mining companies get access to a new 10% tax credit aimed at bolstering critical mineral supplies. Recyclers like Redwood Materials and Nth Cycle will benefit, too — demand for recycled battery materials could grow threefold by 2030, Benchmark said.
Given the status quo, that won’t be enough to fulfill forecasted demand in the U.S., but it may not have to. The next few years will be tricky for automakers as they scramble to secure supplies, but then substitution may kick in with solid state and silicon anodes starting to displace demand for legacy lithium-ion chemistries.
It won’t be a clean transition, but at least there’s now clarity — the United States, at long last, is set to become a key player in the battery industry.