Huayou Cobalt Chairman Chen Xuehua (seventh from left) and Nam Chul, vice president of advanced materials business department at LG Chem and other company executives pose for a photo during the signing ceremony on setting up the Morocco joint venture at Huayou Cobalt headquarters in Zhejiang Province, China on Sep. 22. (LG Chem)

Tighter rules from the US limiting China-made materials in batteries eligible for electric vehicle tax credits might ironically offer a boon for Chinese companies, who hold huge stakes in joint ventures with South Korean battery manufacturers.

The Joe Biden administration on Friday announced new guidance for the Inflation Reduction Act barring electric car buyers from claiming a $7,500 tax credit in case the product uses materials from China and other countries deemed a “Foreign Entity of Concern.”

A company will be ineligible for the full tax break if an FEOC holds 25 percent or more of the company’s equity, voting rights or board seats, according to the Energy Department. The new rules will be enforced in 2024 for electric car batteries and 2025 for critical minerals in batteries.

Following the stricter regulations, Korean battery and material manufacturers might be forced to pay up to hundreds of billions of won to purchase Chinese companies’ stakes in the joint ventures. Most of their Chinese counterparts hold shares of close to or more than 50 percent.

LG Chem, which operates a battery materials business, and China-based Huayou Cobalt control 51 percent and 49 percent stakes, respectively, in the soon-to-be-built joint production facility for cathode materials in Gumi, North Gyeongsang Province.

To make EVs using the joint venture’s battery materials that qualify for the subsidies in the US, LG Chem will have to increase its stake to at least 75 percent.

LG Chem is also building precursor and cathode materials manufacturing plants with Huayou Cobalt in Pohang, North Gyeongsang Province and Morocco. The shareholding ratio on the two plants has not yet been decided, according to a company official.

“LG is considering whether to buy Huayou Cobalt’s shares in the Gumi plant or change its supply channel from the US to Europe, where there are fewer sanctions against China,” said an industry source familiar with the matter. “For the other joint production bases, the company will negotiate with Chinese companies on their controlling stake to make the battery materials eligible for IRA tax credits.”

Posco Holdings has a 60 percent share in a nickel plant, which will be set up with Chinese firm CNGR, and a 65 percent joint share along with GS Energy on a joint battery recycling plant construction project with Huayou Cobalt.

Posco Holdings’ subsidiary Posco Future M faces a greater burden than others because it only holds a 20 percent stake in a joint production facility for precursor that is being built in North Gyeongsang Province, with CNGR controlling 80 percent.

“Many Korean companies, including us, have prepared for the new IRA guidance by adding a clause in their memorandum of understanding or contracts with their Chinese counterparts that the controlling stake might be subject to change,” said an official from Posco Holdings.

“But it would’ve been impossible to set the price per share in advance, which means the two parties have to negotiate on the share price of the Chinese companies.”

Battery makers like LG Energy Solution and SK On are also building battery materials manufacturing facilities with China-based Yahua and GEM. The shareholding ratio between these companies and the Chinese firms was either unavailable or undetermined.

Experts say Washington’s stringent regulations aimed to wean the US off the Chinese-led EV battery supply chain is likely to help them thrive in non-US markets at the cost of the Korean companies.

“It will be challenging to change the Chinese firms’ controlling stake in the joint venture that is predetermined in the contract. Even if the Chinese are willing to negotiate, they might play hardball and try to sell their shares more expensively than their Korean counterparts expected,” said Yang Min-ho, an energy engineering professor at Dankook University.

Choi Jae-won, a chemistry professor at Gyeongsang National University, echoed the view, saying, “With the Korean companies’ share purchase, Chinese firms can use it to expand businesses in Europe or other emerging markets including India based on cheaper battery materials than Korean rivals."

“From the first place, China had little to gain in the US due to the decoupling push. It might as well take advantage of Korea, one of the US’ biggest allies,” Choi added. “The closer Korean companies stick to Washington’s rules, the more will they lose footing in the global markets other than the US.”

Aside from buying the Chinese stakes, the Korean partners might consider securing investment from a third party like a neutral country for the joint venture or setting up a new one with a US ally, however, that could take longer and cost more, according to Yang.