Jang Young-jin, second from right, vice minister of trade, industry and energy, speaks during a meeting with domestic battery companies regarding the U.S. Inflation Reduction Act's foreign entity of concern (FEOC) guidance that includes China at Korea Chamber of Commerce and Industry (KCCI) building in Seoul, Saturday. Yonhap

LG Energy Solution, Samsung SDI, SK On and other Korean battery companies are facing a dilemma as they will lose tax credit benefits for electric vehicles (EVs) sold in the U.S. if their Chinese partners hold more than 25 percent stakes in joint ventures, according to industry officials, Sunday.

Given that most of the Korean-Chinese JVs have a 50:50 ownership structure, it is necessary to buy back a sizable portion of shares owned by Chinese firms, which will consequently require the Korean companies to pay up to hundreds of millions of dollars.

On Friday (local time), the U.S. Treasury Department announced additional guidance on the foreign entity of concern (FEOC) under the Inflation Reduction Act (IRA). According to this guidance, battery and related value chains produced by joint ventures (JVs) with a Chinese capital stake exceeding 25 percent are designated as FEOCs. From 2025, EVs equipped with batteries, minerals and materials purchased from companies that do not meet this requirement will be excluded from tax credit targets.

The IRA was enacted in 2022. It allowed consumers who purchased EVs using more than 50 percent of battery components manufactured and assembled in North America to receive a tax deduction of up to $7,500. The U.S. Treasury Department had not provided a clear definition of the FEOC so far, but by including China in this category this time, Washington made clear its intention to curb China, whose presence is increasing in the EV industry.

An Korean battery industry source said it was reasonably predictable that China would be included in the FEOC, but it was outside the prediction range that the Chinese stake would be limited to 25 percent.

“We didn't expect the U.S. would limit it to 25 percent. The dominant prediction in the industry was that the proportion of Chinese capital would be less than 50 percent. The new guidance is much stronger than what the industry expectated, so we're considering how to respond,” the official said on condition of anonymity.

Choi Young-chan, second row third from left, chief administrative officer of SK On, EcoPro Materials CEO Kim Byung-hun, second row second from left, and GEM Chairman Xu Kaihua, second row third from right, pose during a signing ceremony for investment agreement to build a battery precursors plant in Saemangeum at a hotel in Gunsan, North Jeolla Province, March 24. The three companies said they would invest 1.2 trillion won ($927 million) to build the battery material plant in Korea. Courtesy of SK On

Currently, LG Chem operates a cathode plant with China's Huayou Cobalt in Gumi, North Gyeongsang Province, with LG Chem owning a 51 percent stake in the JV.

SK On and EcoPro Materials also announced last March that they would establish a joint venture with China's GEM to build a battery precursors plant in Saemangeum in North Jeolla Province. Although they did not reveal their stakes in the JV, GEM is forecast to own around 50 percent, while SK and EcoPro each have a 25 percent stake.

A precursors plant that POSCO Future M is building in Pohang with CNGR of China has a 2:8 equity ratio, so it is likely to be difficult to export their products to the U.S. under the new IRA guidance unless they change their equity ratio.

In response to the U.S. move, the Korean government, companies and industry experts held a meeting on Saturday to discuss countermeasures, as they have no choice but to make efforts to comply with this guidance to receive subsidy benefits in the U.S. market.

“Ultimately, the regulation on foreign entities of concern will be an important turning point to enhance the competitiveness of the battery industry by making our supply chain independent,” Jang Young-jin, vice industry minister, said during the meeting. “Through the public-private joint battery alliance launched last year, the government will conduct an emergency check on the current supply chain according to key minerals and actively support corporate efforts to diversify supply lines and secure minerals."

An LG Energy Solution spokesman said, “Since LG Energy Solution has consistently strengthened its supply chains by focusing on localization and diversification efforts, we do not anticipate a significant impact on our business in the U.S. Based on our fundamental competitiveness in costs, products and quality, we will continue to secure solid market leadership in North America.”

Another industry official said, "The announcement came out early Saturday morning here, so the industry will be analyzing the content," and added, "We need to find ways to minimize the negative impact on companies and help them."

Kim Dae-jong, a professor of business administration at Sejong University, predicted that the Korean battery industry could reap long-term benefits through the diversification of resource supply, saying that the U.S. moves are clearly aimed at China's growing influence in the electric vehicle industry.

"Our companies will have no choice but to comply with U.S. regulations. Korean companies are highly dependent on China in the raw material sector, and if they make efforts to diversify this, I see it as a benefit to Korean companies in the long run," the professor said.