“So, Chairman Chung, thank you again for choosing the United States. We will not let you down.”
Those were the words addressed to Hyundai boss Euisun Chung by Joe Biden during a visit to Seoul in May, as the US president revelled in a fresh $10bn investment in US manufacturing by the Korean auto giant.
So there was consternation in the Korean capital last month when Biden signed into law a provision of his landmark Inflation Reduction Act that eliminates subsidies for electric vehicles assembled outside of North America.
Hyundai’s $5.5bn EV plant in the US state of Georgia, announced during Biden’s visit, is not scheduled to begin production until 2025 — making it ineligible for subsidies until then, making US rivals more competitive in the period.
The resulting furore continues to rage, exposing growing tensions between South Korea and the US over Washington’s use of tools ranging from legislation to export controls and investment screening to restrict the transfer of cutting-edge technology to China.
But Korean talk of “betrayal” has baffled some industry analysts, who point out that what amounts to a short-term setback for a single company pales in comparison with the benefits likely to be accrued by Korea Inc overall.
Section 45X of the Inflation Reduction Act allocates $35 per kilowatt-hour in subsidies known as “advanced manufacturing production credits” to battery cell makers. That means that a 40 gigawatt battery plant in the US would stand to receive around $1.5bn each year in tax credits between now and 2032. This amounts to a big subsidy for battery makers with a presence in the US — and the South Koreans are perfectly placed to take advantage.
In July, SK On launched a $7.8bn joint venture with Ford to build three battery plants in the US, while LG Energy Solution and GM announced a $2.6bn investment earlier this year to build a third plant as part of their joint venture in Michigan. Samsung SDI has a similar partnership with Stellantis, the group behind Peugeot, Fiat Chrysler and Jeep.
“All the global automakers will try to source from US-based battery manufacturers, and the Korean companies have a huge capacity in the US,” said Angela Hong, an analyst at Nomura.
According to Tim Bush, a Seoul-based EV battery analyst for UBS, by 2026 Korean battery makers will be operating plants in the US accounting for at least 200 gigawatt hours each year. That would mean an annual collective subsidy from the US taxpayer of upwards of $8bn, likely to rise in line with expanding capacity, from the advanced manufacturing production credit alone. Moreover, restrictions on Chinese components mean that the Koreans’ only serious competitors will soon be eliminated from the US market.
“Given the amount in subsidies the EV supply chain is going to be collecting, I just can’t get my head around the complaints,” said Bush.
The potential benefits don’t stop there. There do not appear to be any restrictions on US-subsidised batteries being exported, raising the prospect that Korean battery makers could be poised to knock their Chinese rivals not just out of the US market, but out of the European market too.
Used wisely, the US subsidies could also finance the transition from graphite to next-generation silicon anodes. This could raise energy density, lower cost and reduce charging times.
“Before, there was no catalyst to get silicon produced at scale, but the Inflation Reduction Act changes that,” said Bush. “Because of the advanced manufacturing credit, you have money to make that investment. It will go from high end to mainstream, and this could give Korean battery makers a crucial advantage over the Chinese.”
Nor is it even clear that the US legislation will inflict significant damage on Hyundai. Restrictions on the sourcing of Chinese components that kick in from 2024 mean that Hyundai’s competitors are unlikely to manage to steal a march before its Georgia plant comes online.
“Many European and even US automakers won’t qualify for these tax incentives, because there are still many conditions to be met,” said Hong. “There are no definitive winners or losers.”
Seoul does have reason to feel aggrieved. According to Wendy Cutler, a former senior US trade official, the provisions in the Inflation Reduction Act likely violate WTO rules and the free trade agreement between South Korea and the US. But Korean leaders might also reflect on the wisdom of kicking up such a fuss over short-term harm to a single company, while ignoring the long-term benefits for an entire industry that can be measured in decades.
