US rift with China threatens EM supply chain hopes
Plans to cut the country out are impacting those with existing JVs like Morocco and Indonesia
The US’s political distancing from China is reshaping supply chains in a way that will have profound and lasting effects. As it tries ever harder to cut China out of its plans to create new North American supply chains for green technologies, it is creating problems for emerging countries such as Morocco and Indonesia which have been busily setting up joint ventures with Chinese manufacturers.
The electric vehicle battery industry, which must expand enormously to decarbonise transport, is a prominent example. In the face of increasing hostility from the US and Europe, Chinese battery makers are looking for new production sites and corporate structures.
The European Commission launched an anti-subsidy investigation into Chinese EV batteries this month.
Yet just weeks ago, China’s CNGR Advanced Material announced a $2bn cathode materials plant project in Morocco to supply the EU and US, which it will build in collaboration with Al Mada, a conglomerate owned by the Moroccan royal family.
Mehdi Tazi, vice-president of the Confederation of Moroccan Businesses, thinks other Chinese manufacturers will follow suit. Morocco is striving to become a hub for green manufacturing.
“We are 14km from Spain, we have green energy, we have the infrastructure — ports, highways, airports — and around 60 free trade agreements,” Tazi said. Among those free trade partners is the US.
Joint ventures like this are occurring in many countries. Sophisticated Chinese manufacturers have the technology and the capital, while countries like Morocco have the raw materials and manufacturing capacity. From nickel in Indonesia to lithium in Zimbabwe, Chinese JVs are omnipresent in supply chains.
But such partnerships are now in the spotlight. The US Inflation Reduction Act offers lucrative tax treatment for EVs if a large percentage of the materials and components are sourced from, or processed in, free trade partner countries.
But in the coming year, that treatment will be removed if any of the materials or components involve a Foreign Entity of Concern (FEOC). China is explicitly listed as a FEOC.
What developing country firms are waiting to see is whether their JVs with Chinese partners are treated as FEOCs.
The US government is preparing to publish regulation on this point. But analysts see worrying signs.
Ford Motors had planned to build a $3.5bn EV battery factory in Michigan, licensing tech from China’s Contemporary Amperex Technology (CATL). Just weeks ago, Ford announced it was halting work, saying there were multiple considerations and it wanted to be confident the plant could be competitive.
Ford did not say so, but this may have been linked to an investigation into the partnership, begun by a US House of Representatives committee in July.
“The Ford-CATL deal has been under a microscope from both the US and Chinese governments and the postponement of the plant construction I think is really due more to political pressure than anything else,” said Chris Berry, president of House Mountain Partners, an advisory firm specialising in battery metals.
Sources say it is interesting to see Chinese firms setting up partnerships in US free trade partners like South Korea and Morocco to access IRA subsidies, when the US is preparing to wield a regulatory knife that could cut out Chinese JVs, regardless of the country.
“We’re heading into an election year in the US and the only thing Republicans and Democrats can agree on is that China is the enemy,” Berry said.
Analysts say firms making investment decisions are increasingly having to consider the risk of escalating tensions between the West and China.
“Any time you see US-China tensions rising there is a probability that Europe might follow,” said Amin Mohseni-Cheraghlou, a macroeconomist at the Atlantic Council’s GeoEconomics Center. “The IRA, entities of concern export control, sanctions, have all made it very complicated for economies to trade and cooperate. And the countries that are getting hurt most by this geo-economic fragmentation are the low and middle income countries in between.”