China's Dominant Lithium Battery Industry Faces Three Major Global Changes

Preface

In recent years, the energy transition has driven the rapid rise of the electric vehicle (EV) industry, significantly increasing the importance of power batteries and sparking fierce competition among major countries. The United States passed the Inflation Reduction Act to subsidize local battery production, while Europe implemented the new Battery Regulation to oversee the EU market and subsidize European battery manufacturing plants. Although the US and Europe compete, they both view China as the primary target, striving to exclude China from their local markets. What impact will the intensifying power battery competition have?

This article analyzes the global landscape of the power battery industry, the competitive prospects of major countries, and the effects of global competition in this sector. In terms of industrial landscape, China, South Korea, and Japan hold absolute advantages in battery manufacturing, while Japan, the US, South Korea, China, and Europe are the main technological innovators. Upstream raw materials are concentrated in a few developing countries.

Regarding competitive prospects, due to restrictions and barriers imposed by the US and European countries, South Korea is expected to expand its advantages in the US and European markets. In terms of R&D capabilities, China will continue to lead in liquid lithium batteries, while Japan and the US are expected to advance in solid-state battery research. Overall, the competition is likely to be a close race.

The competition for power batteries has significant implications for international relations. Subsidies from various countries will intensify the competition; the US and Europe's "friend-shoring" policies will narrow China's market space and cooperation models, giving South Korea and Japan a greater market advantage. South Korea is likely to lean further towards the US in the US-China dynamics. Due to domestic political concerns and fears of losing competitive advantage, the US and European countries may also slow down the transition to electric vehicles.

Currently, major countries, regions, and companies are fiercely competing over power batteries and their supply chains. China's battery industry must compete with South Korea and Japan in overseas markets, and also in technological R&D with major countries like Japan, the US, South Korea, and Europe, facing various restrictions and barriers from developed country governments.

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Chapter One

Impact of Global Competition in Power Batteries

Abstract

The global competition in the power battery sector is fundamentally driven by nations seeking technological superiority to secure market and industrial advantages. This competition manifests as a national struggle that profoundly influences policy behaviors and international relations. Major countries are increasingly relying on industrial policies and substantial subsidies to promote power battery R&D and manufacturing, similar to strategies seen in the semiconductor industry. South Korea and Japan lead in strategic plans and funding for next-generation batteries, while the US and EU employ "friend-shoring" policies to bolster market positions of allied nations, challenging China's dominance.

This subsidy race has led to regionalized industrial chains, complicating global supply chains and resource allocation. South Korea, amid Sino-American competition, is likely to strengthen its economic alliance with the US, focusing on emerging tech sectors like power batteries. Meanwhile, the US and EU's strategies may slow their EV transitions if they cannot maintain a competitive edge in battery technology, potentially exploring alternative technologies to meet decarbonization goals.

Introduction

The power battery sector has emerged as a critical arena of competition among major global economies. As countries transition towards cleaner energy solutions and electric vehicles, securing a competitive edge in power battery technology has become paramount. This competition is not merely a corporate battle for market share but a strategic national effort to achieve technological superiority, which has profound implications for international relations and policy behavior.

In this report, we examine how industrial policies and subsidy races are shaping the power battery industry, highlighting the strategic moves of key players such as South Korea, Japan, the United States, and the European Union. These nations are increasingly adopting aggressive measures, including substantial subsidies and strategic investments in R&D, to enhance their technological capabilities and secure self-sufficiency in battery production.

We also explore the implications of "friend-shoring" policies employed by the US and EU, aimed at reducing dependence on Chinese battery products and reinforcing the market positions of allied countries. These policies are reshaping global supply chains and driving regionalized industrial strategies.

Additionally, the report delves into the evolving dynamics between South Korea and the US amid Sino-American competition, emphasizing the strategic realignments and economic collaborations in the power battery sector. The potential impact of these geopolitical shifts on the global electric vehicle transition is also analyzed, considering the challenges faced by Western nations in maintaining their competitive edge in battery technology.

Finally, we discuss the strategic responses and future challenges for China as it navigates the increasingly competitive and regulated global power battery market. The report aims to provide a comprehensive overview of the global power battery competition, highlighting the key trends, strategic moves, and future outlook of this pivotal industry.

Industrial Policies and Subsidy Races

To promote emerging industries, major nations are increasingly relying on industrial policies, intensifying the competition over power battery subsidies. Similar to the semiconductor sector, the weaknesses in battery manufacturing have led traditionally laissez-faire Western governments to re-adopt industrial policies, providing substantial subsidies to support power battery R&D and manufacturing, thereby enhancing their self-sufficiency.

South Korea and Japan, in their bid to solidify their technological lead, continuously formulate strategic plans and increase funding for next-generation battery R&D. Whether accelerating industrial catch-up, addressing weaknesses, or expanding industrial advantages, industrial policies have become the primary tool for major countries, focusing on enhancing government roles in science, technology, basic research, and key industrial developments.

In addition to subsidies, loans, and tax incentives, these policies include establishing government departments to support specific industries, funding critical technology projects, and pooling resources from academia, industry, and research institutions to steer the market and foster talent in specific sectors. These measures are evident in the power battery sector's development in various countries. While the approach of mobilizing national efforts to support emerging industries is common, the degree varies.

Strategic dependencies exist in certain sectors for all major countries, aiming to enhance the safety and resilience of their industrial chains. Nations are converging towards a new development model that prioritizes domestic circulation, strengthening and securing industrial chains, and ensuring self-sufficiency in key sectors.

Brian Deese, Director of the National Economic Council, emphasized the powerful feedback loop between laboratories and factories, warning that a country abandoning its manufacturing capabilities might also lose its technological edge. Subsidies to promote domestic industry can enhance market appeal but also trigger subsidy races, compelling other countries to follow suit, as seen in the semiconductor industry and now in the battery sector.

The European Union has introduced several incentives, but due to less generous subsidies and complex, slow application processes, many battery companies have paused or delayed their plans to build factories in Europe, opting for the US market instead, including local manufacturer Northvolt. The European Transport & Environment organization warned that over 68% of Europe's lithium-ion battery production projects face delays, cuts, or cancellations. In response, the EU Commission proposed €3 billion in subsidies for battery manufacturers in December 2023. This subsidy race, akin to a security dilemma in the industrial realm, will exacerbate harmful competition, disrupt global supply chains, and lead to "rational chaos" in global resource allocation.

Additionally, the subsidy race accelerates the multi-center layout of multinational companies, forming regionalized and near-shore industrial chains centered around the US, Germany, and East Asia (China, Japan, South Korea), reinforcing these regional trends.

Friend-shoring" Policies in the US and EU

The US and EU's "friend-shoring" policies are narrowing China’s market space and cooperation methods while increasing compliance costs for Chinese companies. Unlike China’s emphasis on "decoupling without disengaging," the US is using administrative measures to enhance the market positions of allies like Japan, South Korea, and the EU, undermining Chinese battery product competitiveness and attempting to break supply chain dependencies on China in high-tech sectors. The EU raises entry barriers through carbon tariffs, gaining time for its own industry development and cautiously adjusting its supply chain with China.

While the US adopts an "absolute friend-shoring" policy in advanced chip sectors, it employs a "friend-shoring first" policy in the battery industry, allowing allies and partners to benefit from US market advantages and collaborate in R&D. The trend suggests tighter US restrictions on the battery sector, leveraging policy, financial, administrative, and public opinion tools to elevate South Korean and Japanese positions to counter China. Consequently, Chinese-American joint ventures and technology licensing might lose policy support.

In Europe, both the EU Commission and car manufacturers are anxious about the rapid growth and export potential of Chinese electric vehicles and batteries. Future measures might include heightened carbon footprint data requirements, stricter battery recycling regulations, and new standards in IP, policy, tariffs, market access, and ESG (environmental, social, governance) criteria, making market entry more difficult and reducing China's competitive position.

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Despite the importance of the US and EU markets, Chinese companies will face narrowing market space and increased compliance costs to meet new standards. Simultaneously, tight-knit transnational investments and R&D collaborations among the US, EU, South Korea, and Japan in next-generation batteries could lead to alliances similar to the "Chip 4" model, making it increasingly difficult for China to participate in global innovation networks. The growing club-like cooperation on critical minerals needed for power batteries further pushes the resource competition into bloc politics.

South Korea's Leaning Towards the US

South Korea is likely to increasingly tilt towards the US amidst Sino-American competition, expanding the scope of the US-South Korea economic alliance. As China's technological advancement narrows gaps in traditional manufacturing and high-tech industries, South Korea faces competitive pressures in shipbuilding, steel, semiconductors, electric vehicles, smartphones, and LCD panels.

Power batteries, a significant emerging industry, exemplify Sino-Korean industrial competition. Sensing intense competition, South Korean policymakers have signaled a shift towards the US and Europe for growth opportunities, with investments in the US semiconductor and power battery sectors increasing as market shares in China shrink.

The US has leveraged market share, technology, and security guarantees to gain South Korea's reliance. Trends indicate South Korea will find it increasingly challenging to balance between China and the US. While Sino-Korean economic cooperation remains crucial, the US market, technology, and security assurances are deemed more vital for South Korea's future. Consequently, South Korea is expected to bolster cooperation with the US in emerging tech sectors like power batteries, aligning more closely with US supply chain strategies and potentially enhancing US-Japan-South Korea economic ties.

Even as South Korea cautiously communicates with China, seeking exemptions for exports to the Chinese market, the substantial and pioneering US-South Korea economic and technological cooperation is likely to overshadow Sino-Korean ties.

Potential Slowdown in Electric Vehicle Transition in the West

If major Western countries struggle to gain a competitive edge in battery technology R&D, they might slow down their electric vehicle (EV) transition. The US aims for EVs to account for about 67% of its market by 2032, and the EU plans to ban new internal combustion engine cars by 2035. Achieving these targets involves a mix of incentives and stricter emissions standards.

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However, declining market demand and slower sales growth signal challenges. In the US, EV inventories have tripled year-over-year, with a significant increase in new car stocks. December 2023 saw a sharp drop in Germany's new car market, primarily due to halved EV sales, marking the first monthly decline in EU EV sales since early 2020. US and EU automakers are adjusting sales targets and investment plans for EVs, and the US government faces challenges with its incentive and punitive measures.

With the 2024 presidential election approaching, the Biden administration might relax emissions standards to appease automakers and unions. Former President Trump has promised to repeal the Inflation Reduction Act and boost fossil fuel investments if re-elected. Additionally, high prices and slow charging infrastructure development hinder US EV sales. Given these obstacles, the US might slow its EV transition, and a Trump victory could halt it altogether.

In 2023, multiple European countries, including Germany, ended EV subsidies, leading to doubts about their commitment to the EV transition. Japan, meanwhile, remains cautious about EV adoption, lacking decisive plans for a full switch from internal combustion engines to EVs.

The power battery industry's growth closely ties to EV sales. A slowdown in EV adoption would significantly impact battery industry development. If China successfully mass-produces next-generation batteries like all-solid-state batteries and expands into Western markets, the US and EU might slow or halt their EV transition to avoid losing their automotive competitive edge. They might explore clean paths for traditional and hybrid vehicles or new tech development tracks to meet global decarbonization needs. For traditional automotive powerhouses, the EV transition is about balancing climate goals and employment and achieving new advantages over traditional strengths. The uncertainty lies in which country will secure this new advantage first.

Conclusion

To maintain its global competitive edge in the power battery industry, China must continue to expand in overseas markets against South Korea and Japan, and compete in R&D with Japan, the US, South Korea, and the EU. This will involve facing various restrictions and barriers from developed nations, presenting significant challenges ahead.