South Korean Battery Industry Alerted by US ‘Concerned Entity’ Designation

Don Graves, U.S. Deputy Secretary of Commerce, delivers a speech at the 2nd U.S.-Korea Advanced Industry and Technology Cooperation Forum held at the Grand Hyatt Hotel in Yongsan District, Seoul on Sept. 21.

South Korea’s battery industry is on high alert due to the potential designation of companies as “Foreign Entities of Concern” (FEOC) by the United States. If Chinese companies that supply raw materials and substances to Korean firms get listed as FEOCs, it could hinder these firms from receiving the Inflation Reduction Act (IRA) subsidies in North America.

On Sept. 24, LG Chem announced plans to construct a Lithium Iron Phosphate (LFP) cathode joint-venture plant in Morocco with an annual capacity of 50,000 tons by 2026 in collaboration with Youshan, a subsidiary of China’s Huayou Group. The facility aims to produce LFP cathodes for the North American market. Since Morocco has a Free Trade Agreement (FTA) with the U.S., products manufactured there can meet the criteria for IRA subsidies.

Additionally, LG Chem will pursue a lithium conversion plant business in Morocco with Huayou Cobalt, under the Huayou Group. They are also considering establishing a precursor plant of 50,000 tons annually in Indonesia and a factory for the extraction and refining of Nickel Matte Hydroxide Precipitate (MHP).

Upon unveiling this comprehensive collaboration plan with Chinese companies, LG Chem emphasized that “both companies will adjust their equity ratios in the future in line with FEOC regulations set by the IRA.” The FEOC is essentially a trade blacklist set by the U.S. government. Although specific details have yet to be finalized, the list is expected to predominantly target Chinese raw material and component providers. Electric vehicles (EVs) containing batteries or other core materials from FEOC-designated companies will not be eligible for tax deductions starting in 2024 and 2025, respectively.

The announcement by LG Chem suggests that if Huayou Group is designated as an FEOC, it might adjust its equity ratio in the joint venture to ensure it still receives IRA subsidy benefits. A secondary battery industry insider explained, “Many other companies have also set up similar safeguards with Chinese firms, mainly because Chinese materials dominate the battery value chain.”

Indeed, major local companies like LG Energy Solution, SK on, POSCO FUTURE M, EcoPro, L&F, and others have all actively sought collaborations with Chinese firms this year. Their motivations align perfectly; while Korean companies need stable raw material supplies, Chinese companies aim to circumvent IRA restrictions. According to IRA guidelines, subsidies can be granted if more than 40% of core minerals are extracted and processed in a country with an FTA with the U.S. Hence, joint ventures between South Korea and China are predominantly located in countries like Korea and Morocco that have FTAs with the U.S.

However, adjusting joint venture equity isn’t a guaranteed safety net primarily due to uncertainties about the FEOC criteria the U.S. will establish. Go Sung-eun, a researcher at the Korea Trade Association, mentioned in a recent report that “If the U.S. strengthens FEOC criteria, even excluding joint ventures with Chinese companies from tax deductions, in the worst case, they might need to withdraw from the venture or seek other partners.”

The most certain strategy remains “decoupling from China.” However, the challenge is the time required for such a transition. According to the Korea Trade Association, dependence on China for major cathode materials in the first half of the year stood at 60.4% for lithium, 100% for cobalt sulfate, and 97.4% for precursors. Anode materials like graphite also largely (90%) come from China. While efforts are underway to diversify imports from South America, Australia, and ASEAN regions, an overnight transition is unrealistic.

In response, local companies have been urging the U.S. government to provide clarity on FEOC and address uncertainties. They’re calling for a clear definition of FEOC, grace periods for minerals heavily reliant on China, and detailed regulations that reflect the reality that fully excluding China isn’t feasible.

During his visit to South Korea, U.S. Deputy Secretary of Commerce Don Graves held a private meeting with executives of leading Korean secondary battery companies such as LG Energy Solution, Samsung SDI, SK on, POSCO FutureM, SK ie technology, and Lotte Energy Materials on Sept. 22.

During this meeting, Korean battery companies reportedly asked the U.S. side to quickly clarify the concept of FEOCs under the IRA, which might essentially put them on a trade ban list, to remove the uncertainties surrounding significant investments. They also emphasized considering the complexity of the supply chain and global interdependencies when defining the scope of FEOCs.

To qualify for EV tax deductions in the U.S. based on the IRA from 2025, batteries cannot use core minerals sourced from FEOCs, irrespective of the proportion. The U.S. Department of the Treasury has yet to release detailed guidelines on FEOCs.

The IRA defines FEOCs as companies owned or controlled by the governments of China, Russia, North Korea, and Iran, implying that, depending on the interpretation, virtually all Chinese companies could be included.

Considering the dominant role of Chinese companies in the global EV industry, especially in the upstream sectors like core mineral mining and processing, completely excluding Chinese core minerals seems practically challenging. If the U.S. sets strict FEOC regulations, there’s a potential that multi-billion-dollar projects between Korea and China might get canceled. Hence, the Korean industry is hoping for realistic final FEOC regulations.

Given the significant role that Chinese companies play in mining and processing key minerals for the global EV industry, concerns have been raised about the feasibility of entirely excluding Chinese-sourced key minerals. If the U.S. implements stringent criteria for defining FEOCs, there are concerns that planned multi-million-won projects between China and South Korea might be canceled. The South Korean industry is hoping for a realistic final FEOC regulation.

The South Korean government has previously expressed that the FEOC exclusion clause should not inadvertently disrupt the global secondary battery supply chain. In a statement submitted to the U.S. government, the South Korean authorities urged, “When establishing FEOC regulations, the intricacies of the battery supply chain should be adequately considered.”