FEOC guidelines ‘administratively easy’ to circumvent

The eagerly awaited definition of the all-important term ‘foreign entity of concern’ (FEOC) in the US Inflation Reduction Act aims to wrest influence over the battery supply chain away from China and spur growth of a circular economy in North America.

But consultancy Bloomberg NEF (BNEF) warns that — despite confirmation from manufacturers that several EVs would lose eligibility for some or all of the available consumer tax credits — controversial US-Chinese battery joint ventures (JVs) could well skate through the new legislation unscathed.

“There is still going to be a lot of incentives to go around,” Evelina Stoikou, senior energy storage analyst at BNEF, tells EV inFocus, citing two loopholes in the legislation that could allow business to continue very much as usual for Chinese battery players Catl and Gotion.

Licensing

Beginning in January 2024, eligible EVs cannot contain battery components that were manufactured or assembled from a foreign entity of concern, and, starting in January 2025, EVs cannot contain critical minerals in the battery that were extracted, processed, or recycled by a FEOC, if they wish to qualify for tax credits.

These regulations will target US OEMs buying components or finished batteries directly from Chinese companies, and by 2025 will disincentivise OEMs from using minerals that have passed through China in their value chain for their batteries, even if the batteries themselves are made in the US.

“The biggest bottleneck that they are going to have is meeting the critical mineral requirement and basically getting their critical minerals from anywhere but China,” Stoikou notes.

But there is one prominent loophole which has already been seized upon the larger Chinese battery players, which have the capacity to enter JVs with US OEMs rather than simply exporting batteries made in China.

“Companies based in the US can license technology from an FEOC, as long as they demonstrate that they have effective control of that deal,” Stoikou points out. “It is a written requirement that companies have to prove — and document what they have to share — the effective control of the non-foreign entity of concern in that deal, but nonetheless, it is an avenue.”

The list of requirements that OEMs must meet to prove that any licensing agreement is compliant is, admittedly, long. A non-FEOC like a US automaker may enter a licensing agreement with an FEOC, such as a Chinese battery company, only if it can:

— determine the exact origin and quantity of critical minerals involved in the supply chain thereby created

— have full access to all areas of production sites and the ability to observe all stages of manufacture

— operate and maintain all equipment critical to production

— determine the timescale of production.

But a report on the newly issued guidance from BNEF finds that these requirements “would make it administratively easy for Chinese and other FEOC firms to gain US approval for their licensing deals, such as the much-discussed Ford-Catl battery plant — even as FEOCs seem likely to maintain some informal influence over these joint projects.”

“Catl actually went out and mentioned that its deal with Ford would not be affected following the guidance,” Stoikou notes.

Quarter ownership

Another prong of the regulation is that an FEOC is considered any company which is more than 25pc controlled, either in terms of board voting or equity, by a Chinese company. But Stoikou believes that, in many cases, “these types of JVs could go ahead and it is likely that we are going to see some companies recoupling their ownership structure to meet that threshold and qualify their material”.

Some will not even have to juggle equity shares. For example, Chinese battery firm EVE Energy already only holds 10pc in its JV with engine manufacturer Cummins and heavy-duty vehicle manufacturers Daimler Trucks and Paccar, despite providing the underlying LFP battery capabilities.

Having similar minority stakes for the Chinese partners could enable Gotion and Catl JVs to avoid classification as FEOCs. However, even if they do so and manufacture batteries in the US, any China-based suppliers in their value chain, such as Chinese mineral extractors or processors, would still be classed as FEOCs, and thus disqualify the onshore US factory project anyway.

Because of this, “you could have a case where you have a [US-based] battery factory that has a certain volume of batteries that qualify to get into EVs that get the credit, and then it has a certain volume of batteries that just do not”, Stoikou suggests.

“A given automaker or battery manufacturer may just simply accept that and just choose to sell the remaining of the batteries to other sectors that are not affected,” she adds.

However, even if consumers lose some or all of the tax credits on a manufacturer’s EVs, there is still a production tax credit that the Chinese manufacturers themselves can receive for onshoring production in the US.

“It is important to note that there are two major types of credits for battery-related items. There is the production tax credit for the module, that is $45/kWh under the IRA, and then there is the EV tax credit, so the $7,500 that goes to the consumer — so supply side and demand side credit,” Stoikou continues.

“Gotion would still be able to get that productive tax credit given it manufactured batteries within the US.”