Tesla cars may lose tax credit over Chinese companies in its battery supply chain

Tesla recently warned that the US$7,500 new EV tax credit it now receives from the US government towards the purchase of one of its bestselling Model Y and Model 3 vehicles may be reduced next year.

By reduced it probably means cut in half, as that's what its base vehicles with Chinese LFP batteries only qualified for until recently. Tesla reworked its product mix filing with the government to hit the foreign-sourced raw material threshold that covers the government's tax credit requirements this year.

In 2024, however, the share of battery raw materials that should be sourced from the US or its free-trade countries in order for an EV to qualify for half of the tax credit, will be raised to 50%, and those Teslas may no longer qualify. The Model Y and Model 3 account for the lion's share of Tesla EV sales in the US, and their cheapest base versions use China-made LFP cells in packs sourced from the world's biggest EV battery maker CATL.

Tesla's dependency on China for its batteries is unlikely to change soon, as a new supply chain analysis by Nikkei Asia shows. Working with the Tokyo data analysts from Fronteo, Nikkei managed to track where the raw materials for the batteries that go into Tesla cars come from.

It turns out that 40% of the companies in the Tesla supply chain for battery materials and components hail from China. Not only that, but some of them have really outsized influence on Tesla's battery supply when it comes to critical materials like lithium or cobalt.

On a dependency scale of 10 developed for Nikkei's analysis, for instance, Ganfeng Lithium had "a chokepoint score of 6.87," while inorganic compound manufacturer Novoray scored the whopping 7.1. Cobalt producer Zhejiang managed 5.7 for the material that goes into batteries for Tesla's performance EVs like the Model S.

Tesla is now fighting its addiction to cheap and plentiful batteries from China by installing new 4680 production capacity at its Gigafactories in Nevada, Fremont, and Texas, as well as breaking grounds on a US$380 million lithium refinery on the Gulf Coast. These projects can't happen overnight, though, and in the meantime the dependency on China for the battery packs of vehicles sold in the US will stay.

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