In a significant move to address the challenges posed by the influx of low-cost Chinese electric vehicles (EVs) and batteries, South Korea has aligned with global trends by revising its EV subsidy policies. Mirroring actions taken by the United States and the European Union, the South Korean government’s updated 2024 EV purchase subsidy scheme reduces financial incentives for EVs utilizing primarily Chinese-manufactured lithium iron phosphate (LFP) batteries.
South Korea’s Ministry of Environment detailed the adjustments in the latest revision to its EV subsidy plan, announced Feb. 6. Vehicles priced under 55 million Korean won (around $41,000) are now eligible for a maximum subsidy of 6.5 million Korean won (approximately $4,900) from the national treasury.
An additional subsidy of up to 1 million Korean won (about $752) is available for specific discounts on vehicles. The subsidy allocation takes into account several factors, including the vehicle’s range on a single charge, battery energy density, the recyclability of battery components, and the efficiency of the vehicle’s after-sales service management system.
A key aspect of the revised subsidy plan is its decreased support for EVs equipped with LFP batteries, predominantly supplied by Chinese manufacturers. These batteries, along with nickel, manganese, and cobalt (NMC) lithium batteries—the primary choice of South Korean battery firms—are central to the current EV market.
LFP batteries are less expensive but offer lower energy density and a reduced driving range compared to NMC batteries. Their value in terms of recyclability also diminishes over time.
Under the new subsidy guidelines, certain Chinese-made EV models, including the Tesla Model Y, which utilizes LFP batteries, will see a substantial reduction in financial incentives. The subsidy for the Tesla Model Y, for instance, has been slashed by over 62 percent, from 5.14 million Korean won (about $3,900) to 1.95 million Korean won (roughly $1,500).
The policy adjustment extends to Chinese-made electric buses, which will experience a significant subsidy reduction of up to 4.3 million Korean won (around $3,200) compared to the previous year. This change comes in the wake of data from the Ministry of Land, Infrastructure, and Transport, indicating that imported electric buses, predominantly from China, constituted over half of the new electric bus registrations in South Korea last year for the first time, totaling 1,528 units (54.2 percent).
Higher Subsidies for South Korean EVs as Chinese EV Imports Surge
In a notable contrast to the reduced subsidies for EVs with Chinese-made batteries, South Korea has increased its support for domestic EVs equipped with nickel-manganese-cobalt (NMC) lithium batteries. This move highlights the country’s strategy to bolster its EV industry against the backdrop of rapidly increasing imports of Chinese electric vehicles.Hyundai Motor’s IONIQ 6 stands out as the recipient of the highest subsidy among EV models, with a government grant of 6.9 million Korean won (approximately $5,200). Similarly, substantial subsidies were allocated to other South Korean EV models, such as the Kia EV6 and KG Mobility’s Tores EVX, receiving 6.84 million Korean won (about $5,100) and 4.57 million Korean won (around $3,400), respectively.
The influx of Chinese-made electric vehicles in the Korean market has surged. Last year marked a significant shift as China overtook the United States as South Korea’s second-largest source of electric vehicle imports. With the competitive pricing and popularity of models like the Tesla Model Y and various BYD vehicles, industry forecasts suggest that it may not be long before China becomes the leading importer of EVs to South Korea. This looming shift threatens to alter the market dynamics currently led by Hyundai and Kia.
EV Market Shifts Amid Rising Chinese Imports
This growing presence of Chinese EVs is also impacting South Korea’s export-driven economy. The trade deficit in EV exports to China widened dramatically last year, exceeding $524 million—a more than threefold increase from the previous year’s deficit of $156.49 million.A significant contributor to this deficit is the Tesla Model Y, which, following its South Korean launch in September, quickly ascended the ranks in imported vehicle sales by leveraging government subsidies through strategic price reductions. In just four months, it sold 13,885 units, securing a significant portion of the government’s EV subsidies.
Moreover, the anticipated official entry of BYD, China’s leading EV manufacturer, into the South Korean market adds another layer of competition. Industry sources suggest BYD could launch an electric sedan in South Korea as soon as the third quarter of this year. The Korea Environment Corporation, under the Ministry of Environment, is currently evaluating a BYD sedan’s performance, a prerequisite for qualifying for South Korean EV subsidies.
The South Korean automotive sector has been vocal about reforming the EV subsidy system, advocating for a reduction in subsidies for EVs utilizing Chinese-made batteries. The argument centers around the notion that it is counterproductive to allocate South Korean taxpayers’ money to support Chinese-made EVs, especially in light of the Chinese government’s preferential treatment towards domestic EVs, which has attracted scrutiny by the EU for unfair competition practices.
Additionally, the Chinese EV industry is grappling with the challenges of overproduction. This issue, initially spurred by aggressive subsidy-driven expansion, has led to decreased domestic sales and an overflow of production capacity.
US and Allies Counter Cheap Chinese EVs Amid Security Concerns
In a concerted effort to address the challenge of low-priced Chinese electric vehicles (EVs) and EV batteries flooding the global market, South Korea’s recent subsidy adjustments align with broader actions taken by the United States and its allies.The United States, through legislative measures such as the Inflation Reduction Act (IRA), aims to mitigate the influence of Chinese products in the battery production sector by promoting North American-produced vehicles with tax incentives, effectively sidelining Chinese components.
U.S. Commerce Secretary Gina Raimondo underscored the national security implications of Chinese EVs during an Atlantic Council fireside chat on Jan. 31.
She articulated concerns over the data collection capabilities inherent in electric and autonomous vehicles, which collect “a huge amount of information about the driver, the location of the vehicle, the surroundings of the vehicle.”
“Do we want all that data going to Beijing?” she questioned.
This concern forms part of the rationale behind the Biden administration’s contemplation of imposing additional tariffs on Chinese vehicles to safeguard American personal data.
Additionally, a recent report from the Financial Times highlighted that U.S. officials have issued a stern warning to Beijing. The United States, alongside its allies, is prepared to take decisive action if China seeks to resolve its issues of industrial overcapacity by flooding the global market with underpriced goods.
Ms. Raimondo’s statements coincide with the administration’s broader strategy of leveraging heavier import tariffs on specific Chinese goods, including EVs, as a countermeasure to perceived threats.
Further cementing the United States’ stance, recent discussions between Jay Shambaugh, Under Secretary of the U.S. Treasury for International Affairs, and China’s vice premier He Lifeng focused on the issue of China’s industrial practices.
Meeting with the Chinese official in early February, Mr. Shambaugh expressed explicit concerns over China’s export of low-priced goods as a solution to its industrial overcapacity, particularly in sectors critical to the future of green technology such as EVs, solar panels, and lithium-ion batteries. The dialogue highlighted concerns over China’s industrial and macroeconomic policies, which are seen as exacerbating global market imbalances by prioritizing supply over demand.
This issue extends beyond the U.S. border, with the EU also taking definitive steps to protect its market and industries. The EU has initiated an anti-subsidy investigation into the Chinese electric vehicle sector, scrutinizing the impact of state subsidies on market distortion and the competitiveness of European EV manufacturing.
The investigation could lead to the imposition of tariffs on Chinese EVs, reflecting concerns over the influx of cheaply priced Chinese cars, buoyed by significant state subsidies, as noted by Ursula von der Leyen, President of the European Commission.
The collective stance of the United States and its allies, including South Korea and the EU, signals a growing resolve to confront the challenges posed by Chinese industrial policies. Through regulatory measures, tariff adjustments, and potential trade barriers, these nations aim to establish a more balanced global market landscape, safeguarding against economic and security risks associated with the dumping of low-priced Chinese goods.
