Geopolitical Risk and Supply Chain Localization

# Geopolitical Risk and Supply Chain Localization

The EV supply chain as it currently exists is geopolitically concentrated in ways that would have been concerning even without the trade tensions of the 2020s. With those tensions, it's become a primary policy concern for every major automotive market.

## What the IRA Actually Built

The US Inflation Reduction Act's EV provisions included strict domestic content requirements for EV tax credits: batteries must have an increasing percentage of critical minerals and battery components sourced from North America or FTA partner countries to qualify buyers for the $7,500 credit. Vehicles from manufacturers with battery supply chains running primarily through China don't qualify.

The practical effect: billions in announced battery plant investments in the US. LG Energy Solution (Tennessee, Michigan, Ohio), Samsung SDI (Indiana), SK Innovation (Georgia), CATL's JV with Ford (Michigan), Panasonic expansion in Kansas — the map of US battery manufacturing commitments through 2024-2025 is substantial.

What actually got built vs. what was announced is a different story. Several projects have been delayed or scaled back — most notably, Ford paused and restructured its CATL joint venture under political pressure. But the IRA has demonstrably accelerated US battery investment that wouldn't have occurred on the same timeline without policy incentives.

The European Battery Act has similar provisions for European content requirements, creating parallel investment pressure in Germany, Hungary, and Poland.

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## China's Processing Dominance: The Harder Problem

Most coverage of supply chain localization focuses on mining — where does lithium come from, who controls cobalt? But mining is only one part of the dependency.

China controls a disproportionate share of the *processing and manufacturing* capacity for battery supply chains:
- ~70% of global lithium refining capacity
- ~65-70% of global cathode material production
- ~75%+ of global anode material production  
- ~70%+ of global battery cell manufacturing capacity

You can mine lithium in Australia, ship it to China for processing into battery-grade lithium hydroxide, manufacture cathode materials in China, build cells in China, and ship packs to US or European assembly plants. Each step of that chain is subject to Chinese export controls.

China has already demonstrated willingness to use this leverage: graphite export controls implemented in 2023-2024 created supply disruptions for battery manufacturers outside China that depend on Chinese graphite for anodes. These controls weren't primarily about revenue — they were strategic.

The problem with Western localization efforts is that they're targeting mining and cell manufacturing — the visible parts of the chain — while the processing and materials manufacturing dependencies are harder and slower to build alternative capacity for. Cathode material production in Europe and North America at competitive cost is a 5-7 year problem, minimum.

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## The Realistic Outlook: Managed Diversification

Full decoupling of Western EV supply chains from China is not achievable in any credible timeframe. The capital investment required, the time to build chemical processing capacity, and the raw material resource constraints make it a 15-20+ year project — if it's fully achievable at all.

What's achievable: meaningful diversification of critical dependencies so that no single supply chain node is a unilateral chokepoint. This means:

- Building North American and European cell manufacturing capacity (happening)
- Developing processing capacity for lithium and nickel in non-Chinese jurisdictions (early stages)
- Securing long-term mineral supply agreements with multiple supplier countries
- Investing in battery chemistry that reduces dependency on the most concentrated materials (LFP reduces cobalt, sodium-ion reduces lithium for some applications)

The policy goal should be described as *managed diversification* rather than *decoupling*. Decoupling is rhetorical. Managed diversification is a concrete engineering and investment target.

The IRA and European Battery Act are the right direction. They're insufficient on their own — they address cell manufacturing more than processing, and the processing dependency is the harder structural problem.

**The verdict:** The EV supply chain is concentrated, geopolitically risky, and in genuine transition. The investments being made will matter in 5-10 years. The policies driving those investments are directionally correct even when they're insufficient. The narrative that EVs are "a China product" is increasingly false for vehicles assembled in North America and Europe; the narrative that the upstream supply chain is fully localized is not yet true.

Geopolitical Risk and Supply Chain Localization

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