Chinese producers in the global battery value chain with overseas projects face an intensifying dilemma, squeezed between Western regulations mandating technology and ownership transfers, and China’s countermeasures restricting outbound intellectual property (IP) and investment. This regulatory friction is already stalling localisation efforts for critical components like cathode and anode active materials. Meanwhile, Korean companies are actively deploying new growth strategies to capitalise on this rising protectionism.
This Insight aims to:
- Recap the crucial regional policies during the first half of the year, directly addressing our clients’ most frequent questions.
- Assess how these instrumental regulations will exert a lingering impact on battery supply chain globalisation, particularly for critical components like electrode active materials.
- Analyse how Chinese and Korean manufacturers are strategically responding.
US upholds Prohibited Foreign Entity standards
On 12 February, the US Treasury and IRS released interim guidance regarding sourcing rules to qualify for key tax credits. The rules focus on the Prohibited Foreign Entity (PFE) and Material Assistance Cost Ratio (MACR) frameworks, the definitions for which can be found in our previous Insight.
Battery manufacturers and energy storage project owners must satisfy increasingly stringent thresholds on how much supply they source from PFEs.
The recent interim guidance offers them an optional shortcut – the Cost Percentage Safe Harbor – which allows producers of “listed components” to use a pre-assigned ratio, enabling them to bypass granular, unit-by-unit material tracing.
Although this seems to provide some relief for the administrative and accounting burden, the caveat is that companies with mixed PFE and non-PFE supply chains are heavily penalised in this method. As it relies on fixed percentages, the presence of any PFE in the upstream supply chain taints the entire assigned value of a component. Most companies are therefore better off self-tracking costs than using shortcuts, as demonstrated by the example below taken from CRU’s Battery Value Chain Service.
Meeting the MACR threshold will become significantly more challenging once the exemptions for existing binding contracts expire (1 January 2027 for battery producers, and 1 January 2030 for BESS project owners). While it is difficult to predict definitively if the thresholds will hold, we are increasingly seeing global manufactures actively adapting to the rules. For example, the Chinese p/CAM companies are restructuring their equity ownership to meet non-PFE standards, indicating the regulator would uphold the rules instead of relaxing the restrictions.
EU’s rising protectionism could upend onshoring
In Europe, one of the most consequential legislative proposals in 2026 is the Industrial Accelerator Act (IAA). It aims to accelerate EU battery supply chain localisation and ensure coherent implementation across member states by introducing domestic sourcing and Foreign Direct Investment (FDI) requirements.
The IAA signals a significant pivot in EU policy – from an inclusive, collaborative stance that welcomed onshoring and tolerated imports, to a protective, EU-first approach that uses targeted measures to force foreign investors to localise production.
This draft regulation explicitly targets investments from nations holding over 40% of global manufacturing capacity in relevant sectors, effectively singling out China. The new FDI mandate also imposes a conditional framework, as summarised below:
While foreign investors seem to have the flexibility to choose three of the five non-mandatory criteria for approval, the reality is far more restrictive. As the research and development (R&D) commitment is the only easily achievable metric, manufacturers are effectively forced into one of two difficult options to meet the remaining criteria – dilute ownership or initiate a technology transfer. Crucially, these new FDI rules apply not only to greenfield investments but also affect the existing operations requiring capital injections for project expansion.
According to data from CRU’s Battery Value Chain Service, EU construction pipelines are overwhelmingly dominated by Chinese capital, particularly for LFP cells and electrode materials, where the region faces a structural deficit. However, the IAA has effectively placed these Chinese investors in a dilemma. Relinquishing project control or transferring IP are both major hurdles, especially given the increasing scrutiny on technology exports by Chinese regulators.
In the short term, some investors might front-load their CAPEX ahead of schedule. However, in the long term, it is reasonable to consider that new projects may be better directed toward lower-cost, more investor-friendly EU trade partners such as Morocco, rather than being localised within the EU. As demonstrated in CRU’s Battery Cost Model, the cost profile supports this case.
Chinese counter-measures limit projects going overseas
Amid rising geopolitical tension, China is strategically leveraging its industry dominance by tightening battery supply chain regulations.
In March and April, China subsequently introduced Provisions on Supply Chain Security and the Counter-Extraterritoriality Regulation. These decrees establish a coordinated legal mechanism to penalise multinational entities that comply with regional protectionist or de-risking policies.
Crucially, the legislation restricts unauthorised data collection, creating severe legal risks for routine supplier audits and information-sharing required by Western regulators for supply chain tracing and ESG compliance.
These laws serve as direct countermeasures, authorising the Chinese government to investigate and impose retaliatory actions against any organisation whose compliance with foreign mandates discriminates against or harms Chinese industrial supply chains.
Meanwhile, the ongoing technology export restrictions apply to both physical exports and intangible IP transfers. While the government temporarily lifted export licensing requirements for selected battery products until November 2026, this waiver applies strictly to the physical products. Cross-border IP transfers, overseas plant relocations, and the relinquishment of project ownership controls are still facing intensifying state scrutiny.
How manufacturers are responding
Chinese midstream companies restructure equity to meet non-PFE standard
To comply with PFE thresholds and supply US customers, Chinese firms are restructuring equity ownership of their overseas operations, although success varies by the type of product.
Since ternary CAM is not on China’s export restriction list, equity dilution was relatively straightforward for leading ternary producers, such as Ronbay. In its public announcement, the company stated it would reduce its effective ownership in the overseas project to just below the 25% PFE threshold, with the transaction being conducted through its Singapore-based holding entity, Singapore AKB.
This restructuring was also driven by a financial lesson – Ronbay’s Q2 earnings revealed a substantial revenue hit, after downstream US clients suffered retroactive production tax credit losses due to its subsidiary’s prior PFE status.
LFP producers are facing a more precarious situation. Changzhou Liyuan (Lopal) indirectly holds a 43.8% stake in Indonesia's PT LBM, which is well above the PFE threshold. Lopal secured approval to produce LFP abroad, long before China imposed export controls, cementing its position as the operator of the only active LFP project outside China.
Currently, the company is shielded from immediate scrutiny by US’s exemption rules for supply agreements, signed prior to June 2025. However, this safe harbor only insulates sales until 1 January 2027.
Replicating Ronbay’s strategy remains challenging because LFP sits on China's active technology export restriction list, making operational control relinquishment subject to government approval. PT LBM’s Phase 3 project announcement explicitly stated the facility will only produce secondand third-generation LFP cathodes, likely because exporting more advanced technologies would struggle to secure regulatory approval.
Korean companies accelerate battery plant retooling and pivot to energy storage
Korean companies are seeking to capitalise gains from the geopolitical squeeze. Following the scrapping of US EV tax credits, Korean cell manufacturers are urgently pivoting their strategies towards LFP BESS as the new high-growth market.
Previously focused on NMC chemistries, they had limited exposure to LFP batteries where China held a dominant position with cost advantages. However, the multiple layers of tariffs imposed on Chinese imports and the new PFE rules have shifted the economics. Localising LFP cell production in the US is now more cost-effective, thereby positioning Korean-owned US plants at the low end of the cost curve.
Leading cell producers – and even some automakers – are retrofitting and reallocating existing and planned capacities towards LFP energy storage cell production. To improve profitability, they are shifting their focus toward grid storage and data centres.
To guarantee capacity amid widespread electrical infrastructure bottlenecks, these producers are forging strategic partnerships across the entire value chain. Recent market developments indicate that cell manufacturers are increasingly locking in direct supply agreements with major project developers, regional grids, and leading hyperscalers.
Cell manufacturers are also verticallyintegrating into full-scale BESS integrators. By shifting from selling bare cells to delivering turnkey, software-enabled systems, producers can capture higher margins and provide robust performance warranties instrumental to secure AIDC partnerships.
When will the status quo be broken?
Korean and Western manufacturers in the value chain are starting to exploit geopolitical tensions by establishing new alternatives to Chinese batteries, but they remain largely reliant on Chinese producers interwoven in their supply chains.
Chinese companies are the experienced incumbent producers holding the know-how, the equipment and industrial capacity to produce critical battery products such as LFP cathodes, ternary precursors and graphite anodes. They are being held back from expanding overseas or sharing their knowledge with foreign partners.
As long as geopolitical tensions remain, production of these key battery materials will remain firmly localised within China, and companies outside of the country will take far longer to industrialise.
However, current Western and Chinese trade barriers and restrictions are not a blanket ban that apply uniformly. International cooperation is still possible through compliant – albeit limited – channels, and it is reasonable to expect that Chinese companies will keep investing in overseas projects given the several long-term imperatives to do so.
For more in-depth global battery value chain analysis, consult our CRU’s Battery Value Chain Service or directly request a demo here.
