As electric vehicles were left out of the government's list of items eligible for the so-called "Korean Inflation Reduction Act (IRA)" domestic production tax credit, concerns are emerging not only in the finished car industry but also in the battery industry. The reason is that if this decision strengthens the offensive of Chinese-made electric vehicles in Korea and accelerates sluggish sales by electric vehicle makers such as Hyundai Motor and Kia, battery companies will inevitably be hit as well.
According to industry sources on the 13th, the Ministry of Economy and Finance released the "2026 tax reform plan" on the 3rd, announcing that it will introduce a "domestic production tax credit" starting next year. The system is scheduled to run for 10 years until the end of 2036.
The domestic production tax credit is a system that reduces taxes based on performance when corporations of Korean nationality produce and sell in Korea. It has a structure and purpose similar to the IRA introduced in the United States to respond to climate change and foster new industries, so it is also called the Korean version of the IRA.
The industries eligible for the domestic production tax credit announced this time include six sectors: ◇ semiconductors ◇ solar power generation ◇ wind power generation ◇ secondary batteries ◇ core materials ◇ artificial intelligence (AI) robots. However, despite strong demands from the finished car industry, electric vehicles were ultimately excluded.
The government was said to have excluded electric vehicles on the grounds that a production system for electric vehicles has already been completed in Korea, the market is entering a mature stage, and subsidies are already provided. Deputy Prime Minister for Economy and Minister of the Ministry of Economy and Finance Koo Yun-cheol said, "Rather than electric vehicles themselves, we designed the system to grant tax credit benefits to core components such as secondary batteries so that the productivity and competitiveness of the electric vehicle industry can be enhanced."
With electric vehicles excluded from the anticipated domestic production tax credit, domestic finished car manufacturers such as Hyundai Motor and Kia are voicing concerns that they will inevitably continue to struggle in competition with Chinese electric vehicle makers.
According to the finished car industry, gasoline and diesel internal combustion engine vehicles have an operating margin of about 10% per vehicle, but electric vehicles have a much lower margin at 2.5%. That is because the batteries installed in electric vehicles are expensive. To raise the margin on electric vehicles, automakers would have to increase prices by the cost of the battery, but in that case they would inevitably lose out in competition with Chinese companies that tout value for money.
If electric vehicles had been included among those eligible for the domestic production tax credit, automakers could have reduced expense and boosted price competitiveness, so the Ministry of Economy and Finance's decision has left the domestic finished car industry largely disappointed.
Chinese-made vehicles are rapidly increasing their share in Korea's electric vehicle market. Tesla manufactures cars in China and brings them into Korea, and its cumulative sales in the first half of this year jumped 192.2% from a year earlier to 56,139 units. Sales of Tesla's midsize sport-utility vehicle (SUV), the Model Y, reached 43,359 units. BYD's sales during the same period surged 807.9% year over year to 11,675 units.
Hyundai Motor sold 39,575 units in the first half of this year. That was up 46.5% from a year earlier, but still fell short of the sales of the single Tesla Model Y. Kia sold 72,078 units, up 151.1% from a year earlier.
A business community official said, "Because the domestic production tax credit targets corporations that manufacture and sell products in Korea, Hyundai Motor and Kia, which produce all of their domestic sales volume in Korea, could have received considerable benefits if electric vehicles had been included," adding, "With electric vehicles excluded from the final list of eligible items, domestic companies have effectively lost factors that could lower unit product prices."
The problem is that if the position of domestically made electric vehicles weakens in Korea, it will inevitably become a long-term negative for domestic battery manufacturers as well. The three battery companies—LG Energy Solution, Samsung SDI and SK On—focus on NCM (nickel-cobalt-manganese) batteries, which are mainly supplied to domestic finished car companies.
In the case of the Tesla Model Y, the rear-wheel-drive (RWD) trim, a mainstay that sold 31,767 units in Korea in the first half of this year, is equipped with CATL's LFP battery from China. Only the Model Y L, which sold 6,947 units, and the Model Y Premium Long Range, which sold 4,645 units, use LG Energy Solution's NCM batteries.
BYD is a corporation established in 1995 as a battery manufacturer before starting electric vehicle production in 2003. Therefore, all electric vehicles that BYD sells in Korea are equipped with its self-produced LFP batteries.
Zeekr, a premium brand under China's Geely Automobile Holdings that began sales in Korea this year, has put forward the 7X, a midsize electric SUV, as its first model. The 7X is sold in three trims: Pro, Max and Ultra. The Pro trim is equipped with a 75-kilowatt-hour (kWh) class LFP battery developed in-house by Zeekr. The higher-end Max and Ultra trims are equipped with NCM batteries, but they use products from China's CATL, not domestic companies.
A battery industry official said, "Even if we reduce unit prices by benefiting from the domestic production tax credit, Chinese electric vehicle manufacturers will have no reason to use Korean batteries unless they build factories in Korea," adding, "If domestic finished car corporations struggle in price competition and sluggish sales persist, battery manufacturers will ultimately suffer damage due to contraction in downstream industries."