Bloomberg is out today with the story of how the Ford/CATL battery factory deal got done. It took two years and many trips back and forth across the Pacific. Even now, there are politicians who are unhappy about the deal to build a battery factory in Michigan that involves CATL and no one can say for an absolute certain that the project will go forward, but right here, right now, it’s a done deal and both parties are moving forward as if this is really going to happen.
Autoblog reprinted the Bloomberg story, which is nice for us and our readers because Bloomberg material is behind a paywall, but Autoblog is not. Here’s the narrative. The two companies began talking about building a battery factory in North America in 2021. At the time, the idea that doing so would be controversial was the furthest thing on anyone’s mind.
Then Nancy Pelosi decided to visit Taiwan and everything changed. The deal that had been moving forward was suddenly put on indefinite hold. China was infuriated by her visit and made its displeasure known by stepping up naval and air operations in and around the Taiwan Strait.
In addition, the trade war between the US and China that began under the prior administration continued to sputter along, fueled by reports of slave labor conditions in some parts of China with large populations of Uyghur dissidents. Then just a few weeks ago, a Chinese spy balloon made a long and widely condemned journey across America, further exacerbating tensions between the two countries.
Ford, CATL, & The IRA
The Inflation Reduction Act has stirred the pot even further. Now there are billions of dollars in federal incentives for battery manufacturing on the table, but only if those batteries are made in America with qualifying materials and components. That would be dandy if CATL and BYD didn’t both control 50% of all battery manufacturing in the world, most of it using materials and components sourced from China.
To break the deadlock, the companies came up with a novel business arrangement. Ford will build the factory and own the building and the land it sits on. CATL will license its technology to Ford and provide supporting staff. The arrangement could become a model for how Chinese companies seeking to profit from America’s rush into battery-powered vehicles and US automakers looking expand their production of electric cars can do business without falling into a morass of political disputes.
Navigating geopolitical disputes will be crucial as carmakers like Ford and General Motors scramble to catch up with Tesla, says Bloomberg. In the fast growing market for electric vehicles, batteries have become a key battleground. Ford and its rivals need Chinese battery technology to achieve their production goals.
“The deal has already set a precedent,” Tu Le, managing director of China and US-based advisory firm Sino Auto Insights, said in an interview with Bloomberg. “For the second or third Chinese company to come in, it’s not going to be as shocking.”
The Long Path To Michigan
A year ago, CATL and Ford were evaluating sites across North America for the new battery factory. Mexico emerged as the front runner, unnamed sources told Bloomberg. Several places along the Mexican border seemed ideal, with lots of skilled labor available and the infrastructure needed to easily export to the US in place. CATL was scouting locations in Mexico last July just before Pelosi’s trip to Taiwan. But her visit kicked over a hornet’s nest and that lead CATL to delay any announcement.
Then Congress passed the Inflation Reduction Act in August, which included big tax breaks for building batteries in the US. That’s when Ford and CATL suddenly shifted their sights north of the border, those sources said. “The IRA was incredibly important to us,” Lisa Drake, Ford’s vice president of EV industrialization, told reporters February 13. “It did what it was intended to do.”
The automaker got offers from multiple US states anxious to land a factory that promised to provide thousands of high wage jobs. The eager bidders included Virginia, which pushed a site in a rural area in the south-central part of the state, according to people familiar with the proposal.
But political pushback complicated the negotiations. As tensions between the US and China intensified, Virginia governor Glenn Youngkin, a possible Republican presidential hopeful, pulled his state from consideration for the factory, calling it a “Trojan horse” that would undermine policy efforts to strengthen the US auto industry.
Youngkin’s chief legal counsel pontificated in an interview with the Washington Post that the proposed battery plant involved “national security risk-type technology and he stopped that. They were looking for land and incentives to build something and I think that was the nucleus” of the evolving concern about farmland, he said.
That’s when Ford and CATL came up with a plan to maximize the tax benefits of the IRA that would avoid political opposition. Ford will own and operate the plant as a wholly owned subsidiary, while licensing the technology from CATL, which will help with installation of factory equipment at the plant and have permanent staff on site.
That setup allows Ford to reap all the tax benefits of the IRA without having to share them with a joint venture partner. And since CATL doesn’t have an equity stake in the plant, the companies avoid a national security review by the US government.
CATL & Political Tensions
The new factory in Marshall, Michigan, 100 miles west of Detroit, is key to Ford’s $50 billion plan to challenge Tesla. When it opens in 2026, it will produce enough batteries to power 400,000 Ford models a year, Drake said. Ford received an economic incentive package worth about $1 billion from Michigan for the plant.
CATL is the world leader in lithium iron phosphate batteries, which are cheaper and more stable than their nickel-based counterparts. They also don’t rely on cobalt and nickel mining, which has been shadowed by allegations of human rights abuses. Ford and CATL are also exploring supply deals in Europe and China, though the structure they will take isn’t certain.
For CATL, the Michigan pact allows the company to establish itself in the US without bearing the multi-billion dollar expense of building and operating a factory. It also adds yet another major brand to its growing stable of clients. Tesla, which amounted to 10% of its company’s sales in 2021, is by far its largest single customer.
While there’s no indication that geopolitical tensions will be enough to derail the Ford / CATL plan, lawmakers have been vocal in their opposition. China will scrutinize the agreement to ensure the battery giant’s core technology isn’t handed over to the Ford, people familiar with the matter told Bloomberg this week.
In the US, Republican Senator Marco Rubio has called on regulators to review the licensing agreement, while Democrat Mark Warner, who chairs the Senate Intelligence Committee, said in an interview Thursday the deal is an “hypocrisy of the Communist Party regime They have forced technology transfer, stolen technology, and now want to try to reverse the flow.”
The Ford / CATL deal is part of a role reversal for the US and Chinese auto industries, Bloomberg says. Three decades ago, western automakers forged joint ventures with local Chinese manufacturers to teach them them how to manufacture automobiles. Now CATL will work inside Ford’s factory in rural Marshall, Michigan. The pact will “help us get up to speed so we can build these batteries ourselves,” Bill Ford, Ford’s executive chairman and great-grandson of founder Henry Ford, said at the Feb. 13 announcement.
Other companies could consider a similar arrangement to reduce the high cost of importing batteries from China. The pact also provides a template for Chinese battery makers looking to establish a presence in America. Deals like this, said Stephen Dyer, a Shanghai-based managing director for consultant AlixPartners and former Ford vice president of business strategy for Asia Pacific, “are now uniquely suited to this new environment of geopolitical sensitivities.”
50 years ago, Richard Nixon went to China because he and his supporters saw it as a major new market for US made goods. Now China wants to come to America, which it sees as a major new market of its goods. Funny how the wheel turns, isn’t it?
No one wants to gloss over the significant human rights issues that abound in China or the mania of its government for stealing trade secrets at every opportunity. Those are real and of great concern. But the US practically begged Chinese business to adopt its business practices and manufacturing prowess. So the argument now that the Chinese are a bunch of godless commies rings a bit hollow. They saw opportunities and took them while America slept.
Boatloads of Chinese cars are finding their way to Europe. It’s only a matter of time before they arrive at American ports as well. Just as Japanese and Korean companies have set up shop in America, so will the Chinese over the next several decades.
Ford needs batteries. CATL makes batteries. It’s a match made in heaven and one that ultimately will help the US decarbonize its transportation sector. If we can just convince Beijing to stop sending surveillance balloons over America, this story may have a happy ending.
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