Summary of Key Points
Starting from September 1st, China will gradually reintroduce a consumption tax on lithium-ion batteries, with the tax rate rising to 2% from September to December 2026 and 4% from 2027, ending the exemption that had been in place since 2015. In contrast, sodium-ion and solid-state batteries will remain exempt from taxation until the end of 2028, provided they meet national standards and CMA (China Automotive Quality Management) certification requirements. This policy has caused significant disruptions within the industry chain, with manufacturers of battery cells, vehicle manufacturers, and material suppliers all re-evaluating their strategies: who will bear the costs, who will make concessions, and who will shift to alternative technologies? Small and medium-sized battery cell and material companies are under the greatest pressure, while sodium-ion battery manufacturers are benefiting from the policy, although they still need to overcome technical challenges and reduce costs.
Why Is the Consumption Tax on Lithium-Ion Batteries Being Imposed Now?
The previous exemption was due to the fact that the lithium-ion industry was still in its infancy in 2015, and the domestic supply chain was not mature enough to support its development without government support. Eleven years later, China accounts for over 80% of global lithium-ion battery shipments and is now self-sufficient, making it appropriate to phase out the exemption as part of the industry's natural transition from being subsidized to becoming competitive.
The policy includes two mitigating measures: a phased tax rate (2% initially, then 4%) to give companies time to adjust, and continued exemptions for sodium-ion and solid-state batteries until 2028 to encourage investment in these emerging technologies.
The Battle of Quotations Among Battery Cell Manufacturers
The introduction of the consumption tax directly affects their profits. For example, a storage battery cell manufacturer in the Yangtze River Delta region has a net profit margin of only 3.2%, meaning a 2% tax would consume nearly 40% of their earnings, and a 4% tax would exceed their annual net profit.
- Existing Orders: Manufacturers are forced to bear the additional costs for orders signed at the beginning of the year, as the contracts did not include the consumption tax. They cannot pass on these costs to customers.
- New Orders: Manufacturers try to share the tax burden with customers by separating the price into the cost of the battery cells and the tax. However, this is difficult:
- Industrial energy storage integrators are bound by fixed contracts with end-users and can only bear a portion of the cost.
- Large grid customers agree to split the cost equally, but existing orders remain unchanged.
- Smaller customers threaten to switch to higher-quality batteries or sodium-ion batteries if prices increase.
Upstream material suppliers are also unhelpful. While battery manufacturers request price reductions of 1.5%, suppliers can only adjust prices in the new quarter, which has limited immediate impact on costs. Manufacturers are constantly revising their quotes, facing increasing anxiety as the deadline approaches.
The Challenge for Vehicle Manufacturers to Absorb Higher Costs
New energy vehicle companies need to stock up inventory in the third quarter. With rising battery costs, they are reluctant to increase prices to avoid losing customers and are looking for ways to absorb the additional expenses:
- Sharing Costs with Battery Manufacturers: They cannot negotiate price reductions from battery manufacturers for existing long-term contracts and must bear the extra cost themselves.
- New Orders: For high-end batteries from leading manufacturers, they may split the cost equally; for lower-quality batteries from second-tier manufacturers, they have to bear a larger portion of the cost.
- Export Orders: They can get a full refund of the consumption tax on lithium-ion battery exports, so prices remain unchanged.
To reduce costs, vehicle manufacturers are trying to negotiate with material suppliers and are also looking for ways to optimize their operations, such as improving packaging processes and reducing vehicle weight. However, building new battery production capacity is not feasible due to high equipment costs and long lead times.
The Differentiation of Material Suppliers
The impact of the consumption tax varies among different types of materials:
- Lithium Iron Phosphate (LFP) Manufacturers: Small and medium-sized companies are under significant pressure, as they have fewer options for price reductions and risk losing business if they cannot meet customer demands.
- High-Nickel Cathode (NCM) Manufacturers: These companies are in a more favorable position because high-nickel batteries are used in high-end vehicles with longer ranges. Battery manufacturers can pass on the tax to vehicle manufacturers, so there is less pressure on material prices.
The Sodium-Ion Battery Industry: A Period of Policy Benefits
Sodium-ion batteries have become more attractive due to the exemption. Customers are now seeking them more frequently:
- Increased Interest from Customers: Traditional battery manufacturers are revising their budgets to include sodium-ion batteries, and two-wheeler customers are also asking about availability.
- Challenges: However, there are still technical issues, such as immature electrolyte and electrode manufacturing processes, and higher unit costs compared to LFP batteries. Even with the tax exemption, the overall cost of sodium-ion batteries may not be more competitive.
The exemption for sodium-ion batteries will only last until 2028, so whether companies can capitalize on this opportunity depends on the rapid maturation of the related technologies within the industry chain.
Conclusion
This tax reform is intended to promote fair competition in the lithium-ion battery industry and create space for new technologies. Companies must either adapt by absorbing the increased costs or switching to alternative solutions. For consumers, there may be no immediate increase in vehicle prices, but the long-term outcome will depend on the industry's ability to effectively manage these costs.