Joe Biden has a dream. And Elon Musk had looked best placed to help make it a reality. The president wants to create a US-centered electric vehicle supply chain and is using his multibillion-dollar Inflation Reduction Act to achieve it. Musk’s Tesla Inc. is already part way there with deep commercial ties to Western suppliers, batteries sourced from a factory in Nevada, and construction of a lithium refinery in Texas underway. In 2023 its vehicles took the first four places in an annual ranking of the most American-made cars.

But Tesla was hedging its bets. Just seven months after the IRA came into force the company started buying Chinese-made lithium-ion batteries in such large volumes that for a spell it was the biggest single US importer of them, according to trade data from IHS Markit. Then, toward the end of 2023, its buying spree, which cost a staggering $2.5 billion, ended as abruptly as it had begun, as the global car industry waited to learn how aggressive Biden would be in excluding EVs with Chinese components and raw materials from the IRA’s tax credit system.

Tesla had taken advantage of a temporary opening in the rules to stock up on cheaper batteries. That was slammed shut by new Treasury guidelines in December that effectively cut Beijing out of the equation, making the search for non-Chinese suppliers of the metals essential to the green transition that Biden wants much harder for the carmakers whose help he needs. The challenge is so great that it risks undermining his primary aim of developing a domestic EV market.

“The US market today is largely Tesla, so much of this will hinge on how it restructures its supply chain — and whether it can,” says Sam Adham, head of battery materials at CRU Group, a specialist consulting firm. “It’s on its way but it’s been relying heavily on Chinese suppliers for quite some time.”

China, the world’s biggest miner or processor of more than two dozen critical metals and minerals, has over the last decade tightened its grip over a sprawling supply network of key battery ingredients ranging from lithium to manganese and cobalt. The US, in contrast, lags far behind.

That is where the IRA — with its baked-in hostility towards China — is supposed to fit in: as a catalyst for the creation of an alternative supply network around the US and its free-trade partners stretching from Australia to Chile, Morocco and South Korea.

Securing the tax credits will be critical for US carmakers like GM and Ford, which are losing billions of dollars on their EV line ups and facing a consumer backlash against high vehicle prices that the IRA is designed to fix. Jim Farley, Ford’s chief executive officer, told an industry conference that up to 30% of the company’s global revenues could be at risk if it’s unable to compete with Chinese carmakers, but up to now it’s been relying heavily on Chinese technology, raw materials and components in its quest to bring its own costs down.

Drawing on supply chain data from CRU, detailed customs records, and interviews with more than two dozen executives and officials, exclusive Bloomberg analysis — part of a series on Western efforts to create a China-free network of suppliers — shows the lengths carmakers are having to go to comply with the IRA.

In 2023, the IRA required that at least half of the value of battery components had to be assembled in North America, and that 40% or more of the battery’s raw materials had to be sourced from the US or via free trade agreements. By 2027, the raw material requirement will double to 80%, making it even more difficult for car models to qualify.

Analysis from CRU — which is based on a best-case snapshot of carmakers’ supply arrangements in September 2023 — reveals how automakers have been managing connections with trading partners to keep their cars qualified for some form of IRA tax benefit.

The Treasury, however, made a concession that allows metals produced by non-state owned Chinese companies, working outside the country, to enter the US vehicle market. It appeared to be an acceptance that without Indonesia’s nickel and cobalt from Congo, US carmakers would not be able to secure the raw materials they’ll need, despite commitments to spend hundreds of billions of dollars on US mines, refineries and battery plants.

Some Washington hawks and US metals producers opposed the move and argued that the Foreign Entities of Concern rules do not go far enough in ostracizing Beijing. Other companies, including carmakers like Tesla — recently overtaken by the Chinese manufacturer BYD Co. as the world’s best-selling EV maker — and Ford, have lobbied hard against ending the use of cheap Chinese batteries.

“China’s influence over materials for battery technology is greater than OPEC’s influence over oil,” says Mattias Gromark, who runs a green metals fund that invests in the European and North American battery supply chain at Sweden’s Atlant Fonder AB. “The entire battery sector in Europe and North America must think seriously about how they can diversify their supply chain.”

Looming large is the question of how China — home to the world’s largest car market — will respond to the threat posed by Biden’s legislation. In December Beijing flexed its muscles by imposing controls on exports of graphite, leading to a slump in shipments.

Fears of a more serious tit-for-tat-style retaliation are so acute that when top-level Western officials met in Paris in September to raise the alarm bell over China’s dominance of the EV battery supply chain, there were several warnings about an unnamed “dominant” player. Yet, in a weird diplomatic dance, none of the officials named China directly.

There’s a similar tension in the European Union, which has launched a probe into the billions of dollars in state subsidies given to domestic manufacturers by Beijing amid a subsequent rise in imports of Chinese EVs. That has coincided with some Chinese companies expanding their operations in Europe, including BYD which is planning to build its first European car factory in Hungary.

Despite the slowdown in demand growth over the past year, EV sales are still predicted to account for 51% of new US car sales by 2030 compared with about 9.5% today, according to BloombergNEF.

In addition to offering consumer incentives, the IRA also provides additional tax credits equivalent to subsidies of as much as 30% of manufacturing costs related to battery cell assembly and pack production. That has helped encourage carmakers and battery suppliers to invest heavily in US-focused supply chains — more than $100 billion was spent in the first 15 months after the Act was signed into law in August 2022, according to BloombergNEF.

Tesla’s profitability and proprietary technology give it a distinct advantage, but Chinese parts makers will still be an important element in its growth strategy in North America and beyond.

At the start of the year, Tesla — the only carmaker selling EVs at scale in the US — lost the $7,500 IRA tax credit on some of its vehicles, including the most affordable version of the Model 3, which used batteries imported from China’s CATL. Ford has plans to source low-cost LFP — lithium, iron and phosphate — batteries, from CATL for its Mustang Mach-E and the F-150 Lightning.

“Ford has said on a number of occasions that they’re struggling to make money on their EVs, and they can’t really do it without LFP batteries,” said CRU’s Adham. “For the automakers, it’s a problem.”

South Korea, home to three of China’s biggest rivals in the battery sector — Samsung SDI Co., LG Energy Solution Ltd. and SK On Co. — is seen by some as the solution. Its status as a free trade partner with the US has made it attractive to western carmakers scouring the globe for supplies of battery chemicals like nickel sulfate, cobalt sulfate and lithium hydroxide.

The country has no meaningful mined reserves of battery metals, but a barrage of investment is helping to turn it into one of the world’s biggest processing hubs. Since the IRA came into effect, Korean companies — some in joint ventures with US carmakers — have committed almost $48 billion to build new plants to make chemicals, cathodes and finished batteries at home and in North America, according to Bloomberg calculations.

But they too are struggling to develop new supply chains free of Beijing’s influence. Korea’s battery makers have historically been reliant on raw materials sourced from China. Nevertheless, the potentially lucrative prize on offer for Korean companies that stay on the right side of the IRA has encouraged an investor frenzy that last year sparked wild moves in stocks linked to Korea’s battery sector.

The race is taking South Korea’s biggest producers of industrial metals into unfamiliar territory: Steel-making giant Posco Holdings plans to build two lithium processing plants using raw materials from Australia, while copper smelter LS MnM. and Korea Zinc Co. are both pushing into production of nickel sulfate.

LS MnM offers a blueprint for what a non-Chinese supply chain could look like. The firm plans to build two processing plants in South Korea, making the first-stage investment of 670 billion won ($495 million) by 2026. The intention is to make battery chemicals using mined nickel and cobalt imported from countries with free trade agreements with the US. Those chemicals will be used to make battery cathodes for sale to Korean manufacturers who will export the finished cells to the likes of General Motors, Tesla, Volkswagen AG and Ford.

A much bigger expansion will, however, be needed to meet the expected demand of US carmakers. And even if they can secure sufficient raw materials from compliant suppliers, they’ll still face the daunting prospect of competing with Chinese rivals over the cost of producing the refined chemicals.

A flood of Chinese investment into Indonesia’s nickel industry has helped give the country a huge cost advantage over other producing nations, which include Australia and the Philippines. With prices plunging, many miners outside Indonesia are being forced to mothball operations.

“Our customers are demanding the same prices offered by Chinese makers,” said Jung Gon Hwang, head of the corporate strategy team at LS MnM. “For now, we are looking for more of those materials where China hasn’t invested yet.”

Diverting raw material flows away from China also brings political jeopardy for South Korea, which is already squeezed between its closest ally, the US, and its biggest export partner, China.

The decision by Beijing to place controls on exports of graphite in December underscored the risks that China’s neighbors face as the US seeks to challenge its dominance of the global metals supply chain.

The solution for some Korean firms is to partner with Chinese companies in joint-venture arrangements that are designed with the FEOC rules in mind. Chinese firms are lining up to invest in South Korea’s battery industry because they want to use it as a gateway to the US market, in a trend that’s exposing the limits of the IRA’s ambition to create a truly alternative supply chain.

South Korea’s finance minister has stressed the importance of its economic links to Beijing. “China is still the closest economic partner to us and we will keep that in mind,” Choi Sang-mok told a hearing of lawmakers on Dec. 19. “We will put our national interest first in terms of economic cooperation with China.’’