There are concerns within the industry that the differential allocation of electric vehicle subsidies will lead to discrimination against affordable electric cars and negatively impact the overall adoption of electric vehicles. Reducing subsidies for LFP batteries, commonly used in budget EVs, is seen as irrational as it diminishes support for the lower-income population.
The Ministry of Environment announced a revised electric vehicle subsidy framework during a recent briefing for the domestic automotive industry on the 16th. The proposed changes suggest that subsidies will be higher for batteries that are lighter, generate higher energy output, and are easier to recycle. This structure favors NCM batteries, represented by nickel-cobalt-manganese, and disadvantages LFP (Lithium Iron Phosphate) batteries. NCM batteries are expected to receive more subsidies due to their higher energy density and efficiency, as well as better recyclability, while EVs using LFP batteries may see reduced subsidies.
The reason behind the government’s reform of the electric vehicle subsidy system is seen as an attempt to counteract the influx of Chinese electric vehicles. Analysts believe that by targeting LFP batteries, which are favored in competitively priced Chinese EVs, the government aims to protect the domestic industry under the guise of subsidies.
However, some raise the valid point that South Korean electric vehicles also use LFP batteries, making the differentiation in subsidies unjust. Models such as the Kona Electric, Casper EV, Korando EV, and Torres EV all utilize LFP batteries, serving as comparatively affordable options attractive to the general public. In contrast, more expensive vehicles predominantly feature NCM batteries.
If the proposed changes go into effect, benefits for budget-friendly electric cars will diminish, resulting in a ‘rich get richer, poor get poorer’ scenario where higher subsidies are directed to more expensive EVs. This means that to receive greater benefits, consumers may feel pressured to purchase pricier vehicles. Critics argue that the policy unfairly penalizes lower-income individuals while trying to curb Chinese electric vehicle competition.
There are also opinions suggesting that the differential subsidy allocation could hinder the overall adoption of electric vehicles. Consumers looking to buy budget-friendly EVs may be dissuaded from purchasing if subsidies are reduced, leading them to forego electric vehicle acquisition altogether instead of opting for pricier models. This could create a vicious cycle where reduced subsidies for affordable EVs lead to decreased sales and delay the broader adoption of electric vehicles.
Moreover, there are significant concerns about potential Chinese reactions. If China decides to retaliate, it could have severe repercussions for South Korea. While the differential subsidy system may prove effective domestically, the risk of facing discrimination in the much larger Chinese market is considerable. The South Korean automotive market had an estimated sales volume of about 1.73 million units in 2023, while China surpassed 30 million. There is concern that in attempting to limit Chinese electric vehicles in the narrow domestic market, South Korea may suffer in the much more expansive Chinese market. Protecting domestic industries through subsidies is a feasible strategy in larger markets like the U.S. or China but may not be suitable for a smaller market like South Korea.
Not all aspects favor the NCM battery; the LFP battery has its strengths. It is about 30% cheaper compared to NCM batteries, and its stable elemental bonding during chemical reactions means lower fire risks and a longer lifespan. While efficiency may be slightly lower, the numerous advantages it offers suggest that the differential allocation of electric vehicle subsidies should be approached with greater caution.
By Lee Sang-jin daedusj@autodiary.kr