China's battery industry is finding its export channels narrowing at home and abroad. As China withdraws tax breaks for mainstream lithium-ion batteries and shifts support toward next-generation technologies, the European Union has decided to limit the number of Chinese-made hybrid vehicles exported to the bloc. The move is seen as giving South Korean battery makers with production bases in Europe a chance to narrow the price gap.

China has imposed a 2 percent consumption tax on lithium-ion batteries since September. The measure follows an earlier notice by the Ministry of Finance, the General Administration of Customs and the State Taxation Administration on adjustments to consumption tax policy for certain batteries. After a grace period, the rate is set to rise to the statutory maximum of 4 percent from Sept. 1, 2027. Export benefits have also been reduced. The export value-added tax rebate for lithium-ion batteries was cut to 6 percent in April and will be abolished in January 2027.

The steps are seen as withdrawing tax support for mainstream lithium-ion batteries and shifting the focus of support to next-generation batteries. Adding a tax burden is also read as easing low-price competition for mainstream products. Sodium-ion batteries and all-solid-state batteries are also set to see their tax-exempt status end after late 2028.

The changes reflect a shift in the direction of support, according to the article. China is adding private fundraising through capital markets as a new pillar for industry development that had focused on subsidies and tax breaks, according to IBK Investment & Securities. The shift comes as local governments' fiscal capacity has weakened due to a real estate slowdown and as U.S. technology controls continue.

For Chinese companies targeting the European market, this has become a double burden. Wholesale domestic sales of Chinese electric vehicle makers for the home market have declined year on year since November 2025, but exports have maintained strong growth. In Europe, Chinese brands' share of hybrid and plug-in hybrid sales rose to 25.5 percent in August 2026 from 3.5 percent in October 2024. China is diverting domestic oversupply overseas and shaking the auto industries of Europe, Asia and Central and South America, Eugene Investment & Securities analysed. Chinese export volumes were also the biggest reason South Korean battery makers struggled in Europe.

The EU has decided to restrict the trend. The bloc agreed to cut by more than 50 percent the annual number of hybrid and plug-in hybrid cars made in China and exported to the EU over four years. Until now, high tariffs were imposed only on Chinese-made pure electric vehicles, and hybrids subject only to base tariffs became an export channel for Chinese makers. Britain is also preparing similar import restrictions.

Export restrictions have created room for South Korean battery makers to expand their share in a growing European market. Europe’s electric vehicle market has returned to growth since last year, and sales are expected to rise by more than 20 percent both this year and next year. If sales of Chinese-made hybrids fall, demand is likely to rise for vehicles fitted with South Korean batteries, according to Eugene Investment & Securities. Vehicles using South Korean batteries could fill the gap left by fewer Chinese-made models, it said. Linked to an expanding U.S. battery energy storage system market, 2027 could be the year South Korean battery makers break out of a bottom in European market share.

Still, for South Korean battery makers to capture that demand, they must first meet European rules of origin. A draft EU Industrial Acceleration Act to be finalised in early next year would require proof of origin for at least three key materials and parts, including battery cells, in order to receive electric vehicle subsidies, rising to at least five items from three years later.

South Korean companies will need to increase the materials and parts for which they can prove origin within the bloc to meet the standard three years from now. They have cell, material and parts plants in the region and free trade agreement status, but as the number of items subject to proof rises, the share of local sourcing for materials and parts other than cells will determine whether they meet the criteria.

The current draft, separate from battery requirements, requires sourcing more than 70 percent of electric vehicle parts from within the bloc and from FTA countries. South Korean companies have cell plants in places such as Poland and Hungary, but basic materials such as anode materials, copper foil and electrolyte still have high dependence on imports from China. An industry official said, "Even if there is a temporary cost burden from restructuring supply chains away from China, it should be seen as an essential investment for survival in the European market in line with tightened EU regulations."