Hyundai Motor Group seems to be further bolstering its ties with China’s CATL, the world’s largest battery maker for electric vehicles, as part of its renewed strategy to diversify battery suppliers amid increasingly protectionist policies in the US and Europe, according to industry sources Sunday.

The latest development comes after the world’s third-largest carmaker by sales has recently been stripped of EV subsidies in the all-important US market under the Inflation Reduction Act, which offers American consumers a hefty tax credit for purchasing EVs whose material sourcing and manufacturing took place in the US or in a partner country with whom the US has a free trade agreement.

Now the carmaker is taking a two-track strategy – speeding up the construction of its EV plant in the US, while enhancing its partnership with CATL for other markets to elevate sales.

“Hyundai is looking to use CATL batteries for cheaper models sold mainly in Korea and China, the markets that are minorly affected by protectionist measures in the US and Europe,” an industry source close to the matter told The Korea Herald on condition of anonymity.

Unlike Korea’s top battery makers – LG Energy Solution, Samsung SDI and SK On – that only supply battery cells, CATL supplies batteries with its own management system, which means less room for carmakers to control product quality, according to the source.

“In order to reduce risks, CATL batteries will be used first for smaller, cheaper models in the early stage,” he said.

In April, TechWeb, the China-based tech news site, reported that Hyundai was planning to buy $1 billion worth of EV batteries from CATL this year following a similar deal signed last year.

Hyundai’s Executive Chair Chung Euisun and CATL CEO Robin Zeng Yugun reportedly met twice in March and April, the report said, possibly to discuss the new purchase deal. Hyundai’s Seoul office declined to comment on the matter, citing its sensitivity.

The new mega deal comes amid Hyundai’s growing battery purchases from the Chinese company in recent years. Hyundai placed orders worth 25 trillion won ($18.6 billion) between 2019 and 2021, of which CATL is believed to have won a sizeable portion along with its Korean rivals.

Although the exact amount was not revealed, a slew of new Hyundai and Kia cars, mostly compact EVs such as Hyundai’s Kona Electric and Kia’s Ray and Niro EVs, are known to be released with a CATL battery pack.

Industry watchers say Hyundai is seeking to expand its presence in emerging markets such as China, India and Southeast Asia, which are less affected by subsidy programs in the US and Europe aimed at countering China’s influence in key technology areas.

“In China, India and (Association of Southeast Nations) countries, there’s more room for Hyundai to boost its profit margin by using cheaper batteries from China,” said Yang Min-ho, an energy engineering professor at Dankook University.

“For EVs, reducing the battery cost is the single most decisive factor in profitability. For Hyundai to narrow the gap with Toyota, the world’s No. 1 carmaker, it should increase its margins in EVs, a segment where the Japanese rival has not yet gained a competitive advantage,” he added.

India, in particular, is expected to be Hyundai’s target market, according to Yang. Currently, India is the Korean carmaker’s third-largest market with some 800,000 unit sales last year after the US and Korea. Hyundai recently pledged to inject 200 billion rupees ($2.4 billion) for the next 10 years into the burgeoning EV market there.

Kim Pil-su, a car engineering professor at Daelim University, also noted that Hyundai is enhancing its risk management by diversifying its battery suppliers.

“Relying too much on Korean battery makers could pose a risk when there are supply glitches in them,” Kim said. “Also, the US and Europe are not the only global markets for Hyundai. They are friendly for now, but we don’t know how the situation will unfold in terms of international affairs.”