The IAA's Local Content Play — Smart Carrot, Wrong Stick

Can demand-pull industrial policy actually build a battery industry?

I've seen this movie before — not in Brussels, but in Russia. Around 2015, the Russian government wanted a domestic wind industry. Their solution was elegant: offer a feed-in tariff roughly double the prevailing energy price, but only if your wind farm hit 60% local content. Later raised to 80%. Within a few years, there were turbine blade factories, nacelle assembly lines, and local supply chains that hadn't existed before. The policy worked because the carrot was big enough to change behaviour.

The IAA — the EU's proposed International Procurement Instrument for EVs and batteries — is attempting the same logic. Tie public EV subsidies and procurement to local content, and manufacturers will localise to access the demand. On paper, the numbers are compelling. Germany alone has allocated €3 billion to its new subsidy scheme, covering an estimated 800,000 vehicles through 2029. France runs a parallel €1 billion programme. Italy is offering up to €11,000 per vehicle. Add public procurement — electric buses, municipal fleets, government vehicles — and the total addressable market for "IAA-compliant" EVs is enormous. The carrot exists.

So why am I not convinced it will build a battery industry?

The Russian wind analogy breaks down in one critical place: who is being incentivised to transfer technology, and whether they have any reason to do so.

In Russia, the technology holders were Western OEMs — Siemens Gamesa, Vestas — who wanted market access badly enough to actually train local engineers, license manufacturing processes, and set up genuine local production. They transferred skills because the alternative was exclusion from a large market.

In the IAA case, the technology holders — Korean cell makers like LG Energy Solution and Samsung SDI — are largely exempt. The EU-Korea Free Trade Agreement means Korean suppliers can access European subsidies without needing to meet the same local content rules as Chinese competitors. They have every incentive to maintain European sales while keeping actual manufacturing and process knowledge at home. The IAA, as currently structured, does not force a technology transfer moment with the companies that actually know how to make cells.

What about the Chinese makers?

CATL and BYD will lose access to the subsidised slice of the market. That's real — but I'd argue it's not the segment they were planning to win anyway. Public procurement was never going to go to CATL; that was always politically impossible. And on the private consumer side, the question is whether Chinese-made EVs can compete on price without subsidies. Given that BYD's European revenue grew 216% year-on-year in 2024–25 largely through direct consumer sales, the answer appears to be: yes, they can price-match without the subsidy.

CATL is also hedging aggressively. Their €7.6 billion Debrecen plant is designed precisely to qualify as "Made in EU" for the purposes of the IAA. If they succeed — and the race to hit 70% EU content is genuinely uncertain — they keep their market position and the IAA has simply induced them to build a factory in Hungary, not to transfer knowledge to European startups.

The deeper problem: skills don't transfer by proximity.

The Russian wind example worked because the local content requirements came with mandatory joint ventures and technology licensing. The carrot forced collaboration that built actual competence.

The IAA creates market access conditions, but not knowledge transfer conditions. An LG Energy Solution plant in Poland, producing cells with Korean engineers and Korean process knowledge, may satisfy EU content rules — while a European battery startup trying to scale its first gigawatt-hour is still struggling to find experienced cell engineers who've seen a production ramp before.

The EU battery ecosystem's real deficit is not capacity. It's the accumulated process knowledge of how to make cells reliably at scale — yield rates, formation protocols, electrode coating know-how. That knowledge lives in Korea and China. The IAA, as designed, does not create a mechanism to bring it to Europe.

The question I'd ask policy makers: What's the mandatory skills transfer clause?

Without it, the IAA may create a very expensive set of Korean and Chinese gigafactories on EU soil, staffed with imported expertise, that satisfy the letter of local content rules while leaving European battery startups exactly where they are today: technically capable, commercially under-capitalised, and without a manufacturing path that doesn't run through an Asian partner they can't fully control.

The carrot is real. The logic is sound. But demand-pull without skills-pull is half a policy.

If you're a European battery startup navigating what the IAA means for your supply chain and commercialisation strategy, this is exactly the kind of decision I help founders think through. Book a call.