The XC60 sport-utility vehicles that Volvo builds in China are powered by South Korean battery technology.
SHANGHAI—Chinese-owned Volvo Car Group is being allowed to use high-end South Korean battery technology in vehicles it builds in China, even as Beijing strong-arms other auto makers into using Chinese batteries.
To build up its battery industry, China requires auto makers to use batteries from one of its approved suppliers if they want to be cleared to mass-produce electric cars and plug-in hybrids and to qualify for subsidies. These suppliers are all Chinese, so such global leaders as South Korea’s LG Chem Ltd. 051910 -1.45% and Japan’s Panasonic Corp. are excluded.
Volvo’s China-made plug-in hybrids, though, are powered by essentially the same LG Chem batteries the car maker uses outside China, according to people familiar with the situation. The main difference: They are made in China under license by Zhejiang Hengyuan, another unit of Volvo’s parent company, Zhejiang Geely Holding Group Co.
A Geely spokesman confirmed that it struck a deal late last year to license LG battery technology, and that LG Chem has helped Hengyuan set up a production line. The batteries will also be used in cars made by another Geely brand, Lynk & Co., the spokesman said.
“This isn’t the use of a loophole or a back channel,” he said, adding that other companies “with the proper foresight could realize and create the same deal if required.”
LG Chem declined to comment, citing client confidentiality.
The Ministry of Industry and Information Technology, which regulates China’s auto industry, didn’t respond to questions. In February, it approved Volvo’s new XC60 sport-utility vehicle—which uses the Hengyuan battery—for production and EV subsidies.
Lynk & Co., like Volvo a Geely brand, will also use battery technology from South Korea’s LG Chem.
Foreign companies have long complained that Beijing gives unfair advantages to Chinese companies, especially in strategic sectors it seeks to dominate, such as EVs. In a March 22 report, U.S. Trade Representative Robert Lighthizer said China’s EV rules unfairly force foreign companies to share technology with Chinese partners.
Foreign auto makers that compete with Volvo are crying foul. The range, power and lifespan of batteries are key factors for buyers of EVs and plug-in hybrids, and being allowed to use LG Chem batteries gives Volvo a significant edge, people at these makers say.
Foreign batteries aren’t officially banned in China, but auto executives say that since 2016 they have been warned by government officials that they must use Chinese batteries in their China-built cars, or face repercussions. That has forced them to spend millions of dollars to redesign cars to work with inferior Chinese batteries, they say.
Auto executives say seeking a way around the edicts, such as by striking battery licensing deals, would be too risky.
“We want to comply, and we have to comply,” said one executive with a foreign car maker. “There’s no other option.”
Lacking the kind of local connections Volvo enjoys through Geely, another executive said, foreign makers would never dare such an end-around for fear of having production of new vehicles blocked, or China operations disrupted.
Volvo was able to pull it off, the executive said, thanks to the influence of Geely founder Li Shufu, one of China’s most prominent businessmen. His company is now China’s best-selling auto brand, and is considered its best hope in building a globally competitive car.
Geely gained valuable technology from its 2010 acquisition of Sweden-based Volvo. And early this year, Mr. Li became the largest investor in Germany’s Daimler AG , acquiring a 10% stake in the Mercedes-Benz maker worth $9 billion.
Hakan Samuelsson, Volvo’s chief executive, has acknowledged that the company’s local connections allow it to operate more freely than rivals. “This is our second home,” Mr. Samuelsson said in response to a Journal question during a round-table interview last year. “We are the only [foreign auto] company that really has control over business” in China.
A spokesman for Volvo didn’t respond to questions about the LG Chem deal, but confirmed that the Hengyuan batteries are used in its China-built plug-in hybrid cars.
Other auto makers in China source batteries from fast-growing local suppliers, such as Contemporary Amperex Technology Co. Ltd., China’s biggest EV battery maker. It is unclear whether a Chinese auto maker other than Geely has tried to license foreign batteries—but none of the others have as much incentive as Geely, as it alone owns a foreign maker that stands to gain from using the same battery supplier in China as overseas.
Chinese President Xi Jinping pledged last month to ease foreign-investment restrictions in the country’s car industry and lower import tariffs. But foreign auto makers say they still face hurdles, notably the battery restrictions.
Panasonic, LG Chem and Samsung SDI all built EV battery plants in China, anticipating a boom as Beijing forces auto makers to produce EVs starting next year. But they can’t sell their batteries locally.
A spokesman for Samsung SDI said the company hadn’t attempted to team up with a third party to sell its EV battery technology in China. “We know it is not allowed,” he said.
The curbs have also complicated foreign auto makers plans to launch EVs in China. Ford Motor Co. executives say they are resigned to working with local manufacturers, instead of preferred supplier Panasonic. Overseas, General Motors Co. and Volkswagen AG both worked with LG Chem among other battery makers, but in China they have now also partnered with local battery producers.