South Korea’s two largest battery manufacturers, LG Chem and Samsung SDI, have failed to secure battery certifications for electric vehicles in China, according to reports.

The setback leaves both companies potentially ineligible to benefit from Chinese state subsidies worth up to as much as 40 percent of the value of a new electric car.

Business Korea reported that the two firms missed out on certification because their battery factories in China had been in operation for less than a year, a prerequisite that was not mentioned in documentation provided by authorities. 

The two manufacturers, which jointly hold about one-third of the world market for electric-vehicle batteries, have only had manufacturing facilities in China since October 2015.

LG Chem has an electric vehicle factory in Nanjing with capacity for 50,000 units a year, while Samsung SDI has one in Xi’an that can produce 40,000 vehicles annually.

SK Innovation, another South Korean battery manufacturer, also missed out on certification because it does not currently have a manufacturing facility in China. In April the company was reported to be in talks with possible partners to build a factory.

According to Business Korea, the certification slight is more likely to have been a miscommunication between the Chinese authorities and the battery companies than the result of any conscious desire to exclude South Korean companies from the market.

Although South Korea-made electric-bus batteries had previously been excluded from the certification process, on this occasion a Shenzhen factory built by Chinese manufacturer BYD was also said to have been left off the list.

At the same time, though, there is evidence that the Chinese authorities may have covered up the significance of participating in the certification process.

“The Chinese government didn’t inform the Korean battery makers of the disadvantages when they failed to get the certificate,” said Business Korea.

“Consequently, Samsung SDI and LG Chem didn’t recognize the importance at first and considered it just a recommendation, which made the two battery makers [speed up their] preparations for the fourth certification starting in April.”

Until this point the manufacturers had not even participated in the selection process, which in this latest round saw 31 companies achieving certification for a battery standard due to come into effect from 2018. 

The Chinese authorities are said to have introduced an electric-vehicle battery standard to combat the threat of counterfeit products and insolvent vendors.

Vehicles that do not have certified batteries will likely not be eligible for generous state subsidies, which could affect the viability of battery makers’ products in the market.  

LG Chem and Samsung SDI are planning to reapply for certification later this year, once their factories have been in operation for a year. The Chinese market is critical to both vendors. Last year it accounted for around one-third of worldwide electric-vehicle demand.

By 2020 there are plans to get 5 million electric vehicles on Chinese roads as a way of combating air pollution and reducing China’s dependence on oil imports. LG Chem and Samsung SDI already provide batteries to a number of Chinese automotive firms.

LG Chem, for example, sells batteries to China’s biggest carmaker, SAIC Motor Corporation, as well as Chery Automobile. The company also serves General Motors, Ford and Hyundai elsewhere in the world.

Samsung SDI, meanwhile, provides batteries for Zhengzhou Yutong Bus and Beiqi Foton Motor. It is unclear for now how Samsung SDI’s failure to secure certification might affect its negotiations to supply batteries for Tesla.

The carmaker currently relies on Panasonic products and is betting big on the Chinese market, where it is due to launch its Model X 75D in July.    

Long-term, though, GTM Research energystorageanalyst Brett Simon said problems with certification should not pose too much of a challenge for either Samsung SDI or LG Chem.

“LG Chem and Samsung SDI are two of the top-tier lithium-ion battery vendors worldwide and already offer highly competitive prices,” he said. “While a lack of government support may present some competitive challenges depending on the nature and volume of support, given these companies’ high production volumes and well-established brands, I doubt they will be unable to make inroads in China.”