China did not stumble into controlling 75 percent of the global battery supply chain by accident. It had a plan, and it has been executing on that plan for years. The question facing the United States isn't whether it can compete – it's whether it's willing to act like it wants to.
The stakes are significant. Demand for lithium-ion batteries is expected to grow from 1.0 terawatt-hours (TWh) in 2024 to 6.8 TWh by 2035, nearly a sevenfold increase driven by electric vehicles, grid-scale storage, and surging data center power demand. Every gigawatt-hour in that surge runs through a supply chain America doesn't control. And the structural gaps are more specific than many realize: the U.S. and Europe each account for less than 10 percent of global anode graphite and cathode precursor production. That's a lot more than a gap; some might call it a dependency.
Closing it will require more than willpower and tax credits. What’s needed is the kind of deliberate, coordinated strategy that has helped other industries fight back from exactly this position, and that the U.S. battery industry has not yet managed to assemble.
A Structural Problem
It's tempting to look at recent battery price drops — pack prices fell to a record low of $108 per kilowatt-hour in 2025, less than half the price in 2018 — and conclude the market is working. It isn't, at least not for American producers. Those falling prices reflect massive overcapacity concentrated almost entirely in Asia. Global overcapacity reached approximately 900 gigawatt-hours in 2025, and the producers driving that glut have cost structures, supply chains, and government backing that U.S. manufacturers simply cannot match today.
The underlying economics are punishing. Every 10 gigawatt-hours of production capacity requires, on average, $700 million to $800 million in capital, with construction lead times of four to five years. We see substantial performance differences on capital and time to market between players in the industry, with some being able to beat the average significantly. Commodity volatility challenges the math more so: lithium and nickel prices have swung three to six times in recent years, and a 50 percent rise in either would push cell costs roughly 10 percent higher. In that environment, private capital stays on the sidelines unless someone reduces the risk.
While it’s tempting to think of this as a market failure, we believe that it is a structural challenge only a deliberate strategy can overcome.
The Mechanism: Incentive Pricing
Other industries have faced this problem before — semiconductors and steel being the most instructive examples — and solved it through what economists call incentive pricing. This isn't central planning or picking winners. It's creating transparent, long-term return thresholds that guide capital toward competitive investments while letting the market determine who executes best.
The U.S. already has one powerful tool in place. The Inflation Reduction Act's Section 45X tax credit — $35 per kilowatt-hour for domestic battery cell manufacturing — effectively lowers production costs by 30 percent to 50 percent, according to our analysis. That's a meaningful floor. But a single credit instrument isn't a strategy. What's missing is a coordinated set of complementary mechanisms: strategic reserves to dampen commodity volatility, loan guarantees to de-risk early-stage projects, and long-term offtake certainty to make returns legible to institutional capital.
Done right, this doesn't require choosing technologies or companies. It creates the conditions under which the market can function.
Sourcing the Capital
The American economy has more than enough capital to make this work. The challenge is that it isn't flowing to batteries, especially in recent years, because the risk-return profile doesn't make sense for the pools that could move the needle. Three groups need to be brought in intentionally.
Strategic industrials — large chemical, oil, and mining companies — have existing capabilities that translate directly into battery supply chain participation. The upstream materials challenge is partly their opportunity if the incentive structure invites them in.
Infrastructure and private capital funds are sitting on significant dry powder looking for stable, contracted returns. Batteries don't look like infrastructure today because the volatility and policy uncertainty are too high. Reduce those, and the asset class becomes attractive almost immediately.
Automakers and utilities are the strategic customers whose demand commitments can anchor the entire supply chain. OEMs have leverage here that they haven't fully deployed — long-term offtake agreements with domestic producers would do more to unlock investment than almost any other single action.
None of this is hypothetical. Nearly 700 gigawatt-hours of battery production capacity was already under construction in the U.S. as of early 2025. The "Battery Belt" taking shape across the Southeast and Midwest is a true industrial cluster in formation. The foundation exists, but what's needed now is the coordinating strategy to build on it.
The Clock is Running
For readers of this publication, the near-term focus is clear: battery energy storage is becoming as important as EV supply chains, driven by the same data center expansion and grid modernization pressures reshaping the entire energy sector. The U.S. needs a competitive domestic supply chain to meet that demand, and the window to build one is narrowing.
China won its position in batteries through sustained policy, targeted capital, and patience. The U.S. won't replicate that model, nor should it try. But the tools available to the American industry including deep capital markets, a strong industrial base, existing policy frameworks, and emerging regional clusters are formidable. What they require is a plan that connects them.
The next two years will matter more than most people in the industry currently appreciate. Our advice: act now or spend the next decade buying from the competition.
Raphael Rettig is a McKinsey partner based in Düsseldorf, Germany, and lived and spent several years in the United States. He co-leads the McKinsey Battery Accelerator Team globally.