We study the optimal channel choice and battery capacity allocation strategies of an electric vehicle (EV) manufacturer in the presence of battery recycling. The EV manufacturer also produces EV batteries. As an upstream manufacturer, this firm has the option to supply batteries to its competitor, a downstream EV manufacturer which is unable to produce batteries. We characterise the equilibrium decisions of the two EV manufacturers under different channel structures. One finding is that the optimal channel choice of each EV manufacturer depends on the procurement cost from an external battery supplier. If the procurement cost is moderate, the downstream manufacturer prefers to order from the upstream manufacturer and the upstream manufacturer will supply batteries to satisfy the order. In addition, we investigate the effects of key parameters on the equilibrium capacity allocation decisions and manufacturers’ profits using numerical experiments. We also show that to maximise social welfare, the upstream EV manufacturer should not supply batteries to its competitor if the procurement cost from the external supplier is low, which is contrary to the case of profit maximisation.