The green transformation of society is gaining speed and the mobility sector is leading the charge. Out of the six-fold increase in lithium-ion battery demand between 2022 and 2030 (see Figure 1), a whopping 80+% is due to light vehicles and commercial vehicles. With personal and commercial mobility moving towards electrification at an ever-increasing speed, access to and control over electric powertrains, batteries and battery raw materials becomes a crucial concern for nations and regions.
It is hardly surprising then, that President Joe Biden and European Commission President Ursula von der Leyen held talks recently to understand how to co-operate on critical minerals used for electric vehicles (EVs) and government subsidies. Both understand the criticality of ensuring access to mobility free from potential political coercion. A lesson that countries such as Germany or Italy had to learn the hard way as the war in Ukraine disrupted what were believed to be safe, cheap sources of fossil fuels from Russia.
The main challenge that both leaders face is Chinese dominance in electrified powertrains. While lots of discussion has focused on rare earth metals mining and processing in the past, the Chinese footprint in processing lithium, nickel, manganese, cobalt, natural and synthetic graphite accounts for 40+% to in some cases 80+% of global capacity. Focused industrial policy has created a national moat in electrified powertrains that will take at least a decade to overcome. In addition, innovations such as cell-to-pack or LFPM batteries are driven by leading Chinese companies increasing the dependency of Western players on their Chinese suppliers.
Given a testy relationship between China and the West exacerbated by Russia’s aggression in Ukraine and a more and more centralised decision making process in China, the risks of this dependency have become painfully obvious. Yet on paper, the US and Europe seem to be doing alright in the mid-term. By 2030, we predict based on current announcements that Europe will have more than enough battery capacity while the US will fall short by about a 100 GWh pre-IRA (see Figure 1). Yet, European capacity forecasts have to be taken with a grain of salt. Nearly one-third of the announced projects needs to be considered as high risk, as these projects are driven by start-ups. Not all of these will materialise due to missing operational experience, availability of production equipment, scarcity of talent, lack of secured sales volumes/anchor clients, supply constraints for critical materials and financing challenges. Both regions are driving the investment in regional battery gigafactories to ensure regional supply and build up regional capability in electrified powertrains. Yet, their approach differs in practice and the projections carry different amounts of risk.
The Biden administration has taken a “carrot” approach to driving the de-carbonisation of the economy. The US$460bn Inflation Reduction Act (IRA) is a massive subsidy programme that combines decarbonisation goals with the intent to re-industrialise the American heartland. The US IRA heavily incentivises local production of batteries through transferable tax credits while demanding a compliant supply chain. With an incentive of US$35/kWh for locally produced battery cells, US$10/kWh for battery modules and 10% of the production costs for electrode active materials and critical minerals, US-produced battery cells are cheaper than their Chinese counterparts (see Figure 2). In addition, credits for qualified commercial clean vehicles (US$7,500/vehicle through Class 3, US$40,000/vehicle for Class 4 and above) dramatically improve TCO-performance of electrified vehicles and will drive demand by fleets eager to fulfill their SBTi targets. Beyond de-carbonisation, Foreign Entity of Concern restrictions on applicable critical minerals (extraction, processing or recycling) limit the opportunity for Chinese, Russian, Iranian and North Korean companies to operate effectively in the US.
Europe is more focused on the regulatory “stick” compared to the US. Stringent emission regulation, for example, for heavy commercial vehicles, has forced OEMs to invest in ZEV concepts. The requirement to reduce CO2 emissions by 15% in 2025 and 30% in 2030 has driven the need to electrify interregional traffic. Currently, increasing the 2030 target to a 45% reduction is being discussed which dramatically increases pressure on OEMs. The final goal is that all new cars and vans sold in the EU as of 2035 should not produce any CO2 emissions at all.
Yet, given the American precedent, the regulatory stick is not sufficient for Europe. Large incentives in the US compound escalating energy prices and the general uncertainty due to the Ukraine crisis on the old continent. Tesla was the first to move investments back from Europe to the US, a precedent that is not tenable for the EU. As a consequence, the EU is in the process of developing the Green Deal Industrial Plan to support de-carbonisation on a large scale and to address some of the competitive disadvantages that the block faces vs the US.
Differences between the US and Europe are not limited to governments alone. From an industrial perspective, North American and European OEMs are following slightly different strategies as well. As can be seen in Figures 3 and 4, US OEMs mainly partner with established cell producers to build up gigafactories. European players also go at it alone and transform the capability set of their companies to attempt to own what they consider critical differentiation possibilities in cell design and chemistry. While the jury is still out regarding which approach will ultimately be successful, the space will continue to be exciting.
The world of batteries and electric powertrains will be a “in region for region” game in the foreseeable future. While disagreements between the US and EU may exist on the size of incentives or on who gets to be included, both blocks will find a common way especially given the overall challenging geopolitical environment.
So what about China? As seen in Figure 1, Chinese capacity outstrips domestic demand. Part of this capacity will continue to push onto the European market which is perceived to be more open compared to the US. However, China will also cement its role in penetrating other export markets such as Southeast and South Asia and other regions where low-cost, high-quality batteries are the need of the day to drive a sustainable future.
About the authors: Wilfried Aulbur is Senior Partner, Isaac Chan is Partner and Tim Hotz is Principal at Roland Berger
