Capital cost
Capital cost
Fundamentally, Gigafactories are meant for economies of scale in the unit costs of batteries and electric vehicles developed under the single roof. Over time, there appears to be a rise in the unit size of each such manufacturing facility. The upfront costs of the facilities, factoring in the land, fixed input costs, and the raw material input linkages, make such facilities a tough balancing act in commercial viability and project management. The emerging global manufacturing pipeline is unprecedented in scale and complexity, as the focus is on vertical integration to maximize efficiencies and market share.
The development pipeline provides some indications of the capital costs related to the Gigafactories. The local factors make the difference, as evident in the per GWh capital cost in North American projects versus those in the European region. In the same comparison, the Chinese factories show a lower average cost, at about $72 million per GWh. The cost advantages (or lack of it) are conditional to the factors including the battery chemistries (for instance China’s monopolistic position in LFP), supply chain control and the endowed infrastructure base.
Indicative Capital Costs of Major Projects under Development
Indicative Capital Costs of Major Projects under Development
At an aggregated level, the long-term trend appears to indicate a pattern of decline in the average capital cost of battery manufacturing facilities. The possible factors to attribute such a trend include the active policy support extended for the facilities (global leaders like CATL and BYD got policy aid in early stage), easier financing, and development of efficient supply chain linkages, among others. Technology adds to the mix, to the extent that the choice of one or another battery chemistry impacts the upfront investment.
Historical Trend in the Announced Capital Cost of Battery Manufacturing
Historical Trend in the Announced Capital Cost of Battery Manufacturing
Some of the major parts of the manufacturing process add to the upfront investment cost. The vertically integrated structure of upcoming Gigafactories aims to mitigate some of this through scale. The dominant LFP battery chemistry, for instance, imposes a significant cost share for electrodes, especially the cathode. Cell assembly and finishing are other broad segments. Equipment supply thus assumes a critical role in the current Gigafactory pipeline – cost estimates and supply reliability could sharply change with progress in the Gigafactories’ under development. McKinsey’s estimates (as of May 2022) indicate that about 60% of upcoming capital investment in European battery manufacturing will be towards the critical equipment.
Distribution of a Typical Lithium-Ion Battery Cell Cost
Distribution of a Typical Lithium-Ion Battery Cell Cost
Critical Inputs in Cost Structure
Critical Inputs in Cost Structure
Raw materials cost of the upcoming production facilities is largely centred on the critical minerals. Not all developers are likely to have access to near-assured supplies. The relative scarcity and competing demand will reflect in the prices as capacities come to fruition. Already, the prices of some of the most important battery metals have risen in tandem with the rush to secure supplies.
Average Cost of Critical Battery Metals
Average Cost of Critical Battery Metals
The role of critical inputs assumes importance in cost structure because every single Gigafactory may not be able to build out a totally vertically integrated business model with full control over its back-end supply. Similarly, the long-term contracts to secure raw materials may be limited to a select few of the pipeline. In such a scenario, the onus will be on commercial arrangements – joint ventures, strategic partnerships, and the like for best and competitive rates. Indicative estimates suggest that this could become a challenging task for both developers and financiers.
Illustration of Material Requirement for 20 million Vehicles at Tesla
Illustration of Material Requirement for 20 million Vehicles at Tesla
In effect, it is not so much about the price per se. The moot point is raw material supply lagging far behind the apparently accelerating demand. The pressure on the backward linkage is evident from the steps of existing OEMs. Tesla, in its quarterly earnings report for 2023, held lithium refinery supply (and not price) as a ‘choke point’ in production. In this backdrop, in May 2023 Tesla announced the setting up of a Texas-based lithium refining plant, which will commence production by end of the year. This could position Tesla as the only North American auto OEM refining its own battery metal.
Other OEMs are aiming to match the pace. Chinese battery and automobile manufacturer BYD has been in discussions to acquire six African Lithium mines worth about 25 million tonnes of the ore. The US-based General Motors, through its equity finance arm GM Ventures, has a strategic agreement with EnergyX to develop the latter’s extraction and refining technology. The Japanese companies are finding policy support in critical minerals. Japan’s Ministry of Economy, Trade and Industry is planning to subsidize up to half the cost of mine development and related upstream activity of domestic companies. It is meant at incentivizing initiatives at securing mineral supply for the electric vehicle and other industries dependent on rare earth minerals.
Funding by Type
Funding by Type
The huge Gigafactory pipeline, despite its promise, faces challenges in securing funding. Factors such as the complexity of projects, long-winded route of approvals, technology, and supply chain linkages together shape the investor perceptions. For many developers, the lack of firm orders or customer linkages for the projects proved to be a constraint in seeking timely funding. As a result, the financing of such projects is from a mix of avenues including private equity, institutional funding, debt/bonds, etc.
Recent Major PE Funding in Gigafactory Projects
Recent Major PE Funding in Gigafactory Projects
Enterprises with strong and credible backing of equipment manufacturing, supply chain sourcing or joint ventures with major end-use customers have had access to the private equity and bond issuance routes of funding, among other avenues. Notable names of the industry such as Northvolt raised over $1 billion through bonds. The dollar-denominated bond market has also been tapped into by the incumbent battery manufacturers for capacity expansion. A notable example is CATL’s $1.5 billion bond issue in September 2020 to fund its planned capacity expansion.
Bond Issuance by Major Companies to Fund Battery Manufacturing Projects
Bond Issuance by Major Companies to Fund Battery Manufacturing Projects
Policy funding, through grants or institutional channel loans, are among the other key funding sources in the Gigafactory pipeline. Beyond the stated policy goals to incentivize the manufacturing investments, the policy makers have been extending support to enable the commercial viability of such capital-intensive projects. Some of the important instances of policy support are in the US market – the state of Michigan committed about $2 billion worth of funding to attract major big-ticket projects during 2022. The support is over and above the federal offering under the Inflation Reduction Act. The authorities in the state have officially created an incentive/funding pool to sustain the investment flow. In Canada, official commitment to match US subsidies helped secure Volkswagen’s Gigafactory project. European countries are doing the same, in varied measures – the
Hungarian government reportedly offered $800 million in grants to attract CATL’s proposed Gigafactory project; ACC received about €437 million in grant funding to help get the production base in Germany; and the French government had direct policy-level interventions to secure Gigafactories at Dunkirk, through undisclosed incentives such as in terms of competitive energy prices and tax credits.
With a dynamic phase of the Gigafactory industry landscape, a clearer picture of funding structure will be evident after a while. Some of the most important areas such as the business model, competitive strength in the supply chain, and geopolitical factors, together add to the flux. The investors might prefer to look at the models of a few in the pipeline before determining the course of action for the path ahead.