Global EV Transportation Report

The price of Lithium-Ion battery pack rose for the first time in 2022, reversing an otherwise historically consistent declining trend. Higher costs of lithium, nickel, and other battery components together led to a 7% price rise. The pressure is likely to persist. BNEF’s supplier survey indicates a consensus projection of $152/kWh during 2023. A subsequent decline in price is contingent on the new production facilities coming onstream. Such a price movement will impact the rate of electric vehicle penetration. Cheaper batteries are critical to reach parity vis-à-vis conventional vehicles, especially with rationalization in subsidies.

Battery supply chain is central to the electric vehicle manufacturers and investors’ strategy. The access to resources and technical know-how is the crucial factor driving current investment plans in adding capacity. The Chinese predominance is a given, with three-quarters of global battery cell manufacturing and 90% of anode and electrolyte production. Efforts are underway to moderate the Chinese concentration. The US and European investments are in this direction.

BNEF’s annual Lithium-Ion battery supply chain ranking had China at the top spot. Canada however rose to the second spot this time around, resulting not only from endowed resources but other supporting factors including infrastructure, environmental-social-governance factors and innovations. Interestingly, the US dropped to third spot in the ranking despite the strong policy basis arising from its Inflation Reduction Act.

Globally, the predominant demand for batteries is from the mobility sector. Growth has been consistently high. A 2022 study of McKinsey projected a 4.7TWh market in Lithium-Ion battery by 2030. Also notable is how the projections get revised upwards with each year. McKinsey 2019 report on the same topic had projected a 2.6TWh market for the same period. The acceleration in demand upended most projections. By end of 2022, battery usage for electric vehicles was 3.5 times that in 2020. Importantly, this growth also took place in a backdrop of widening demand-supply gap, an inflationary pressure and the rationalization in subsidies. In January 2023, the battery energy held in electric vehicles (based on incremental sales) rose by 18% over corresponding period of previous year.

Lately, the relative share of plug-in hybrid vehicles in overall electric vehicle sales is in a declining trend. The rapid growth in electric vehicle penetration and a rationalization in subsidy support is gradually shifting the balance in favour of battery-electric vehicles. Till recently, plug-in hybrid powertrains received an equal benefit in the subsidy disbursement, as policy authorities sought to promote the transition. The change in incentive structure, in conjunction with the stricter emission norms, changed the balance.

A study by the International Council on Clean Transportation (ICCT) placed this topic in perspective. The emission profile of the electric vehicles is contingent on the power source involved in charging the batteries. Thus, in Europe (high renewable energy share in grid power supply) emission reduction from electric vehicles are higher than China’s (high coal-based power share). ICCT’s report adds another element in the analysis. Driving habits have a significant impact on the net emissions’ impact of plug- in hybrid vehicles. The report highlights that while regulatory estimates typically assume 70%-85% electricity mode in such vehicles, the self-reported data for personal vehicles indicates the same at 45%-50%.

With the rise in penetration, EV manufacturers and suppliers are seeking expansion in target markets and setting up facilities to localize the production of vehicles and components. Tesla got its locally produced vehicles in China by end of December 2019, after setting up a facility at Shanghai. Europe is the emerging focus for most of the leading equipment manufacturers and automakers. Tesla’s Berlin Gigafactory is one example. Automakers such as Volkswagen, Ford Motors, are among the leading ones in planning dedicated electric vehicle and battery production lines. A common thread running across the upcoming capacities, and particularly the Gigafactories, is the vertically integrated structure. In a way, many of the upcoming Gigafactories are emulating Tesla’s precedent, as observed in the Gigafactories of Nevada (US) and Berlin (Germany).

For many of the automotive manufacturers, vertical integration is key to securing a competitive edge. In this regard, this somewhat reverses the globalized outsourced model of the conventional auto powertrain production processes. The rising instances of joint-venture or strategic partnerships, direct procurement arrangements in raw materials, or the investments in setting up in- house facilities in battery/equipment – all constitute evidence of the shift towards vertical integration.

Some of the prominent automakers such as BYD are reported to have bought about six mines in Africa, as part of strategy to secure critical minerals’ supply. In most cases, partnership with specialized technology providers and equipment manufacturers is a preferred route. Ford, GM, Stellantis, and Mercedes are the notable names which struck major deals with South Korean and German entities for product development. A few others are scaling up for in-house battery production units. Volkswagen plans to build six battery factories in Europe by 2030 and has provisioned about €2 billion for its upcoming German Gigafactory.

Though critical, batteries are not the only part to address in supply security. Electric vehicle manufacturers are also seeking options for securing the technology and software embedded in the vehicles. One of the most vital components in this regard is the semiconductor chip. Tesla, GM and Nio are among the electric vehicle manufacturers planning in-house chip design. Volkswagen, among the major manufacturers after Tesla, is working towards customized silicon for its chip requirement. Similar initiatives are underway in building up the software capabilities. Volkswagen’s aim is to develop most of its software by 2030. Others such as Mercedes and Toyota are working on the same lines, planning proprietary operating system software for their respective platforms. The transition in this context is a drastic one – the entire business model is likely to come under pressure as the traditional auto manufacturing process and structure gets dismantled.