What Are the Advantages of China battery pack assembly line？

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Batteries are the single most valuable part of an electric vehicle (EV), representing 30&#;45% of the cost for light duty vehicles and ~50% for heavy duty. More than that, they are a key technology required to reach the climate neutrality goals of the Paris Accord. And in doing so, capture a massive market along the entire battery value chain, which in Europe alone is worth &#;250 billion per year by and shall create more than 4 million jobs.

It would therefore be accurate to think of the battery as the beating heart of the EV supply chain, encompassing the entire process from raw material production to battery manufacturing and recycling.

And the race is on from the U.S. to Europe to China to not only grab market share, but also secure a cost-competitive supply chain. One is not possible without the other.

Several months ago, Bloomberg reported that China&#; EV market has passed the inflection point for EV uptake &#; signaling a change from early adopters to early majority. To drive this home, 35% of all auto sales in China were electric, 24% being BEVs. That&#;s a seven-fold increase over the past 2.5 years. And double-clicking on the electric heart, China, Korea, and Japan together hold 92% market share for battery manufacturing (). This is partly due to their un-matched battery production speed leading to lower battery costs.

China is miles ahead in battery costs

If things turn out as projected &#; and China is quite good at meeting long-term targets &#; production costs for a new battery plant in China are expected to come down from $60 million/GWh currently to $50 million/GWh by , with huge impacts on the prices of battery packs. Today, China already has a roughly 30% cost advantage over Europe and the U.S., with an average battery pack priced at $127 per kWh. In comparison, production costs in Europe are set to stay around $100-120 million/GWh or above partly due to high industrial electricity prices.

A Contemporary Amperex Technology Co. (CATL) production facility in Shanghai, China, on Sunday, ... [+] April 16, .

© Bloomberg Finance LP

These are on average 2.5 to 3.5x (0,21&#;/kWh) that of the U.S. (0,08&#;/kWh) and China (0,06&#;/kWh), but vary significantly across the continent, with Germany at roughly 1&#;/kWh and Sweden and Norway at 0,11&#;/kWh and 0,06&#;/kWh, respectively. But the needle keeps moving on this topic, as wholesale electricity prices in Europe dropped by 50% in as compared to the second half of .

The U.S. would face a similar challenge. However, with the enactment of the IRA, coupled with additional funding, battery prices could drop significantly and be on par with China. Since the IRA was announced, major EV and battery makers have pledged more than $52 billion in investments to secure North America&#;s EV supply chains. Meanwhile in Europe, record high energy costs are set to further widen the battery price gap to around 40% against the U.S. and China. Unless decisive action is taken.

In order to not only survive but thrive in the transition to electric vehicles, the U.S. and the European Union (EU) are doubling down to not only &#;speed up&#;, but also level the playing field. The European Battery Alliance and the U.S.&#;s IRA are on the front line.

To understand the magnitude of what is at stake: the U.S. auto industry contributed ~3% of the U.S.&#;s GDP, a trade surplus of $105 billion and 9.6 million jobs in , or roughly 5% of all private sector employment. Similar story in the EU, with a turnover representing 7% of the EU&#;s GDP, a trade surplus of &#;101.9 billion, and 13 million jobs; that&#;s 7% of all jobs in .

Today, the race unfolds on three tracks, all interdependent yet requiring distinct strategies: 1) domestic EV market dominance, 2) market lead in EV exports, and the strength and independence of the 3) (domestic) battery value chain.

Chinese automakers dominate domestic EV market, imports from EU in free fall

In , China&#;s domestic EV market grew 82% year over year. The ~6.2M units sold in represent a staggering 59% share of global EV sales making China, by far, the largest EV market globally. The country alone has more than 50% of all electric vehicles on its roads (13.8 million). And with a projected CAGR of 6.38% through , the growth speed will remain high.

Domestic brands such as BYD, Wuling, Chery, Changan and GAC have established a firm supremacy in their home market, accounting for 81% of all EV sales in . European carmakers at the same time had to witness their EV exports to China getting cut almost in half, from 30% in to an 18% share last year.

It is no coincidence.

In , SAIC Motor, China&#;s largest automaker by size, received $598 million in state subsidies, more than any other Chinese company. The fact that three more automakers, BYD, Great Wall Motor and Anhui Jianghuai Automobile Group (JAC), rank in the Top 10 shows the strategic priority of the industry for Beijing.

QINGDAO, CHINA - JANUARY 31, - A robot arm welds a car body at SAIC General Motors Wuling ... [+] branch in Qingdao, east China's Shandong province, Jan 30, . (Photo credit should read CFOTO/Future Publishing via Getty Images)

Future Publishing via Getty Images

It is not only the subsidies for the automakers, but also tax breaks for the customers. An additional 520 billion yuan ($72 billion) will be in place until the end of , allowing for purchase tax exemption (-), and then be halved (-) for new energy vehicles.

The speed and strength of China&#;s EV market has left global automakers scrambling, and some are now turning toward alliances with their Chinese counterparts. Volkswagen Group recently announced a deal with EV maker Xpeng to jointly develop two new EVs for China. In turn, VW Group will invest about $700 million in Xpeng, taking a 5% stake in the company. A parallel deal was confirmed with Shanghai-based SAIC Motor, to jointly develop new Audi-branded EVs for segments where Audi does not currently have entries. Seizing China's thriving domestic EV market is now an uphill battle.

An &#;export wave&#; from China is building

Not only are the Chinese carmakers dominating their home market, but they also have their eyes on export. Or as Reuters put it back in April reporting from Auto Shanghai: &#;An export wave builds&#;.

YANTAI, CHINA - JULY 05: Aerial view of vehicles waiting to be loaded onto a ro-ro ship for export ... [+] at Yantai Port on July 5, in Yantai, Shandong Province of China. (Photo by Tang Ke/VCG via Getty Images)

VCG via Getty Images

Comparing Q2 to Q2, there has been a 54% increase in EV sales, meaning the market is moving more quickly now.

But the fight is not over yet. The global market share of BEVs is 13%, with three of the biggest European economies at the inflection point and the U.S. still hovering below 10% market share.

In this environment, research firm Canalys expects China to sell 1.3 million units abroad this year, nearly double last year&#;s volume. Back in April at Auto Shanghai, BYD&#;s &#;Seagull&#;, an entry level EV with a 186-mile range and a starting price of $11,000, created as much excitement among analysts as it raised concerns among Western incumbents.

SHANGHAI, CHINA - APRIL 18: A BYD Seagull small electric car is on display during the 20th Shanghai ... [+] International Automobile Industry Exhibition at the National Exhibition and Convention Center (Shanghai) on April 18, in Shanghai, China. (Photo by VCG/VCG via Getty Images)

VCG via Getty Images

Clearly, China&#;s concerted, long-term measures have led to an enormous depth and breadth of domestic EV offerings across all customer segments and price points. If the stigma of Chinese cars being somewhat lesser copies of Western models was ever true to the extent it has been portrayed in our climes &#; these days are gone.

The question is, are the U.S. and Europe ready for this wave of technologically and qualitatively competitive EVs, particularly those that will come at slashed prices?

U.S. is shielding its market from the import wave by strengthening local producers

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The U.S. is taking a multi-pronged approach.

First, IRA regulations shall reign in the potential import of EVs to the United States. In particular, its local content requirements create a real headache for carmakers from outside the U.S. or a country that has no free trade agreement with the U.S. in place &#; like China (or Europe). To tick all boxes and receive the full $7,500 of the IRA&#;s consumer tax credits, final car assembly and the production of at least 50% of an e-car&#;s battery components have to take place in North America. But it doesn&#;t stop there, as 40% of the critical raw materials must also be extracted, processed, or recycled in the U.S. or one of its free trade partners. And all those percentages rise by 10 points each year. As a recent report by the ICCT showed, these local content requirements alone could result in curbing imports from 30% today to potentially 20% or even 10% by .

Second, American car companies are stepping up their efforts in the battery value chain. Take Ford Motor Company, whose Executive Chair Bill Ford recently told CNN &#;We&#;re getting ready&#; for the competition. In doing so, they will invest $3.5 billion in an electric vehicle battery plant in Michigan with a first focus on licensing but later doing the manufacturing themselves &#; also creating jobs. And there are many more examples.

ROMULUS, MI - FEBRUARY 13: Bill Ford, Executive Chairman of Ford Motor Company, announces at a press ... [+] conference that Ford will be partnering with the world's largest battery company, a China-based company called Contemporary Amperex Technology, to create an electric-vehicle battery plant in Marshall, Michigan, on February 13, in Romulus, Michigan. Part of a multi-billion dollar investment, the battery plant will provide approximately 2,500 jobs. (Photo by Bill Pugliano/Getty Images)

Getty Images

Third, U.S. automakers are slashing prices, too! Yes, that is right. While the sales of electric vehicles are increasing with a 48% increase year over year in Q2 this year, they are not enough to scoot the more than 90,000 battery-powered cars and trucks off the dealer lots (4x as many compared to ). Ford&#;s announcement of cutting prices by $10,000 on the F-150 sent shock waves into the market. And not so surprisingly, now allowing for the $7,500 credit from the IRA. Ford also mentioned that access to raw materials for the truck&#;s battery is improving, enabling it to drop prices and follow in the footsteps of Tesla, which has also been price cutting up to 20% since autumn .

And Europe?

Over the past months, the European Commission has brought forward a comprehensive set of industrial policy measures. These set minimum local production targets of 40% of installed capacity for strategic cleantech sectors like batteries, drastically reduce permitting times, foster up- and reskilling, repurpose some &#;250 billion in existing public funds, and expand trade agreements. All of that with a clear focus on accelerating large scale industrial (manufacturing) projects along the value chain. However, these policy proposals haven&#;t yet been cast into law, but are under discussion in the EU member states.

EU Commission's President Ursula von der Leyen talks to media in the Berlaymont, the EU Commission ... [+] headquarter on February 1, in Brussels, Belgium. Today, the Commission presents a Green Deal Industrial Plan to enhance the competitiveness of Europes net-zero industry and support the fast transition to climate neutrality. The Plan aims to provide a more supportive environment for the scaling up of the EUs manufacturing capacity for the net-zero technologies and products required to meet Europes ambitious climate targets. (Photo by Thierry Monasse/Getty Images)

Getty Images

Hence, the door for Chinese imports is wide open thus far.

China&#;s share of the EU electric vehicle market is expected to triple from 5.8% in to 18% by , while the EU&#;s global market share in has been revised downward from 16% to 13%. As Bloomberg reported, BYD&#;s Atto 3 SUV claimed Sweden&#;s best-selling EV in July, surpassing both Volkswagen and Volvo Car &#; perhaps heralding another dethroning in the European arena.

Volkswagen AG has responded with actions toward becoming the leading battery maker to supply their own fleet, earmarking &#;20 billion ($22 billion). Yet VW&#;s technology chief, Thomas Schmall, was recently quoted as saying the EV battery efforts &#;keep us awake at night&#;. Mercedes-Benz Group AG has joined Stellantis NV and TotalEnergies SE in a &#;7.3 billion battery venture.

Beyond those incumbents, new players along the battery value chain are lining up to fill some of the existing gaps in the battery value chain.

To name a few: Northvolt recently announced the continuation of their plans for a third European Gigafactory in Northern Germany with a capacity of up to 60 GWh; French gigafactory company Verkor is planning a 65 GWh Li-ion battery cell capacity in Dunkirk operational by ; Vulcan Energy Resources, a producer of zero carbon lithium in the German Rhine Rift Valley, aims to start production of up to 24,000 tons per year from end of ; and Spanish battery company Basquevolt, who will initially produce battery cells as early as the end of , are planning to move to up to 10 GWh production of solid state batteries by .

Peter Carlsson, chief executive officer of NorthVolt AB, during the Federation of German Industries ... [+] (BDI) conference in Berlin, Germany, on Monday, June 19, . Germany&#;s economy will probably stagnate this year, according to the BDI Federation of German Industries, which told Frankfurter Allgemeine Sonntagszeitung that it cut its outlook. Photographer: Liesa Johannssen-Koppitz/Bloomberg

© Bloomberg Finance LP

But will these companies be able to scale quickly enough, and at the same time onboard sufficient numbers of skilled workers? According to a Fraunhofer and EIT Raw Materials Report, the EU&#;s battery value chain alone must reskill and upskill up to 800,000 workers by to meet the workforce gap needed for the industry production targets to be met. The recently launched InnoEnergy Skills Institute is set to answer that call.

Clearly, the European Union has made incredible progress in the last five years. In , there was no domestic production of raw materials at all. Yet today, over 20 projects &#; from lithium extraction to Manganese production &#; are ongoing. Same for cell production. In , there were hardly any gigafactory projects announced in the EU: only Northvolt, LG Chem, and Terra E. Today, four are in operation with an additional 20 in different project stages &#; from being built to being announced.

It is essential, however, that the EU not only keeps this pace, but further accelerates. Only speed will help bring down the costs and increase the availability of cell production.

Oversupply of cheap(er) batteries in China creates a challenge overall in both the U.S. and EU

China is expected to have a ~ to GWh excess of battery supply, as compared to the EU which would have a deficiency of ~200-500 GWh. The U.S. is dependent on the impact of the IRA and could see either a deficiency of ~100 GWh or, under the IRA, a surplus of ~100 GWh.

Apparently, China is holding the beating heart in their hand. Combining that with the immense progress China has made on the safety and quality of their vehicles and adding a purchase price which is around &#;10,000 cheaper than a U.S. or EU electric vehicle, the threat is not only real; it is imminent!

The winning strategy: Speed, scale, and securing the supply chain

The name of the game is now the 3S&#;s: speed of implementation, scaling industrial projects through financing and other policies, and securing the supply chain.

As their success is co-dependent, so is their potential demise.

The U.S. has taken further steps to up the implementation speed by establishing the Li-Bridge with the goal to double current value capture from the lithium battery, adding $17 billion in GDP and 40,000 direct jobs. Part of this focus is on reducing the lengthy and uncertain timelines to secure permits and project approvals.

With its recent measures &#; the Green Deal Industrial Plan, the Net Zero Industry Act and the Critical Raw Materials Act, the EU is trying to ensure policies that allow for faster decisions on the financing and commissioning of projects related to the battery value chain. Since , the European Battery Alliance has proved to be a central instrument to identify and propel industrial projects. As of today, 47&#; billion worth of aggregated CAPEX strategic projects are in the pipeline.

Secondly, scaling these projects fast is direly needed. One key aspect of that will be to provide significant financial support to level the playing field for cell manufacturing. For the U.S., a recent ICCT analysis on the IRA impacts gives reason for optimism. It shows that the IRA alone could raise light duty EV sales share to up to 67% by , and heavy-duty vehicles up to 52% &#; from below 10% today. Similarly encouraging, price parity with ICE cars could be reached even this year, at the latest .

WASHINGTON, DC - AUGUST 16: President Joe Biden, center, flanked by (L to R) Sen. Joe Manchin ... [+] (D-WV), Senate Majority Leader Chuck Schumer (D-NY), House Majority Whip Jim Clyburn (D-SC), Rep. Frank Pallone (D-NJ), and Rep. Kathy Castor (D-FL) delivers remarks and signs H.R. , the Inflation Reduction Act of into law in the State Dining Room of the White House on Tuesday, Aug. 16, in Washington, DC. The 737 billion dollar bill focuses on climate change, lowering health care costs and creating clean energy jobs. (Kent Nishimura / Los Angeles Times via Getty Images)

Los Angeles Times via Getty Images

However, even this will not work without, thirdly, supporting industrial projects which fill the gaps in raw materials mining and processing, active materials, battery manufacturing, and recycling or second-life.

There are no alternatives. With China&#;s strong positioning around the battery value chain, plus a growing range of competitive and cheaper electric vehicles ready to enter international markets, the entire U.S. and European auto industry is presented a real threat, particularly in the volume segments.

Consequently, the &#;challenge&#; outlined requires a comprehensive solution with thoughtfully orchestrated, interrelated actions in all three dimensions, one which targets both the battery value chain as well as the electric vehicle as such. In doing so, the narrative is no longer just about increasing electric vehicle sales. It is about driving the market share of the domestic battery industries. Radical, collective action is needed now in order to not be at risk for another &#;Nokia-type&#; demise. To be continued&#;

There is little that Europe and the US can do to change the geographic concentration of resources in the ground. Cobalt and lithium are geographically concentrated in a handful of countries. This is particularly true of cobalt, where around 70 per cent of mined cobalt is produced in the Democratic Republic of the Congo (DRC). Europe and the US are developing their own mining operations, but cobalt mining is likely to remain dominated by the DRC.

However, the crucial intermediate step of refining the raw metals can be located anywhere.

In , Chinese companies accounted for around 68 per cent of global cobalt refining capacity, and 72 per cent of global lithium refining capacity. By , our analysis indicates this is likely to only marginally decrease, by around 2 percentage points for cobalt and 10 percentage points for lithium.

Thus the West&#;s likely continued dependence on China in battery supply chains is much more a function of Chinese cobalt and lithium refining dominance (and their associated purchasing power) than it is of Chinese battery manufacturing capacity.

Returning to the F1 analogy, the West is unlikely to have enough fuel (refined cobalt and lithium) to power their increasingly fast car (battery manufacturing factories).

Yet this supply bottleneck for the West is readily addressable. Refineries can be built relatively quickly and in close proximity to the gigafactories they supply, regardless of where geological deposits are located.

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