The Battle for Supremacy in Car Batteries: China vs. Europe and the West

Annual Report - 2018


DIEGO PIGNATELLI

The Battle for Supremacy in Car Batteries: China vs. Europe and the West

DIEGO PIGNATELLI

With Electrical Vehicles (EVs) drawing a great deal of attention worldwide, industry projections indicate an exponential increase in the number sold over the next decade.

The 2014 Volkswagen diesel emissions scandal brought a backlash against diesel cars, which will increasingly face bans in urban areas. This is accelerating the electrification transition, which will transform the entire transportation industry.

A market of this size, and with technological implications expanding beyond just EVs, cannot be ignored.

EVs offer an improved ownership experience and convenience at an increasingly lower relative cost. Over 50% of light-duty vehicles sold globally are expected to be electric by 2040, showcasing the revolution that the individual transport market is starting to undergo (BNEF).

All major manufacturers are evaluating their electric car offerings. For example, Volkswagen has announced that all of its car models will be electrified by 2030, and has pledged to spend €30bn on EV-related technologies over the next five years. Toyota is targeting 50% of its sales to come from EVs by 2030 (representing 5.5mm vehicles), while GM’s target is to sell 1mm EVs annually by 2026 (BNEF).

The battery is the key component of an EV. With batteries accounting for approximately 40% of an EV’s value today, we can expect a battle for supremacy in the underlying technology. As the cost of batteries continues to decrease, the take up of EVs should increase and the question then becomes, will the powering technology be the anchor behind the choice of a vehicle?

Government officials and regulators have taken note that the most important and expensive component in an EV is the battery, and that this item is currently totally dependent on Asian manufacturers. This raises the question of whether it is appropriate to delegate all supply to Asia. What impact could this have in the long term?

Car manufacturers are not in agreement on which path to follow. Daimler, for example, has taken an intermediate route by building a €500mm factory to assemble batteries using cells provided by LG Chem (IFRI, 2017). Delegating this knowhow ought not to be the right answer, for several reasons:

  • The value of the market for batteries is estimated to be worth $240bn in the next 20 years (Forbes, August 2017);
  • Car batteries will be a cornerstone in the deployment of Vehicle-to-Grid (V2G) technology, which will play an instrumental role in grid management and the electrification of cities; and
  • The automotive industry is one of the largest industrial platforms in Europe, and the future supremacy of this industry is at stake.

Even though the battery industry is effectively controlled by Asian manufacturers, in time the competitions in car showrooms will shift in favor of those with the most advanced technology. This opens up an opportunity for western competitors to establish their footprint, while giving Asian OEMs the opportunity to further strengthen their presence in European markets, as they did with solar PV manufacturing.

By 2010, China had already identified “new energy vehicles” as one of seven strategic sectors for the future of the country (IFRI, 2017). Dominating the market for the power source may provide China with a powerful competitive advantage in developing a leading vehicles business. We saw a similar situation in the 1970s, when Japan was the first to respond to the 1972 oil crisis with high-mileage cars, and successfully penetrated the U.S. market, achieving 23% market share by 1982 (NY Times, February 1983). Such a competitive advantage significantly impacts entire economies.

The most important opportunity that EVs offer may be in supporting the grid. EV batteries are typically only used at between 80-90% of their capacity, so when a consumer comes back from work, the battery still holds significant capacity to support a household and relieve the grid in evening peak times. Why install dedicated storage in your home when you can get more stable connected storage via grid-tied car batteries? (See Damien Sauer’s article on “The Hidden Value of the Battery in Your Next Car”)

Where are we now in the battery space?

Currently, all of the six largest EV battery manufacturers are based in Asia, with the market leaders being Panasonic, LG Chem and BYD.

China is adding the most production capacity, which is expected to quadruple by 2021 with many new entrants that will vault China into global leadership. The challenge is also represented by the EV Li-ion capacity under development, expected to grow from 117 GWh/year to 348 GWh/year in the next three years, by when China is projected to harbor approximately 70% of the enlarged manufacturing capability.

This corresponds to the average price of Li-ion batteries, which has decreased by 79% to $209/KWh since 2010, and is expected to drop below $100/kWh by 2025 (BNEF). These two dynamics create a significant challenge for a newcomer seeking to scale up.

The EU has been slow to respond, despite key industry participants stating that the automotive industry cannot continue to prosper unless it builds its own capacity. In 2018, the EU established a research fund that included €200mm to fund battery projects and €800mm to build demonstration facilities. Regions looking to promote the industry can apply for funding from a further €22bn (Financial Times, 2018). In addition, the European Investment Bank has made its European Fund for Strategic Investment available to co-fund the creation of a large battery production facility to compete with Tesla’s giga-factory in Nevada.

A select number of European competitors are lining up for the task. To name a few, a consortium of Saft, Siemens, Solvay, and Manz is looking to develop competitively priced solid-state batteries, but production is not expected to begin before 2025. German manufacturer Varta is teaming up with Ford to produce EV batteries, while Swiss company Lechanché appears to want to go it alone for the time being. In addition, Northvolt is developing a new manufacturing facility that will begin producing 8 GWh/year of battery capacity by 2020, a figure expected to rise to 32 GWh/year (EU Battery Alliance, October 2018).

How important is having a large market share in the car battery market?

In 2017, the EU produced 19.6mm vehicles, 23% of global motor vehicle production. More importantly, car manufacturing employed 6.1% of the European workforce, amounting to 13.3mm people (ACEA). The value of this market is estimated at over €500bn per annum (estimated average car price x 19.6mm cars sold). If we assume the battery is 25-30% of the value of the overall vehicle, we can estimate the market at approximately $130-150bn. A market of this size, and with technological implications expanding beyond just EVs, cannot be ignored.

What scenario may develop and who will be the players?

Multiple scenarios are possible. The most likely is that as demand for batteries grows, it will be satisfied by imports from Chinese manufacturers. Such a scenario might play out despite the Korean competitors’ best efforts to catch up by opening new manufacturing facilities, for example in Eastern Europe. The European lineup as of today remains very tentative, with only a few consortia or new start-ups. Europe’s efforts may come through R&D in a new technology that is cost-effective or operationally efficient enough to compete with the Asian manufacturers. History shows that competing on price with a Chinese volume producer is hardly a successful financial model, however other industries have succumbed, and most recently the PV panel and wind turbine manufacturers have been severely challenged by Chinese competitive pressures. The outcome may be different this time if the R&D efforts these consortia are conducting with the EU’s financial backing can develop a more effective energy storage technology at a lower cost than what is on the market today. This is still a blue-sky scenario.

The Battle for Supremacy in Car Batteries: China vs. Europe and the West

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