The Profound Transformation of Battery & Motor Supply Chains
The electrification of mobility, whether for people or goods, has passed an inflection point and continues to build momentum. In 2021, battery electric vehicles (BEVs) represented 6% (4.9 million units) of all light vehicles sold, doubling their 2020 penetration. Volumes continue to grow at an annual rate well over 50 percent, increasingly pulled by natural market demand and a quickly growing product offering, even if incentives remain critical in certain regions.
Growth will remain high for years to come, leading to a global market penetration of 39% by 2030 according to the BCG – it is even expected to reach 60% in Europe, which will make it the most electrified region. This roughly tenfold volume growth from 2021 to 2030 will not happen without growing pains.
There will be two very different aspects to this difficult yet necessary transformation. On one side, the industry must shift away from internal combustion engines (ICE), which comes with a set of major social and industrial issues. On the other side, the complete supply chain from mining to the end-of-life recycling – for both motors and batteries – must scale at a high pace. Massive efforts must be deployed to quickly reach full technical and economic maturity across the board, incorporating key sustainability objectives. We will focus on this second side here.
Current Supply Chain Status – Batteries and e-Motors
The complete battery supply chain has been strategically developed by China over the years, to a point where about 70% of all BEV batteries are produced by Chinese companies. CATL, the global market leader, produced 71 GWh worth of batteries in H1 2022 (+115% yoy), the equivalent of about 1.2 million vehicles. China “owns” an even bigger share of the global market for refining and processing minerals (e.g., lithium, graphite, cobalt, nickel) even though most are mined in Latin America, Africa, Australia or S. East Asia – not China.
Separately, the initial strategy of most OEMs consisted in outsourcing electric motors since this was a completely new technology for them. Conversely, Tesla vertically integrated motors from the start. Renault was another exception, developing and producing their own motor for Zoe starting in 2012 (the market was just emerging). Incumbent suppliers, such as high-voltage powertrain leader Valeo, have very quickly assembled significant intellectual and industrial resources to enable the current EV market growth. But the status quo will not last.
Forces Driving a Profound Transformation of Supply Chains
Geopolitical turbulences combined with the need to better control and shorten supply chains and reduce the overall carbon footprint call for a complete restructuring of how OEMs source batteries, starting at the mine. Moving materials from Chile to China, then batteries to Europe, then potentially complete vehicles to the USA is obviously not sustainable.
Europe has so far taken the lead in public initiatives aimed at securing raw material supply chains and creating a regulatory framework to manage batteries from mine to grave. For instance, the EU’s REESilience project aims to build a production system that ensures a more resilient and sustainable supply chain for rare earth materials and magnets for e-motors.
Much more ambitious yet, the EU is finalizing a regulatory framework for batteries which is yet to get final approval. This data-driven approach addresses a series of critical issues including CO2 emitted during battery production, recycled content, performance and reliability, end of life management, due diligence on raw materials sourcing as well as labeling. Implementation starts mid-2024 with labeling including information on the C02 footprint followed by the introduction in 2026 of a battery “passport,” i.e., a digital ID for each individual battery. This first-of-a-kind framework will require significant efforts throughout the complete battery supply chain. It is also likely to trigger similar initiatives in other parts of the world.
In the USA, a transformative text was very recently passed by the federal government. The Inflation Reduction Act aims in part for three goals, namely boosting BEV penetration via financial incentives, developing N. American BEV production and reducing the reliance of battery supply chains on non-friendly states (essentially China and Russia). The amount of incentive (up to $7,500 per vehicle) will be modulated based on the percentage of raw/refined materials and battery components sourced from friendly trading partners (up to $3,750 for each subset). Proving the source of material will likely require some sort of passport similar to what is emerging in the EU. However, the text fails to address critical matters such the battery manufacturing C02 footprint or full life cycle management.
What Comes Next for Batteries
Multiple initiatives have been taken to onshore battery manufacturing. In Europe, they are essentially focused on manufacturing cells using other players’ technologies, mainly from Asian companies. For instance, this is the case of Northvolt, ACC, Verkor or Britishvolt, at least initially. A limited amount of activity related to core battery technology is visible compared to the USA.
In the USA, many startups have emerged over the years to bring innovative battery technologies to market. This includes chemistries and manufacturing solutions for anodes (e.g., silicon-based) and cathodes (e.g., Lithium Iron Phosphate or LFP) or solid-state batteries. However, capital-intensive cell manufacturing initiatives are predominantly done with Asian incumbents, e.g., Panasonic with Tesla and Ford, LG Chem with GM, Stellantis, Ford or Honda. OEMs partner with battery suppliers and contribute billions of dollars to secure long term supplies.
Much has yet to be done with regards to mining and refining minerals as well as transforming them into anodes and cathodes. However, OEMs around the globe are getting increasingly intrusive upstream their supply chains, securing long-term contracts for raw materials, sometimes investing in mining or mineral processing projects. For instance, BMW invested in lithium producer Lilac Group. GM and Stellantis secured long-term lithium supplies with Controlled Thermal Resources. Stellantis also invested 50M€ in Vulcan Energy Resources, another lithium supplier and GM secured long-terms supplies of cobalt from Glencore. Tesla, which is already the most vertically integrated OEM, is even considering refining lithium in-house. This has clearly become of strategic importance!
OEMs are also increasingly engaging downstream the supply chain, committing to long term partnerships with second life battery players such as Moment Energy in the case of Mercedes and Nissan. Finally, they are engaging with recyclers, e.g., Redwood Materials with Volvo, Ford, Toyota or the VW Group.
How About e-Motors
Many OEMs have recently reconsidered their initial strategy which consisted in buying motors. Some have partnered with motor manufacturers and will bring a portion of their sourcing needs partially in-house as is the case for Stellantis with Nidec or Renault with Valeo. Others have bought motor suppliers or tech providers outright, as did Mercedes with British axial-flux motor specialist Yasa for their high-performance vehicles.
As it is the case for batteries, there are multiple technology options for motors. OEMs are progressively making these technology choices based on each vehicle positioning. They will likely maintain a blend of in- and out-sourcing for the foreseeable future to optimize access to technology, workforce balancing with ICE production needs and cost management.
The sourcing raw material for motors also needs to be tackled. Rare earth materials, which are required in motors using permanent magnets, remain an issue akin to that of minerals for batteries — though China is the global leader in the mining of rear earth. In the EU, the REESilience project aims at creating resilient and sustainable supply chains for these materials. Alternatively, asynchronous (or induction) motors and electrically excited synchronous motors take rare earth materials out of the mix, but they do have their downsides. See my article Next Frontier for Battery EVs: A Race to Efficiency (Feb 2022) for more information.
In conclusion, OEMs are clearly departing from the traditional multi-tier supply chain where they had limited visibility beyond Tier 1 suppliers – with a few exceptions, e.g., metals and plastic pallets. They are now not only building transparency through the entire supply chain (up and down) but they are also engaging with players in strategic positions to secure long term contracts from mining to end-of-life recycling. Furthermore, they are making their supply chains sustainable and resilient, including to geopolitical forces, to a certain extent under guidelines set by local governments. The challenge is significant but will lead to a stronger automotive industry.
Managing Director, Orsay Consulting
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