Deep Dive: Electric vehicles and batteries

Some regions are turning to legislative pressure and trade controls to compete with China. In October 2023, the European Commission launched an investigation into Chinese subsidies of its EV industry. The investigation is expected to take up to 13 months and could result in the EU imposing duties on Chinese EV imports. The Chinese government has stated that it is "very much dissatisfied" with the investigation, which it asserts lacks evidence and does not meet World Trade Organization regulations.  

But those components are nothing without their raw materials, and in that area, China holds a further advantage either in accessing them locally or sourcing from other countries. The chart "Chinese producers dominate in battery markets for light passenger vehicles" highlights S&P Global Mobility's May 2023 forecast for key raw materials, including lithium, nickel, cobalt and graphite, and their sourcing. 

In the case of battery raw materials, a supply crunch could materialize within this decade. For lithium, S&P Global Mobility forecasts a sixfold increase in demand between 2022 and 2030, from some 60,000 metric tons to 370,000 metric tons for light passenger vehicle applications alone. Lithium supply will be unable to meet demand by 2027, creating a bottleneck for automotive supply. Lithium takes nearly 16 years on average to reach the market after initial discovery; thus, there is no readily available source of additional supply. For this reason, the industry is prioritizing battery recycling. 

Geopolitics and the race to secure critical minerals 

Certain raw materials are considered critical and share some common characteristics: 

• There is no alternative or substitute in their high-technology usage. These are typically found in the energy transition, green transportation and intelligent manufacturing. 
  
  

• Their distribution and availability are inconsistent across global regions. 
  
  

• They are subject to a volatile geopolitical environment. 

In the US, for example, the passage of the Inflation Reduction Act of 2022 resulted in intensified demand for cobalt, nickel, lithium and copper. This prompted Indonesia, among other nations, to pursue negotiations with the US toward free trade agreements to plug supply gaps. Other countries, including Australia, India and South Korea, have devised their own critical minerals strategies.  

Although critical minerals vary across geographies depending on domestic availability, supplier countries have a glut of certain bulk minerals (copper and aluminum, for example) and high-tech minerals (cobalt, lithium, etc.). But the situation is fluid; today's oversupply could turn into a deficit in a few years. Estimates suggest that demand for the raw materials needed to manufacture EV batteries will outstrip supply starting in 2030. This is because developing a raw materials mine takes seven to eight years, while the turnaround time for downstream manufacturing facilities is much quicker.

With the race on for countries to secure materials, the definition of supply chain security will change over the next five to seven years, from one in which countries seek a diversified, sustainable solution for sources of critical materials to comprehensive supply, technology, political and trade competition. Those who succeed will develop a "whole chain" mindset whereby exploration, mining, beneficiation, separation, metallurgical applications and recovery will be undertaken by establishing exclusive alliances and trade partnerships.  

At the same time, countries that supply critical minerals — including Indonesia, Malaysia and Mongolia — may avoid these alliances and indulge in nationalism to drive economic prosperity at home, in turn creating regional divergences in production costs. 

Asia's manufacturing superiority 

Beyond raw materials, China has a sourcing advantage on rare earth elements necessary for electric motors. It recently announced that it wants to control exports of gallium, germanium and graphite as well as rare earth mining equipment and technologies, prompting other countries to reassess their supply chain exposure. The move marks an important shift for China, whose primary focus has been on batteries, because rare earths are more difficult to replace than raw materials. 

Asia, led by China, South Korea and Japan, is by far the most sophisticated region in terms of EV parts manufacturing, especially batteries. To maintain its lead, many EV battery suppliers in the region are increasingly investing abroad.  

In China's case, battery manufacturers expanded rapidly ahead of demand with the result that capacity utilization rates have slumped to less than 50% in the first eight months of 2023, according to S&P Global Ratings estimates. The industry may therefore be ripe for consolidation.  

Exports are helping to ease some of the effects for Asian manufacturers. South Korean and Japanese companies see more robust opportunities in North America, while China is making a bigger splash in Europe. 

Global exports of EVs from the seven largest export markets reached $100 billion in the 12 months to Sept. 30, 2023, with China and the EU accounting for one-third each, according to S&P Global Market Intelligence. (see chart, "Chinese exporters focus on EU, others on US") South Korea and Japan represented 13% and 6%, respectively. 

• The EU accounted for 41% of China's exports of EVs, followed by the UK with 15% and the US with only 1%. 

• The US and Canada combined accounted for 37% of exports from South Korea and Japan, respectively, while the EU represented 35% and 27%. 

• Other major export markets include the UK, with 75% of exports headed to the EU, and Mexico, with 68% headed to the US and 30% to the EU. 

The changing landscape 

Although overall EV demand was sluggish in 2023, some markets are showing relative strength. And, because battery manufacturing and supply chains are less developed outside of Asia, many global automakers are relying on imports to meet their demand. For Chinese battery manufacturers, the upside is especially strong in Europe, where Chinese producers already have been capturing market share from South Korean competitors. 

Europe has proven politically and economically more attractive for China's producers. The 25% tariffs imposed by the US on EV imports since 2018 have been continued by the Biden administration as it strives to reduce its reliance on technology supplies from China. The political landscape will continue to shift into 2025 following the US elections, as discussed in "Supply chain politics: National security meets economic growth." 

Under the terms of the Inflation Reduction Act, starting in 2024, any electric car with battery components supplied by what the US deems "foreign entities of concern" is ineligible for tax credits. As such, manufacturers affected by the law could lose cost competitiveness and the incentive to invest or produce in the US market. The precise list of "foreign entities of concern" has yet to be defined, providing the US government with some latitude in implementing the regulations. Notably, the January 2024 list of approved vehicles does not include any built in China or with battery packs manufactured in China.