The shift towards electric mobility in Europe and the US is both a market-driven phenomenon and a policy goal. This will put under pressure European car-makers that will have to rapidly adjust to this new trend and will find themselves increasingly reliant on foreign suppliers of critical components, most notably batteries from Asia. EU policy-makers are sensible to the threat of excessive dependence on non-European parties, especially after the experiences of the Covid pandemics and more recently the natural gas crisis. It is not obvious, though, that a way out may be found in the mere resurgence of old-style industrial policy aimed at promoting and financing domestic producers of batteries.
The problem should be understood both from a demand-side perspective, and from a supply-side one. As far as the demand side is concerned, two main drivers are relevant. On the one hand, people are demanding more e-vehicles for a variety of reasons: the perceived superior performance, the awareness that this helps to reduce their environmental footprint, the expectation for substantial savings on the fuel costs, and possibly network effects. Some of these may lose grip for short or long-run reasons: for example, the energy and raw materials inflation may reduce the economic advantage of e-cars, while the loss of tax revenues from declining consumption of oil products may soon or late induce governments to increase taxes on e-vehicles as well.
Greater demand for e-vehicles is not the only driver behind the increasing popularity of electric mobility. Policy decisions also matter a lot, including generous subsidies to the purchase of e-cars, the tax-funded plans to deliver charging infrastructures, “cash for clunkers” programs, and the ban on internal combustion engines in Europe from 2035. The latter may be the single most impactful factor, even though a number of caveats have been considered and further doubts have been raised after energy prices soared in the past few months.
The economic and political determinants of the demand for e-vehicles (and therefore batteries) are crucial to understand the challenges that the producers of vehicles, components, and batteries shall face. According to BloombergNEF, battery-powered cars may jump from 10% of car sales in 2021 to 40% in 2030 globally, with Europe being the second largest market after China. This raises two problems: first, the ability of producers to supply the market with enough batteries; secondly, the geopolitical struggle to prevent batteries from becoming a sort of territorial monopoly the same way chips are. Of the six largest battery producers, two (BYD and CATL) are from China; three (Samsung, LG and SK Innovation) are from South Korea; and Panasonic is from Japan. None are from Europe or North America.
Reversing this situation is not easy. Putting together a “gigafactory” to manufacture batteries takes time and skills on top of capitals and materials. According to the Economist, as of now China dominates the landscape: “The country houses close to 80% of the world’s current cell-manufacturing capacity. Benchmark Minerals forecasts that China’s share will decline in the next decade or so, but only a bit -to just under 70%. By then America would be home to just 12% of global capacity, with Europe accounting for most of the rest”. Europe is moving to fill the gap to some extent. This, again, comes from both private investors’ efforts and policy push. Volkswagen alone plans to build six gigafactories by 2030. Other producers, such as BMW and MercedesBenz, are launching joint ventures with third parties. At any rate, these companies face the twin challenges of scaling up their production of e-cars and securing access to key technologies, such as batteries, by either making or buying them from reliable suppliers.
At the same time, both national and European policies are being developed to increase Europe’s productive capacity of batteries. A regulatory reform has been started to make Europe a world leader in the battery sector. It is always hard to disentangle the rhetorical emphasis from the real beef in these broad-based policies. This is to be achieved by increasing the standards (including the protection of human rights along the supply chain) for batteries to be used in Europe as well as by providing funding to industrial investments as well as research & innovation in the field of batteries.
The main problem with these strategies is that they tend to be, at the same time, ahead and behind markets. Politics stands ahead of markets in the sense that it aims at pushing markets in the desired direction or, to be more precise, it aims to increase the pace of switching from traditional to electric vehicles. By doing so it stretches the market ability to supply the desired products and, in fact, it may unintentionally increase the reliance on non-EU producers (as it happened with solar panels to some extent). Politics also stands behind markets: while it is likely that e-mobility will dominate the transport sector in the future, this is still far from being certain and many alternatives are (or may become) available, such as synthetic fuels or hydrogen. If a one-size-fits-all policy choice is made which in the end does not reflect what might be the preferred technologies in the future, Europe may find itself cut off from the main waves of innovation, not just by putting all of its eggs in the same e-basket, but also crowding out private investments in other fields (including the development of more efficient, non-electric engines).
The jury is still out concerning how important batteries will be in the future. Europe lags behind. There is little discussion that it should make a leap forward. It is not obvious, though, which strategy is best suited to meet the goal while not giving up other innovative potentials.