European auto manufacturers are gradually embracing the green mobility revolution, albeit with some hiccups. They have little time to waste, however, as 2021 is the deadline for the EU’s tighter emission standards for new cars. 

The coronavirus pandemic may gain auto makers some time as the new targets will likely be postponed, but producers still have to rethink their products – or else face fines in the hundreds, if not billions, of euros. 

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Furthermore, the success (or failure) of a shift by auto makers towards electric vehicles depends to a great extent on the development of a European value chain for the production of lithium-ion battery applications. Greener vehicles are more expensive to produce than traditional internal combustion engine vehicles, and batteries account for up to 40% of their production costs.

Playing catch-up

Controlling the battery value chain means controlling the market, and an estimated 89% of this chain is currently in the hands of Asian producers. Some European investors have finally made a move, and the EU has also put its weight behind a European battery industry, pledging billions in aid. But Asian producers are far ahead and many industry observers are wondering if it is too late for Europe to close the gap. 

“It is a catch-up game for European manufacturers, but it is not too late,” says Simon Schnurrer, partner for the automotive sector at consultancy Oliver Wyman. “If we look at the logistics of the industry and the role of labour, the idea of producing electric vehicle batteries in Europe is [viable]. And technological development will go hand in hand with the process.” 

European countries and car makers have been slow in embracing green mobility. The sales of light electric vehicles grew on average by 28% a year between 2015 and 2018, way behind China (69%) and the US (46%), according to an analysis by consultancy McKinsey, although they picked up quickly in 2019, growing by an annual 50%. 

With the carbon dioxide emission profile of their fleets struggling to adjust, European car makers are all expected to miss the 2021 emission targets. PA Consulting estimates that total fines for that year alone will amount to more than €14.7bn, with Volkswagen, Fiat Chrysler, Ford and Renault-Nissan-Mitsubishi responsible for two-thirds of this.

Counting costs

While the switch to electric vehicles may be necessary for auto makers to survive in the medium term, they will also have to find ways to make it profitable as well. Electric vehicle production can be 35% more expensive than traditional vehicles, according to estimates by Boston Consulting Group (BCG). This would inevitably erode their profit base unless value chains are upgraded to reduce costs – beginning with batteries. 

“If [European auto makers] want to stay relevant, they have to come up with alternatives [to the dominant position of Asian producers] and localising production in Europe is the right way to think about it,” says Daniel Küpper, managing director and partner at BCG.  

From this perspective, the nature of battery manufacturing is a good fit with reshoring. Its high degree of automation means labour costs are marginal, bringing to the fore other production and logistics processes. BCG estimates that the landed costs of batteries produced in eastern Europe and sold in the EU market could already be 14% lower than those imported from China. Looking forward, applying ‘factory of the future’ principles to facilities in France or Germany could extend savings to 17%.  

EU development aid

With a clear economic case for the development of a European value chain for electric vehicle batteries, in December 2019 the EU deemed production to be of strategic interest to the bloc. It approved €3.2bn in state aid for an important project of common European interest (IPCEI) scheme, to support research and innovation across the whole value chain and to unlock private investment in the order of €5bn. 

A first Franco-German, Airbus-style consortium led by French Total and its battery-making subsidiary Saft, alongside car manufacturer Groupe PSA, officially launched in February 2020. As part of a €5bn investment programme, the consortium will develop a pilot plant in Nersac in south-western France able to bring batteries to the market in 2023. This will trigger an investment decision for a large-scale production plant in northern France, producing 8 gigawatt hours per year (GWh/y) initially, and rising later to 24GWh/y.

The consortium will set up a sister facility in Germany, targeting total capacity of 48GWh/y by 2030, which would meet about 10% to 15% of the European demand for electric vehicle batteries. Another consortium led by Germany’s BMW and BASF is being worked out, and both initiatives are expected to draw funds from the IPCEI scheme. 

However, European car makers have been beaten to the punch by Asian battery producers even on their own turf. Korean Samsung and LG Chem, as well as Chinese CATL, are all ramping up their existing battery production capacity in Hungary, Poland and Germany, respectively, to consolidate their European gigafactories and meet market demand in the region. 

New strategies

In an industry with high technological barriers, as well as barriers to accessing the raw materials often controlled by the same Asian producers (primarily China), European producers will have to think creatively to be competitive. “They have to learn fast from the others – although the others will always be one step ahead, which means they have to come up with something new,” says Michael Schweikl, managing consultant at PA Consulting.

Some companies are already innovating to gain the competitive edge they are lacking at the moment. For example, Northvolt is building a 32GWh/y battery factory in Sweden after raising about €900m in capital in 2019. The Swedish company is following a model of vertical integration that brings in-house a large part of the supply chain. It is innovating in battery cells technology and will reduce exponentially the environmental impact of production.  

Global production of lithium-ion batteries is expected to pass 2000GWh/y globally, and the whole market will have a value of €250bn in Europe alone within the next few years. European producers missed the starting gun and the coronavirus hit right when they were just moving off the blocks. But they must strive to catch up and begin producing electric vehicles batteries locally – or risk losing all the race to Asia.

This article first appeared in the April-June edition of fDi Magazine. The full digital version of the magazine is available here