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A battery cell from CATL: China is building up significantly more capacity than the Chinese market can absorb

Photo: Krisztian Bocsi / Bloomberg / Getty Images

Hardly any other market is currently growing as fast as the one for electric car batteries. Until 2030, the global battery market will grow at a total growth rate of 34 percent per year. Around 80 percent of the demand for the sought-after lithium-ion batteries will be accounted for by electric vehicles in the coming decades in view of the transport transition. These are the findings of a new study by the management consultancy Roland Berger and RWTH Aachen University, which is exclusively available to manager magazin. Asian cell manufacturers such as CATL and BYD from China, LG from South Korea and Panasonic from Japan have a big lead. National legislation is exacerbating imbalances in the market, with the result that the production capacities and needs of the countries, especially in the USA, China and Europe, are currently diverging sharply. Wolfgang Bernhart (61), consultant at Roland Berger, explains in an interview with mm what this means for battery cell manufacturers in Europe.

manager magazin:Mr. Bernhart, the automotive world is waiting for the electric offensive of the Chinese manufacturers. At the same time, will the Chinese also try to dominate the market for the most important parts of the vehicles: the battery cells?

Wolfgang Bernhart: At the very least, they are building up enormous capacities, as we show in our study. Even if the entire capacity of about 6000,2030 gigawatt hours of energy announced in China for 4000 is not realized, even 60,70 gigawatt hours could equip <> to <> million average electric vehicles – more than the entire global market demand.

That sounds absurdly high.

That would at least be significantly more than the Chinese market can absorb.

What would be the consequence? Falling prices, probably.

Even if not all projects are realized, cell manufacturers would look for other markets. And this export pressure could only find its outlet in Europe. The U.S. is out of the question due to political barriers such as high tariffs.

What does this mean for European battery cell producers and suppliers?

You will come under enormous pressure. You need to reduce costs faster than previously planned; and they have to increase quality at the same time. Otherwise, they will have a very difficult time, especially against giants like CATL or BYD. The same applies to suppliers of other components for electric cars.

European governments are striving for greater independence of manufacturers and suppliers from China. Is this even possible in the medium term? Can cell manufacturers in Europe produce at a cost level that is equal to imported cells from China?

If you include all costs, including transport and customs duties, this can work. This also applies to the projects of the major car manufacturers. That's why the major Korean cell manufacturers such as LG ES and Samsung have been producing in Europe for a long time, and why Chinese players are now also building up capacities here.

The same applies to materials that are central to batteries, such as cathode materials.

Exactly. It won't be easy, but even with these components, the Europeans can keep up. In some cases, European manufacturers buy their material more cheaply than the Chinese.

Their scenarios show that the supply of battery cells in Europe and North America is not yet secured, despite China's giga-expansion. How does that fit together?

Currently, there is no threat of bottlenecks in view of the weak demand for electric cars. After all, in North America and Europe, some cell manufacturers have already laid off employees, ...

LG has laid off 10 percent of its employees at a US factory. And SK On has also cut more than 100 jobs at a U.S. factory; ...

In the medium term, however, the supply is not yet secured. First of all, the announced works do not yet exist. And secondly, it is true that the major Chinese suppliers deliver high quality. But we don't yet know whether automakers will be able to rely on the newcomers from China.

European newcomers such as Northvolt, the joint venture ACC and the Volkswagen subsidiary Powerco have not yet proven this.

No, they haven't been delivering large quantities yet. In this respect, it is quite possible that the supply will become more difficult again. Anyone who thinks that there is guaranteed to be more than enough capacity, and in case of doubt can buy from China, is negligent. It's not quite that simple, at least not for the car industry.

Who has it easier?

The capacities for the batteries for electronic devices should be sufficient for the time being.

In an earlier conversation, you said that there is a risk of shortages, especially in lithium. Are you more optimistic now?

At the moment, we don't expect a huge problem anymore; a number of major mining projects have been launched. So the lithium should be enough. We see somewhat higher risks in refining capacities outside China. Even temporary bottlenecks in such plants could lead to highly fluctuating prices.

The U.S. is promoting the construction of battery cell factories with a massive subsidy program, the Inflation Reduction Act (IRA). Companies from countries that are considered political opponents are not supported and in some cases even blocked. Your study states that the IRA is shifting the focus of Chinese investment to Europe. Where is this development already visible?

Many Chinese cell manufacturers such as CATL and Svolt are coming to Europe, some of which have already started building plants. Cathode manufacturers are also looking for locations in Europe or Morocco. From there, there are no import duties to Europe.

Do you really expect the Chinese to leave the American market to South Korean cell manufacturers like LG ES?

The American market is becoming difficult for Chinese manufacturers. They are currently looking for ways to become active there after all. But whether this will be tolerated in the long term is uncertain and depends on political developments. For the time being, the Koreans now have a decent lead over companies like Northvolt, which are only now going to the USA or Canada. As far as subsidies through the IRA are concerned, companies whose factories are already up and running or producing have a clear advantage.

From February 2024, new regulations will apply to all batteries sold here in the EU. Above all, the regulations on the sustainability of raw materials are becoming stricter. Do local players have an even harder time competing when the requirements are so high?

I don't think they're too high in general. The only question is what is feasible. The EU regulations are already having a positive effect, and it goes well beyond Europe: Asian cell manufacturers are also paying much more attention to their CO₂ emissions – because customers demand it, especially in Western Europe. In addition to costs, sustainability is the most important criterion when selecting upstream suppliers.

The EU Commission is currently investigating the extent to which China supports manufacturers of electric cars with state subsidies and thus distorts competition in exports in the European Union. Could this also have an impact on the battery market?

Probably not. Rather, I expect the adjustment of tariffs and effects on the vehicle market. In China, the import duty is 15 percent, in Europe it is 10 percent for vehicles from China. This difference doesn't make sense. But the export restriction on graphite can be read as a reaction to the EU investigation,...

... an important raw material used in the production of lithium-ion batteries. China is now requiring special export licenses for this.

Correct. In this way, the government may be saying: If you put pressure on us, we can do it too.