In brief
Automotive business models are changing and batteries will soon be the value differentiator. In February 2021, Ford Motor Co. (Ford) announced a near-doubling of its global investment in electrification, to $22 billion by 2025.1 Ford’s announcement is the latest in a growing trend toward vehicle electrification. The Volkswagen Group, BMW, Daimler AG, Mercedes-Benz AG, General Motors, Renault, Nissan, Mitsubishi Motors, Startups, such as Rivian and NIO, are all well on their way to helping EVs (electric vehicles) reach critical mass.2
According to the EY Mobility Lens Forecaster, EV sales are expected to exceed 17 million units in total for the US, China and EU (including the UK), growing at a compound annual growth rate (CAGR) of 22% until 2030.3
The marked acceleration in EV production is driven by three parallel forces:
In addition to accelerated EV production, governments are mandating local, sustainable content and there is the potential for economic market failures in raw material supply. Automakers are facing headwinds in a battery supply market that is transitioning from a global buyer’s market to a regional dynamic in which suppliers will hold increasing sway.
Chapter 1: Defining the strategic ideal
Chapter 2: Facing the tactical reality
Chapter 3: Responding to disruption
Chapter 4: Winning the race
Chapter 1
OEMs must develop a battery sourcing strategy that balances security, sustainability and simplicity.
OEMs have tended to view batteries as one of thousands of parts in the OEM value chain — a part that comprises as much as 40% of an EV’s value, but a part nonetheless. However, regional trade protectionism, rapid technology evolution and interdependencies between the battery and wider OEM operations mean that decisions relating to battery supply, strategic footprint, cycle plan and the market equation become more interrelated and sensitive.
Within the battery supply chain, there are raw material miners, refiners, midstream suppliers that manufacture the battery materials and components, cell manufacturers, and module and pack manufacturers. At each stage of the battery supply chain, OEMs will need to work with these ecosystem partners to achieve supply security, environmentally sustainability and simplicity in design and production.
OEMs will want to establish a secure short- and mid-term battery supply for key vehicle programs using a set of criteria, including the following.
Simplicity of design and production will be key for cost competitiveness. Battery costs have been declining over the last several years, but they are set to rise again based on an exponential increase in demand that will place pressure on almost every aspect of the supply chain. Standardizing battery cell design across EV models can reduce both the cost and complexity of manufacturing the battery. Additional efficiencies can come from driving economies of scale, either through in-house production or through streamlined procurement alliances and partnerships across the ecosystem.
For increased agility, OEMs will want to focus on simple designs and consolidating volumes across selected cell manufacturers, while promoting technology flexibility in cell formats and chemistries. The go-to battery cell for most OEMs is lithium-ion based. However, a range of battery technologies are evolving, including solid-state and silicon anodes, which could prove to be a game-changers for EVs.
Localization of battery manufacturing across all points of the supply chain allows OEMs to understand and ensure that materials are sourced and manufactured sustainably along all points of the supply chain. This is particularly true for tailored cells for OEMs. In doing so, OEMs can avoid the risk of future regulatory changes and the associated adjustment costs. They also gain proximity to suppliers, have greater opportunities for collaboration and codesign, and increase transparency across the supply chain.
In multiple jurisdictions around the world, free trade agreements mandate that a certain percentage of a vehicle value needs to originate within the trade zone. Otherwise, OEMs will be subject to trade tariffs that could add more than 10% to the cost of the vehicle when sold in the EU. These tariffs would acutely impact competitiveness given the razor-thin margins OEMs operate within. With batteries comprising as much as 40% of a vehicle’s value, it’s critically important for OEMs that the batteries, components and materials they buy are sourced and manufactured within the trade zone wherever possible.
Sustainability from mine to wheel is becoming increasingly important. This can include the use of renewable energy, new technologies, responsible water consumption and ethical working conditions, among other considerations. A 2020 United Nations report suggests that many of the raw materials used in EV lithium-ion battery manufacturing come from a relatively small number of countries where environmental and labor regulations are either weak or they don’t exist at all. If OEMs have complete transparency across the battery supply chain, they have more opportunity to purchase from or partner with battery manufacturers that follow sustainable practices.
Chapter 2
Many OEMs commit to electrify their vehicle models over the next decade. The race to secure battery supply is on.
The European battery market could best be described as two races being run in parallel. For OEMs, one player after another announced bold accelerations of their cycle plans towards electrification. This was not just in anticipation of more regulation banning the sale of petrol and diesel cars but also an acknowledgement that they could only realistically compete on one front. Given the host of new entrants, EVs became the key battle ground.
For their part, the battery makers – whether established Asian major or new European challenger – have rushed to build new European plants and capture the share of what will remain the biggest EV market until at least the beginning of the next decade. In 2020, there was a forecast European supply shortage of 75GWh in 2025. However, several cell suppliers have recently announced ambitions for new plants and extensions to existing facilities. It is probable that such healthy competition will meet the demand, though imbalances will still emerge in chemistries, formats and perhaps even more importantly, in localized supply of sustainably produced materials.
The OEMs cannot afford to rely on traditional commodity strategies and supplier off take agreements. The battery makers cannot afford to build expensive factories without customers. In that environment, we will see a lot more in the way of consolidation, strategic alliances and vertical integration.
Improvements in design and manufacturing efficiency, as well as low commodity prices, have driven down battery costs over the last several years. However, with a demand-supply imbalance on the horizon, prices — especially for cobalt sulphate and lithium hydroxide — are more likely to increase than decrease at the cell level.
In particular, prices for raw materials will need to increase to unlock supply. This may require new mines and refineries for nickel, cobalt and lithium. Meanwhile, to qualify within rules of origin regulations, cell and battery manufacturers will need to build more localized cell plants and battery materials plants, with high land, labor and energy costs. An increased focus on mine to wheel sustainability and environmental, social and governance will also increase costs in the short- to mid-term. Further, headline cell prices are often effective prices achieved on paper through advanced in-module or pack. Actual cell costs are often higher.
The supply-demand dynamics will play out between OEMs and battery makers. Battery makers will start to choose their customers and will increasingly pivot from buying market share to prioritizing economic returns, such as through volume. Incumbent OEMs that have focused on internal combustion engine (ICE) vehicles will need to act quickly to keep up with the competition. Premium OEMs (mostly Europe and US) should focus on battery manufacturers with tailored approach due to lower volume.
In an effort to secure supply in an increasingly constrained market, some OEMs are exploring vertical integration opportunities and strategic partnerships with cell manufacturers and mid-stream suppliers that produce components and materials, such as cathode active materials and synthetic graphite.
Other OEMs, such as Daimler AG and Mercedes-Benz AG,4 have made strategic investments in battery cell manufacturers. Volkswagen5 announced their intention to build their own gigaplants and bring manufacturing capabilities in-house.
In addition to supply security, OEMs can achieve cost efficiencies, better control over sustainability, and an opportunity to influence innovation. Ultimately, the most compelling reason for vertical integration is competitive advantage. Chemistries and technologies are increasingly becoming differentiators in battery performance for EVs. OEMs that continue to see cell batteries as just another commodity could well be left behind.
OEMs that are alert to the critical supply risk are adopting new business models. They are securing upstream supply for key metals, either directly or through a tier one early take or pay, procuring cells on a conversion or tolling basis. Additionally, some OEMs are balancing short term offtake with incumbent cell manufacturers with long-term strategic alliances, including equity investments. Others are encouraging the emergence of a flourishing group of startup European and US players. Still others are in investing, either through their corporate venture capital divisions or through other vehicles, in emerging technology, such as silicon anodes, solid state and recycling technology.
Chapter 3
OEMs must act quickly to address the short term risks without losing sight of their long-term strategy.
In responding to the disruption that lies ahead, there are six big-thinking, no-regret moves OEMs can make to plot a path that addresses the short term risks and delivers long-term value.
To manage the unprecedented growth and disruption of EV battery market, OEMs must first understand the strategic risks across their supply chain. Events such as Brexit, COVID-19 and macro trends such as decarbonization will continue to impact supply. But through a combination of regional sourcing, decentralized manufacturing and investment in digital capabilities, OEMs can create a sustainable and resilient supply chain.
OEMs will want to increase collaborative engagement downstream and upstream, from battery makers to cathode providers. Stronger connections can help OEMs to learn more about the ecosystem participants and understand levels of potential influence over roadmaps, portfolios and footprint.
Memoranda of understanding (MOUs) can help startups to raise capital, while government engagement can help to improve incentives that encourage localization and mitigate a further tightening of the supplier-customer dynamic.
OEMs will want to adopt a regional view of battery markets for vehicle production to better understand the cost-benefit dynamics, and what each battery supplier can (and cannot) deliver.
The roadmap should integrate each part of the organization and build in cycle plan flexibility to remain resilient to the unknown, such as changing consumer preferences and technological innovation.
OEMs will need to assess what’s required along the roadmap and make, build, buy or partner decisions based on the organization’s capacity, capital and capability to deliver against the plan.
To plug capability gaps and reduce supply risk, OEMs will want to identify a range of possible strategic investment targets, from acquiring battery startups to building alliances or expanding partnerships. If they haven’t already done so, now may be a good time to create a corporate venture capital (CVC) fund help accelerate capabilities and M&A options.6
Chapter 4
OEMs need to shift their battery strategy into high gear to secure supply.
The race is on for battery supply. OEMs that cross the finish line first will be those that engineer their strategies to maximize local sourcing, design and production simplicity, technical performance and sustainability in the short term, while strengthening collaborations and identifying investment opportunities for long-term value creation.
This article has been authored by James Nicholson, Xander Penney and Piyush Patel from the EY-Parthenon automotive sector team.
OEMs have tended to view batteries as one of thousands of parts in the OEM value chain. As geopolitical protectionism and technology evolution accelerate, OEMs will need to secure short- and mid-term battery supply that is local, affordable, technologically flexible and sustainable, without losing sight of their long-term battery strategy.
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