Europe's Accelerating EV Shift Faces Battery Supply Risks
Morningstar DBRS warns that dependence on China may become an Achilles’ heel.
The transformation of Europe's automotive industry towards electric vehicles (EVs) has gained significant momentum in recent years. Driven by both internal advancements and external demand, this shift has led to increased EV manufacturing across European Union (EU) economies. However, a new commentary shared to Battery Technology by full-service global credit ratings business Morningstar DBRS details how this growth also highlights a critical dependency on Chinese battery imports, posing substantial risks in the face of potential geopolitical or trade disruptions.
Surge in EV and hybrid car exports
Morningstar points out that the automotive sector stands as the largest manufacturing industry within the EU, contributing 13% to the gross value added (GVA) in 2021. Countries like Slovakia, Germany, the Czech Republic, and Hungary showcase the industry's substantial role, with automotive manufacturing comprising between 16% to 23% of their total manufacturing GVA.
Over the past five years, the structural shift towards EVs has been unmistakable. While traditional internal combustion engine vehicles still dominated 61% of EU passenger car exports in 2023, the export of electric and hybrid vehicles has surged, climbing from a mere 10% share in 2019 to 39% in 2023.
MORNINGSTAR DBRS
"The rapid increase in EV exports reflects the broader global transition towards cleaner energy vehicles," notes the Morningstar DBRS report. "This trend is expected to continue, with the International Energy Agency (IEA) forecasting EVs, including plug-in hybrids, to constitute 60% of Europe's domestic passenger car sales by 2030."
Rising dependence on Chinese batteries
With the expansion of EV production, the reliance on Chinese battery imports has grown significantly: In 2023, 43.8% of the EU's battery imports came from China, up from 28.1% in 2019. This increase is largely attributed to China's dominance in battery technology and production capacity, alongside their control over key EV battery minerals such as cobalt and graphite.
"China's commanding position in the global battery market presents a vulnerability for European manufacturers," warns the Morningstar DBRS commentary. "Any geopolitical or trade shock involving China could disrupt the supply chain, posing a threat to the continuity of EV manufacturing in Europe."
The growing dependency on Chinese batteries has also coincided with rising trade tensions between China and the EU. In July 2024, the European Commission imposed tariffs ranging from 17% to 38% on Chinese EV imports, citing unfair subsidization practices. Such measures underscore the risks of a potential escalation in trade conflicts, which could further jeopardize battery supplies.
Efforts to boost domestic production
To mitigate these risks, the EU is making concerted efforts to ramp up its domestic battery production capabilities. The European Commission's recent approval of EUR 900 million in state aid to Northvolt for a new battery plant in Heide, Germany, is a significant step in this direction. The facility aims to produce batteries for up to 1 million EVs annually and is expected to reach full production capacity by 2029.
"Enhancing domestic production capacity is crucial for reducing the EU's reliance on external suppliers and securing the supply chain," emphasizes the Morningstar DBRS report.
Despite these efforts, the future of EV battery production in the EU remains fraught with uncertainty. Concerns about the strength of domestic consumer demand for EVs have led to the downscaling of several battery investment projects. Additionally, the competitive positioning of new producers in the global market hinges on their technological advancements and price competitiveness.
Navigating future challenges
Looking forward, the EU faces a complex landscape in securing stable and diversified EV battery supplies. The realization of all announced investment projects could boost Europe's domestic battery production capacity by 364% between 2023 and 2030. However, this pales in comparison to projected increases of 798% in the US and 160% in China over the same period.
MORNINGSTAR DBRS
"The scale of future production increases and the positioning of new producers will be pivotal in shaping the EU's battery supply landscape," concludes Morningstar DBRS. "Maintaining price competitiveness and securing key mineral inputs are essential for the success of Europe's EV battery industry."
In summary, while the EU's automotive industry is making significant strides towards an electric future, the journey is not without its challenges. The dependency on Chinese battery imports poses a substantial risk, necessitating strategic efforts to boost domestic production and diversify supply sources. As the EV market continues to evolve, these developments will be crucial in determining the stability and growth of Europe's EV manufacturing sector.
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