How Europe will become an EV battery powerhouse

Europe recently passed China as the world’s No. 1 market for electrified car sales, but it lags in building the most valuable component in those of vehicles: the battery.

Drawing on decades of experience in the consumer electronics market, Asia-based suppliers such as South Korea's LG Chem, Samsung and SK Innovation, China's Contemporary Amperex Technology Limited (CATL) and Japan's Panasonic, dominate both European and global cell production. 

European automakers either import cells from these companies' vast Asian gigafactories, or buy them from their plants in Poland and Hungary.

But that is about to change.

Major European automakers are preparing to break ground on their own gigafactories, in collaboration with partners such as Northvolt of Sweden and Total of France, boosted by a surge in financial support from the European Union and national governments. In doing so, they will be competing with European expansions by the Asian producers (see chart, below, right).

Also looking to join the game are startups such as the UK's Britishvolt and France's Verkor, which are seeking for financing for their plan as well as commitments from automakers.

There are both strategic and economic reasons for this shift. The EU says there are millions of jobs at stake if Europe cedes battery leadership to Asia. In addition, policymakers want Europe to build an industry based on sustainable energy and ethical raw materials extraction to align with climate and human rights goals.

Automakers say a bigger European battery production infrastructure will save them money by slashing high transport cost, especially once cell factories are located close to production hubs. They are also looking to diversify their supply base, partly as a result of uncertainties surrounding the coronavirus crisis. And they want to have control over the dominant powertrain technology. 

With EV demand smoothing out, largely because of EU regulations that are forcing automakers to introduce full-electric and plug-in hybrid vehicles, the case for building gigafactories in Europe is becoming even stronger.

"Battery production will follow car production, and in the future most of the batteries for Europe will be made in Europe," said Xavier Mosquet, managing director and senior partner at Boston Consulting Group. "Transporting batteries is expensive; it may also potentially be dangerous, and that is why we are going to see a significant ramp up in manufacturing in Europe."

A critical question for any automaker is whether to make a key part or buy from a supplier. The answer for battery cells should be approached from several perspectives, Mosquet said. Any automaker planning a gigafactory will face competitors that have a head start in chemistry and production processes. A shift in technologies, such as toward solid state batteries, could leave them behind, after having already invested hundreds of millions of euros.

With such an expensive -- and single application --– technology, suppliers and automakers are seeking to balance the supply/demand equation. A factory cannot be built without demand for its output already in place, but automakers also need to be assured that battery output can keep up with the EV market.

In recent years some automakers have faced battery cell shortfalls that led to assembly halts or slowdowns.

"If you think there might be a shortage in capacity, you might think that some of the battery makers would try to exploit the situation, basically to extract higher prices," Mosquet said. "If the battery is 30 percent of the cost of a car, you cannot afford that."

Because of this some automakers are starting "to be more in control of their battery production, so they can manage prices better and be able to react if there is a shortage in capacity," Mosquet added.

Automakers also want a diversified supply base to avoid problems such as fire-related recalls announced by brands such as BMW, Ford and Hyundai.

PSA Group CEO Carlos Tavares sees battery cell production as part of an overall effort to create a vertical EV supply chain, from cells to transmissions and electric motors to associated parts such as inverters. It will reduce the costs of building an EV by about 10 percent, he estimates, helping to close the profit gap between cars with internal combustion engines and EVs.

PSA currently sources cells from CATL's Asian factories, but that will change starting around 2023, when a joint venture with the French energy giant Total called Automotive Cells Company comes online with two cell factories in Europe, one in France (likely in the eastern part of the country where PSA plants are concentrated) and one in Germany that would serve Opel.

"From a strategic standpoint it's not relevant to send 50 percent of your total value to China," Tavares said earlier this year when asked about moving battery production in-house. He said PSA was investing 1 billion euros in the venture with Total's Saft unit, with an eye toward producing batteries not only for PSA brands but also for Stellantis, the new company that will be formed if PSA and Fiat Chrysler Automobiles complete their merger.

Renault Group, which sources batteries from LG Chem, has signaled its intent to join the PSA-Saft venture, which has received backing from the governments of France and Germany, as well as the EU.

Tesla, which is building its first European assembly factory near Berlin, plans its own gigafactory on the site, although it has run into environmental review snags.

Volvo, too, firmly subscribes to the "local for local" philosophy when it comes to batteries, even if it will not build its own cells.

"There is a big benefit from having a local supply of batteries, which are both big and costly and also hazardous to transport due to their chemical set up," Volvo Chief Technical Officer Henrik Green told Automotive News Europe. "Our strategy going forward is to have a local supply of batteries in America, Europe and China."

"When that flow is optimized, it gives you big benefits in terms of cost," Green added, citing tariffs as well as shipping expenses.

Daimler is skeptical about diving into cell production, CEO Ola Kallenius said last month. "We don't think it's a good idea to build our own cells," he said, adding that if technology shifted abruptly, it "could cost us billions in capital." Instead, Daimler has taken an equity stake in Chinese cell maker Farasis Energy.

"The contract will provide a secure source of battery cells for Mercedes-Benz's electrification strategy, while Farasis gains security for its planned construction of production capacity," Daimler said in July. 

Farasis plans a factory in Bitterfeld-Wolfen, Germany, creating up to 2,000 new jobs, but it will not be the sole supplier to Mercedes, Daimler said.

BMW is building a pilot cell factory in Parsdorf, near Munich. The automaker has not committed to building its own cells, but it says the pilot plant and its own research will focus on "optimizing production efficiency, costs and quality" with suppliers. Separately, BMW has committed to using some of Northvolt's Swedish production, and has research projects with Northvolt and Umicore, a Belgian company working on cathodes.

The biggest player of all, Volkswagen Group, which has committed tens of billions of euros to developing electric vehicles across its many brands, is preparing to build a cell factory in Salzgitter, Germany, in a joint venture with Northvolt. The factory will have an initial capacity of 16 gigawatt-hours when it comes online in either late 2023 or early 2024. But it will be just a fraction of VW Group's power demand for its electrified vehicles, which the company says will be 150 gWh by 2025.

"Automakers want a regionalized market for this industry," said Jesper Wiegardt, vice president for communications and public affairs at Northvolt. "It's no longer a question of if it will happen. We're past that point. The question now is will there be a fully integrated European supply chain, with battery manufacturers, raw materials suppliers, and R&D."

Without this, Europe is at risk of losing a considerable number of jobs, he added.

The scope of global lithium-ion battery demand is coming into focus. In Europe, the share of electrified (plug-in hybrids and full-electric) vehicles is likely to exceed 30 percent by 2030, up from about 10 percent in 2020. That translates into as many as 5 million passenger vehicles based in last year's sales.

At the same time, battery size is increasing overall, driven by Chinese regulations, plug-in hybrids that need electric-only range for EU "supercredits," and what analysts call the "Tesla effect," where buyers have shown a clear preference for EVs with longer ranges. 

The expectation is that Europe will need 400 to 500 gWh of annual production capacity by 2030 just for electrified (battery-electric and hybrid) passenger vehicles, up from about 50 gWh by the end of 2020 and 120 gWh by the end of 2022, LMC Automotive analyst Sam Adham said.

That will probably understate the installed capacity, because lithium ion battery cells have many other applications, including in mining operations and industrial uses such as manufacturing and even elevators. 

Adham estimates that Europe will need at least 25 gigafactories by 2032 at an output of 24 gWh each – at an average cost of 1.5 billion euros per plant. He said roughly 10 major, credible projects are in the works now. "Europe will be self-sufficient pretty quickly," Adham said.

The EU has recognized the urgency, and has mobilized financing tools at its disposal to build up a domestic battery industry. In 2017 the European Commission founded the European Battery Alliance, which was created to promote cell production and identify promising projects for financing.

The European Investment Bank, or EIB, said recently that it would finance 1 billion euros in battery cell projects in 2020 (see box, right). That is more than the total of the 10 previous years.

Two years later, the commission invoked a mechanism called IPCEI (Important Project of Common European Interest) to approve a total of 3.2 billion euros in state aid in seven countries (Belgium, Finland, France, Germany, Italy, Poland and Sweden) to jump-start research and production. That in turn is expected to unlock an additional 5 billion euros in private investment. 

As part of the IPCEI designation, battery projects can benefit from relaxed rules on competition because of their strategic interest, EU competition chief Margarethe Vestager said. 

Said Mosquet of Boston Consulting: "There has been a significant change in the position of Europe around batteries since 2019. There was reluctance to support one or the other industry, but now it's very clear" that it is backing battery technology.

Thore Sekkenes, industrial program director at the battery alliance, said in a report in September that Europe was now the global center for battery investment, even outpacing China. Total financing is now of 100 billion euros, 30 times more than in 2017, he said. 

A full European battery value chain, from materials processing to recycling, could reach an annual value of 250 billion euros and provide 4 million jobs, the alliance predicts. That could cushion the blow from the transition away from internal combustion powertrains. 

Northvolt's Weigardt said that the more than 400 million euros in EIB loans were a small fraction of the battery maker's total financing to date of $3.5 billion, but he said they were critical for setting a financial structure that allowed outside investors to come in. "We are very grateful for the support we have received from the EIB," he said. 

The battery industry could provide a significant number of jobs, Weigardt said, pointing to the 3,000 direct positions at the Northvolt's Skelleftea factory, 3,000 positions at nearby suppliers and "multiples" of service jobs in the area.

"There is an opportunity to make this transition in a good way," he said. "There will be opportunities for people who are now part of the internal combustion engine supply chain."

Douglas A. Bolduc contributed