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EV players seek upstream integration to ease battery raw materials supply chain challenges

Original equipment manufacturers (OEMs) in the electric vehicles industry are recalibrating their approach to supply chains amid concerns over the environmental, social and governance (ESG) standards of battery raw materials. Aiming to mitigate the expected bottlenecks in battery raw material supply, EV players are taking an interest in upstream activities, eyeing different approaches to responsibly source critical materials for battery production. Rystad Energy expects EV players to increasingly invest further up the supply chain in the latter part of this decade to secure high quality battery raw materials as EV demand continues to grow.
Environmental pressures and security of supply are critical drivers pushing battery electric vehicles (BEV), hybrid and plug-in hybrid electric vehicles (HEV/PHEV), fuel cell vehicles (FCV), and internal combustion engine (ICE) players to take greater ownership of their respective supply chains. The fragmented nature of the battery supply chain poses some issues, thus direct involvement has become an option for many industry giants. Volvo, Ford and Volkswagen, for instance, have invested heavily in blockchain technology to bring greater transparency to the supply chain, while BMW joined the initiative for responsible mining assurance to define ESG standards around resource extraction. While approaches differ, ensuring certain standards for raw materials supply chain will be a growing trend.

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There are several advantages to players moving upstream. By developing battery systems internally, companies can customise the software controlling the power systems, which can have a direct impact on the battery range over the life of the vehicle. Also, as batteries are the most expensive component of an EV, there are long term cost advantages to manufacturing your own. In addition, lithium has been flagged as a core battery raw material that may experience a shortage in the latter part of this decade, leading many manufacturers to consider upstream investments in this sector. Rystad Energy anticipates a deficit in the lithium carbonate equivalent (LCE) market in 2027 (see Figure 2). Due to evolving battery chemistries and western players’ preference for a nickel intensive cathode, this bottleneck could come sooner for battery grade lithium hydroxide.

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Companies have a range of options to intersect the raw materials supply chain at various points:

Long-term contracts with battery cell producers
Long-term supply contracts have traditionally been the most common of relationships between battery producers and automotive companies, which often partner with higher tier battery suppliers over the lifecycle of EV models. Procurement of raw materials has often been led by battery producers, however this is rapidly changing as EV companies aim to insert themselves higher upstream in the supply chain.

Example: BMW signed in 2019 a long term supply contract with Samsung SDI valued at €2.9 billion ($3.5 billion). This contract means Samsung SDI will supply BMW with its fifth generation electric drive trains from 2021 to 2031. Over this period BMW had similar contracts with other battery suppliers including China’s Contemporary Amperex Technology Limited (CATL).

Direct investment into battery cell producers
To create a resilient supply chain, companies will need to invest capital upstream, particularly into batteries, which account for approximately 30% of the total cost of manufacturing an EV. By directly investing in battery suppliers, EV players are developing long-term strategic partnerships, which can be expanded as battery chemistries evolve.

Example: Volkswagen invested around €900 m in 2019 in Swedish battery producer Northvolt for a 20% stake. At Volkswagen Power Day this year, further investments were announced to strengthen the Northvolt relationship.

Joint ventures with battery cell producers
This has been a favoured approach of US and European EV manufactures keen to bring the battery production closer to their operations. By localizing battery production, these companies are gaining more control over the supply chain and typically reduce the carbon footprint associated with the logistics of the supply chain.

Example: Ford and SK Innovation signed in May 2021 a memorandum of understanding (MoU) to create a joint venture called BlueOvalSK. The aim is to manufacture battery cells and arrays in the US by 2025. Ford expects its annual energy demand for its vehicles to reach 140 GWh by 2030, thus, the proposed 60 GWh BlueOvalSK facility will be a core component of meeting that demand.

In-house battery cell production
Companies are increasingly considering the option of bringing battery production in-house. Although the initial capital expenditure (capex) and shift in expertise is large, many players are recognizing the long-term benefits. Customizable in-house software provides enhanced control of the power system, enabling battery life to be extended. In addition, bringing expensive batteries in-house has a significant cost advantage.

Example: Volkswagen announced earlier this year that it aims to take most of its battery production in-house. The company plans to build six giga-factories across Europe by 2030. The aim is for each factory to have an annual production capacity of 40 GWh, equating to a total for the group of 240 GWh, by 2030.

Upstream raw material involvement (joint ventures and off-take agreements)
Some companies are taking more radical solutions to ensure the electrification their EV fleets is not limited by raw materials constraints. Greater pressure for proven ESG credentials in the supply chain is leading players to source the raw materials for their battery partners. This represents a new dynamic in the supply chain with EV companies taking greater ownership of upstream assets.

Example: BMW signed a $335 million deal with Livent to ramp up their sustainable sourcing of lithium. With ambitious e-mobility plans, battery grade lithium will become increasingly important for EV manufacturers. Livent will supply BMW’s cell manufacturers with lithium from 2022. BMW has partnered with Livent, which sources lithium via brine operations in Argentina, in part due to the company’s focus on sustainable water use and minimal impact on local ecosystems.

Figure 3 outlines the options available to automotive companies along the supply chain. Please note this is not an exhaustive list but designed to provide insight into the existing and changing relationships throughout the supply chain. Increasingly, EV companies are considering greater vertical integration of supply chains due to the ethical sourcing and sustainable localization of production routes, as well as the security of battery raw material supply and potential bottlenecks.

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Jon Mulcahy, Jon Mulcahy is a consultant with the Rystad Energy team based in London. Jonathon.Mulcahy@rystadenergy.com

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