Battery Production: How Electric Car Manufacturers are Freeing Themselves from Asia

Dear Friends & Shareholders,

Two important news items have been published in the past 24 hours; first, VW acquired a 20% stake in the Swedish battery manufacturer Northvolt. Together the two companies want to build a 16 gigawatt hour (GWh) battery cell factory in Salzgitter, Germany. Production is to start at the end of 2023 or beginning of 2024. Second, Tesla, as always one step ahead in strategic planning, is reviewing direct investments in mining projects to ensure the availability of strategic metals such as lithium and thus a sufficient number of batteries. Both reports are a clear signal that the international car manufacturers must free themselves from dependence on the Asian markets in order to realize their planned sales figures for electric cars.  This applies both to the battery cells themselves and to the necessary raw materials such as cobalt and lithium.

In my discussions, especially with German car manufacturers, I repeatedly hear the argument that they are not dependent on a single manufacturer of battery cells because they have delivery commitments from at least five suppliers; however, what does this mean in practice when battery cells are apparently scarce and Samsung recently questioned a contract with VW? Samsung wants to supply only 5 GWh of battery cells instead of the 20 GWh VW expects. If no replacement is found, VW will probably lack the cells for around 225,000 electric cars. So how stable and reliable are supply contracts in a young, extremely dynamic and growing market? How precise can Asian suppliers predict their future production?

Here are two examples from my recent trip to China, where I met battery manufacturers and lithium producers. In a new battery factory, the management said they want to produce around 10 GWh of battery capacity in two years at the latest. The current stated output is 2 GWh. Based on these figures, supply contracts are being negotiated. However, a more detailed look into the production facilities revealed that only around 200 MWh of capacity is actually being produced at present. The company is now planning a fifty-fold increase in capacity in a short period of time – and yet there was no activity whatsoever to expand the production lines!

A second example from the field of lithium production: a manufacturer wanted to show us the factory in which around 12,000 tonnes of battery-compatible lithium are to be produced from the end of the year. However, the factory was not even fully built, just one third of the production facilities were finished, not to mention test runs. In my view, production will not start until 2021 at the earliest – two years later than the lithium buyers are promised.

Building up Battery Know-how Must Cover the Entire Value Chain

At least Tesla and VW have now drawn the consequences from such reports: the construction of their own production facilities and especially the necessary know-how! There are three important steps – greatly simplified for the lithium battery sector:

  1. The extraction of raw materials such as lithium;
  2. The further processing of the raw materials into battery-capable chemicals, for example lithium hydroxide in so-called converters; and
  3. The production of battery cells.

While Tesla already has battery production at its disposal and is now considering entering mines and investing in converters, VW is currently focusing solely on the production of battery cells and relies on supply contracts with Asian partners when purchasing raw materials.

The Chinese companies, on the other hand, are already active in all three areas, with investments running into the billions in recent years. If the world’s largest carmakers really are going to rely 100% on electric cars in the future, they will have to follow this example and build up know-how in all areas of the value chain. This will require further investment, and ultimately also investments in mines in stable countries that meet the compliance requirements of large corporations. VW is currently taking the first, right steps!