Are e-Car Production Targets in Jeopardy due to Bottlenecks?

Dear Shareholders & Friends,

Based on recent media reports, particularly in Germany, it is increasingly clear that the manufacturers of electric cars are not able to meet their orders in full. A report in German "Manager Magazin" received particular attention in this regard. According to the report, Daimler will be forced to reduce the delivery of the new electrically driven SUV EQC to 30,000 units this year, roughly half the originally planned quantity. The report cited a lack of suitable battery cells as the cause. Daimler immediately denied the statements of the renowned business magazine.  

There are similar rumors about the e-tron from Audi - also a new electric SUV, which has only been on the market for a few months. According to unconfirmed reports, the Audi plant in Brussels is currently producing - at least in part - cars without batteries, which will be retrofitted later.

Finally, the Financial Times reported in early February that Jaguar has had to suspend production of its i-Pace electric SUV at contract manufacturer Magna Steyr in Graz. The reason, again, was supply problems with the battery cells which, in the case of Jaguar, are supplied by LG Chem from Poland.

Already last year, bottlenecks in battery cells were repeatedly reported in the industry. These rumors concerned, for example, Jaguar and its electrically driven i-Pace or the South Korean manufacturer Kia.

At present, it is hardly possible to obtain reliable information on this problem - which is why the headline of the newsletter is also marked with a question mark this time. However, the fact remains that all European volume manufacturers rely on the supply of battery cells. This means that they do not have the "heart" of electric cars in their own hands. Only Volkswagen, together with the Swedish start-up Northvolt, is planning its own cell production in Germany; however, even this will not go into full production until the turn of 2023/2024. All the other manufacturers are sourcing battery cells from suppliers based primarily in China and South Korea.  

Various causes for possible bottlenecks

In my view, there are essentially two plausible explanations for why there is a lack of a sufficiently large supply of battery cells at present, especially in Europe.

Firstly, it could be that although enough battery cells are produced, there is a lack of quality. There is, after all, a difference between a lithium-ion battery to power a hand-held vacuum cleaner and an SUV weighing several tonnes. The demand for battery cells is currently rising sharply worldwide, so that quality problems are very likely when production is ramped up. We know this from other areas where demand suddenly skyrocketed and supply was unable to keep up in terms of quantity and/or quality in the meantime.

Secondly, battery cell manufacturers may simply not have sufficient capacity at present. Most likely, Chinese and South Korean producers will first supply their domestic car industries before their European competitors take their turn. This is particularly conceivable in the case of the state-controlled economy in China.

Currently, the coronavirus epidemic is adding to this, threatening to disrupt the entire supply chain. However, at least this is probably a temporary effect.

The good news is that battery cell factories are currently being built on a large scale in Europe as well. Production capacities will increase significantly in the coming years pushing the bottleneck in the value chain further upstream. In my view, current and planned production capacities for the required battery raw materials will not be sufficient as the corresponding expansion is already faltering in many places. For example, Galaxy Resources, an Australia-based lithium producer, has announced that in view of the (too) low lithium price it will significantly reduce its production and leave the raw material in the ground until prices have risen to an appropriate level. In the long term, Galaxy management is optimistic about the demand for lithium, given the increasing popularity of electric cars and stationary energy storage devices.

The reaction of lithium companies' share prices when the price of the light metal rises was last seen in 2017 and is a harbinger of what is to come.  

For our German-speaking audience:

Recently, I visited Aktionar TV for an interview about electric vehicles and their impact on raw material supply chains. Please watch the video below:

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