• China dominates supply chains for batteries and critical raw materials, which poses risks for US and EU companies in the electric-vehicle (EV) sector.

• Automotive companies are moving to ensure uninterrupted supplies of battery materials by making direct investments, entering into long-term supply agreements or focusing on recycling.

• EIU expects the share of western countries in midstream and downstream supply-chain activities for batteries to increase over our forecast period (2023-27), but upstream activities will see less of a shift.

• Expansion will be supported by government policy initiatives such as the US Inflation Reduction Act and the EU’s Critical Raw Material Act. 

The global surge in EV production will continue to drive demand for critical materials, but a complex battery value chain could create hiccups in the transition from fossil-fuelled vehicles to clean mobility. Automakers and battery makers are experimenting with new technologies to decrease their reliance on supplies of expensive materials such as lithium and nickel. However, the dominance of a few countries (notably China) in stages of battery production could pose a business risk, especially for US and EU companies. This is encouraging some automakers into vertical integration far outside their previous business models, with Volkswagen (Germany) and Stellantis (Netherlands) set to buy two mines, while Ford, General Motors (GM) and Tesla (all US) are investing in refineries for critical raw materials.

Building an EV battery supply chain

The battery supply chain comprises three stages: upstream, midstream and downstream. The upstream stage in batteries involves the extraction of key raw materials such as lithium, cobalt, nickel and graphite. In the midstream stage, mined raw materials are refined and processed to create active cathodes and anodes—the positive and negative electrodes for a battery, respectively—which are then manufactured into a battery cell. The downstream stage involves the assembly of battery cells into modules and then modules into battery packs, which are used as batteries in EVs. Battery recycling is becoming an important fourth stage, as it reduces dependence on mined critical raw materials and impacts the environment less adversely. 

Western countries make a minimal contribution to upstream 

Dominance of the upstream sector relies on deposits or ownership of critical raw materials, including lithium, nickel, graphite, cobalt. Lithium-ion batteries, which contain all four, accounted for about 90% of the market share for EV batteries in 2022, according to the International Energy Agency (IEA). Even solid-state batteries, which are expected to become popular in the future, use lithium metal in their composition. Yet only three countries—Australia, Chile and China—accounted for 90% of lithium mining in 2022, the Democratic Republic of Congo mined 74% of cobalt, Indonesia mined about 49% of nickel extracted in 2022.

This reliance of the upstream supply chain on a handful of countries makes automotive production vulnerable to shocks including price volatility, geopolitical risks and protectionist policies by governments. To diversify and secure their supplies, automakers are making direct investments in mining activities and forging long-term agreements. Volkswagen and Stellantis are closing a deal in August involving investment in two Brazilian mines producing nickel sulphide and copper. In January GM announced a US$650m equity investment in Lithium Americas, a Canada-based mining company, to develop a lithium mine in Nevada, US. 

EU and US policymakers are also implementing policies and regulations to secure future supplies, including through their respective laws on critical raw materials. However, this is an area where there is limited potential to shift production, given that resources are unevenly distributed across geographies. Moreover, the mining sector is not an attractive one to develop, given its environmental impact, its tendency to displace local populations, and the risk of health issues and unsafe working conditions. 

Asia dominates mineral processing

The potential for geographical shift in the midstream battery supply chain is greater. In 2022 China accounted for a major share of the processing of key battery materials: about 65% of the world’s lithium, 74% of cobalt, 100% of graphite and 42% of copper processing. The processing of these materials is critical for China to meet its own demand for lithium-ion batteries. In 2022 China accounted for about 57% share of global demand for lithium-ion batteries, as it leads global EV production. 

Policymakers elsewhere have their sights set on boosting their EV production. Indonesia, which accounted for 43% of the world’s nickel processing in 2022, is discussing collaboration with lithium-rich Australia in the EV segment. In the US Tesla announced plans to build a lithium refinery in Texas to refine battery-grade lithium sufficient for about 1m vehicles each year. In 2022, Tesla manufactured 1.37m vehicles. The construction of the factory is expected to be completed in 2024 and reach full capacity by 2025. Legislation underpins some of these efforts. The US IRA mandates 40% of critical minerals to be sourced from the US or its free-trade partners, for an EV to qualify for subsidies.

China will continue to lead battery downstream activities

Western policymakers also have their eyes set on the downstream battery supply chain, which is also firmly in the hands of China at present. The country accounted for about 73.3% of global lithium battery manufacturing capacity as of May 2023, according to S&P Global, a market research company. The US, Germany and Poland accounted for about 6.7%, 5.4% and 3.2% of the market, respectively. Investment is still pouring into China, which faces a risk of overcapacity in 2024. 

While global lithium-ion battery capacity is set to grow over the next ten years, however, China’s share will decline. According to a March 2023 report by Transport and Environment, Europe might also lose market share. The main reason for this is the US IRA, which is attracting the lion’s share of new investment there. In February 2023, for example, Tesla decided to focus on battery cell production in the US in order to secure IRA tax incentives, rather than switching its German plant from battery assembly to full production. The IEA estimates that around US$26bn was invested into EV battery manufacturing in the US between August 2022 and March 2023, with at least six new battery plants due to open in 2024.  

The EU is fighting back under the Green Deal Industrial Plan: it has fast-tracked permits for critical minerals projects in the EU and is offering subsidies. The Gigabat project, which aims to expand the lithium-ion battery production capacity in Europe from 60 GWh to 900 GWh by end-2026, started in July. It will support the EU’s target under the Net Zero Act to expand the region’s manufacturing capacity for strategic net-zero technologies to at least 40% of its annual demand by 2030. Power Co (Volkswagen’s battery subsidiary), French battery manufacturer Verkor and Stellantis’s equipment manufacturer Comau (Italy) are among the companies involved in the project. If the plan works, Europe should eventually be able to supply nearly all its own EV batteries, but it will still rely on other countries for inputs.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.