Chinese batteries are on track to dominate the European car industry

Europe has been one of the world’s major hubs for the production of internal combustion engines for decades, but as the sector makes its transition to electric vehicles, China is becoming the world’s battery powerhouse.

By 2031, its production capacity is projected to be greater than that of Europe, the second-largest market for electric vehicles, according to an analysis of public announcements conducted by Benchmark Minerals, a data company. Industry executives and national authorities are concerned.

Although China started relatively late in developing an automobile industry capable of competing with Europe and the United States in engine technology, the shift to electric propulsion offers it a chance to leapfrog traditional automotive production regions.

Around 40% of an electric vehicle’s value is in its battery, so the country supplying the battery gains a huge share of the market. “The new world, the world of electric vehicles, will be clearly defined by battery costs,” said Thomas Schmall, vice president of technology at Volkswagen.

According to Benchmark Minerals, China will have 322 gigawatt hours of production capacity in Europe by 2031, ahead of South Korea, with 192 GWh, and France and Sweden.

The US will be fifth, thanks to Tesla’s Berlin factory, followed by Germany and Norway. The UK would be eighth, with just 20 GWh.

In addition to the already announced battery production, a number of Chinese brands, from BYD to Great Wall and Nio, plan to significantly expand their sales in Europe. This will mean, over time, that more battery factories and vehicle assembly lines will use Chinese technology.

Schmall hopes this will spur innovation in Europe. “Sure, it’s a risk,” he said. “But it’s also an opportunity.”

Volkswagen is among major European manufacturers looking to expand their battery capacity and reduce their reliance on outside suppliers.

The automaker wants to build five factories in Europe, as well as one in North America. But in the meantime, it has a supply agreement with China’s CATL, the world’s largest battery manufacturer.

“Our starting position is 100 meters behind their position [os chineses]”, Schmall told the Financial Times. “We need to run faster, we need a higher level of speed than them [o que é difícil]if you have any idea how fast the Chinese are advancing”.

China’s growing presence in Europe’s auto industry is the result of supply agreements with automakers in the region, where electrification is being driven by ambitious plans to reduce pollutant emissions aimed at ending the sale of vehicles with engines. of internal combustion by 2035.

CATL is a supplier to Volkswagen and Mercedes-Benz, while BYD — which also makes batteries for its own cars — has an agreement with Stellantis. Envision AESC, a battery manufacturing group backed by China’s Envision, supplies batteries to Nissan in the UK and may build new factories in France and Spain.

Nuria Gisbert Trejo, director general of CIC Energigune, a Spanish research institute on energy storage, sees Chinese investment in battery factories in Europe as a problem, as it reduces Europe’s independence and autonomy in a key sector for the future.

“While in terms of economic impact and jobs these investments represent an opportunity for Europe, they are fundamentally a problem as they imply dependency,” she said.

At an FT event this year, Stellantis Chief Executive Carlos Tavares warned that “there will be a significant dependence of the Western world on Asia.” He also called the European Union’s pollution reduction rules “naive and dogmatic”, asking: “Do you really want to put your mobility in the hands of the Chinese state?”

However, as they seek to secure jobs, European governments sometimes have to worry more about securing supplies for local car makers and have been offering generous subsidies to attract production.

Some in the industry argue that attracting investment is more important than discussing technology.

“It is very important that we have a strong battery cell manufacturing business in Europe,” said Heiner Heimes of the RWTH University of Aachen, who has been following announcements of construction of so-called “gigafactories” in Europe.

But Olivier Dufour, one of the founders of French battery maker Verkor, said that “what happened in the last two or three years [Covid-19 e a invasão da Ucrânia] confirms the need to relocate the industry in Europe and to be independent in terms of supply”.

An unexpected winner in the race to attract production was Hungary, which took steps to support its growing auto industry and signed up to China’s Belt and Road Initiative, attracting investment from CATL and EVE, another Chinese battery maker.

While production incentives can be significant, for a new investor they are not the most important factor.

“The labor cost and incentives are good, but when it comes to operating costs, it’s all about energy,” said Schmall. While Volkswagen considers more than 200 indicators when making a decision on where to build a factory, energy costs come “first, second and third,” Schmall said.

When Verkor selected Dunkirk, in northern France, for its battery plant, Dufour said proximity to customers and licenses to develop a large complex were the most important factors, as well as the ability to source renewable energy at affordable prices. accessible. Labor availability was also an important consideration, as the factory will need 1,200 skilled workers and will create two to three times as many jobs in the local supply chain.

One question is whether Europe will resort to regulation to limit Chinese involvement.

In the United States, the Inflation Reduction Act prevents cars containing technology from an “entity with foreign involvement” from receiving consumer incentives, which makes them more expensive.

But Europe has no plans to penalize Chinese companies.

“We are doing our best,” said Walter Goetz, chief of staff for the European transport commissioner, at a Financial Times event earlier this year. “I believe that the new geopolitical situation in Russia and China will give additional impetus to efforts to seek independence, but this will not be an easy task, because raw materials, of course, also need to be mined on a world level.”

He added: “But I think manufacturing should happen in Europe, as much as possible. That’s our goal.”

Schmall believes that it is “better to stimulate and force competitiveness” through rules than to impose barriers. “Otherwise, things get more expensive for the customer in the long run.”

Mercedes-Benz is one of the companies that buys some of its batteries from Chinese suppliers.

“It doesn’t depend on where the headquarters of the company you are working with are,” Chief Executive Ola Källenius told the Financial Times. “Even if an Asian company came to Europe to build a factory [de baterias] for you, you would still work with this Asian company.”

And while some countries are pursuing protectionist policies, business leaders like Källenius warn of unintended consequences.

“I think it would be a very big mistake if, economically, the world built strongholds around the big economic regions, because that would stifle growth.”