What is driving the automotive sector forward and how will this affect you? We look at key sector trends from Q2 2022.
By 2035 all vehicles sold in the UK will be zero tail pipe emissions, with the majority of light vehicles probably battery-electric. In our Q2 2022 automotive review Professor Ian Henry explains what's happening now. You'll also find out about the supply for anodes, cathodes, electrolytes, and the associated raw materials, and get detailed analysis of the UK and other countries' capabilities for sustaining new closed-loop ecosystems and supplying gigafactories.
According to the Faraday Institution, the UK needs 140 Gigawatt hours (GWh) of battery production by 2040 to sustain its c.30 vehicle assembly and engine production plants. The ATF is successfully attracting gigafactories to the UK: including Britishvolt (38 GWh) and a joint venture between Nissan and Envision AESC (11 GWh, which could expand to 38 GWh). Other potential projects include Inobat and AMTE. What's the problem? It's not clear if the UK actually has the supply chain to support these gigafactories.
The EV battery supply chain is currently dominated by Asia, and Europe is also starting to invest heavily – access to lower-cost labour and greener energy means that some parts of Europe may be more attractive to suppliers than the UK.
Five raw materials are crucial to Lithium-ion EV batteries: graphite, cobalt, lithium, manganese, and nickel. These materials are extracted, refined, and processed before they reach the battery cell producer. Extraction is mostly centred on Africa, South America, or Asia, and very difficult to relocate to other regions. Refining and processing is mostly limited to China.
China produces 50% of synthetic graphite and 70% of flake graphite, and is responsible for almost all processing. New extraction sites are being explored in Africa.
Although most cobalt is processed in China, The Democratic Republic of Congo holds a c.70% market share in extraction and presents the highest procurement risk due to the lack of transparency over its supply chain and concerns about human rights issues. Work is underway to reduce the cobalt in EV batteries, but it's currently considered essential for range and durability.
Only 1% of supply should be needed for batteries.
Nickel increases the energy density of batteries and must be class I (99% purity). Indonesia is by far the biggest mining country, while China dominates the processing required to ensure high purity.
Supply is dominated by Australia, Chile, and Argentina, with four businesses controlling 60% of global production. Asian companies have secured large volumes through long-term supply agreements and acquiring stakes in key companies, reducing the volume of freely available lithium. Projects are underway elsewhere to increase supply and, positively for the UK, lithium has been found in Cornwall. Green Lithium Limited plans to build a 50,000 tonne a year refining facility in the north of England.
Establishing a robust supply chain that balances security of supply with cost has the potential to differentiate battery suppliers. These are the key factors concerning companies:
Finally, under the Trade and Cooperation Agreement (TCA), for a battery cell, and thus an electric vehicle to qualify for the tariff-free trade, most of the supply chain needs to be located within the EU or UK – in the short term, businesses may have to resign themselves to a tariff on trade in EVs between the EU and UK.
There are worries across the industry that current government support is insufficient to secure both the gigafactories and broader supply chain in the UK. The Environmental Audit Committee chair is pessimistic:
"We doubt the £500 million government funding left in reserve for automotive transformation will be sufficient to secure the additional 100GWh of gigafactory output needed for the UK electric vehicle sector to reach its full potential. Without further government support, establishment of the battery electric vehicle sector in the UK, critical to maintain our auto industry supply chain, will reach a dead end."
There's hope, however, that establishing gigafactories in the UK could attract some elements of the supply chain to the UK and EU, but this will take time. Even if this does not happen early enough to start production, gigafactories could still be operational while procuring materials from elsewhere, and hopefully attract suppliers to Europe in the longer-term.
For more insight on electric vehicle supply chains, get in touch with Olly Bridge.
The upstream will experience disruptive changes in the extraction of rare earth materials. This will include the extraction of ore from the ground and its refining to generate materials for use in cathodes, anodes and cell production. Typically, only 1.2% nickel is extracted from the ores removed from the ground, compared with 0.7% for lithium and 0.2% for cobalt 0.2%.
But this is only the start of the process. The processing of the material to generate the cathode, anode, and eventually the cells, entails high energy costs to ensure the required quality and consistency, which is not easy. Without a consistent process, waste and scrap cost will be high – estimated to be between 20% -30% of revenue – falling to between 5% and 10% once the battery manufacturing plants are fully up and running (Source Warwick Motor Group).
Therefore, OEMs are adding to their current automotive ecosystem controls on the sourcing and pricing of raw materials. A number of OEMs are already working hand-in-hand with raw material providers and planning carefully for the recycling of the black material, which is waste from the cathode, anode and cell production process.
There will also be changes in the supply chain for the production of batteries, motors and other BEV-specific components, which contain rare earth magnets and other materials that have not been used in vehicles until now. Demand for such raw materials will be high, and is expected to increase the price of these raw materials in the short term, driving efforts to achieve further cost reductions in the supply chain.
The downstream market will also be impacted by changes in the sale of BEVs. Some brands, such as Stellantis and VW, are using BEVs as a catalyst to change their sale process from the current franchise agreement process to the agency model – a direct sales model to the private consumer.
There are also complexities for the leasing and asset finance companies to determine the residual value to be set on BEV and the value that the EV battery holds in the life of a BEV. Due to the shortage of pricing data on used BEVs, it is difficult to establish the residual value of such vehicles. As time progresses, more used BEVs will enter the market and the accuracy of pricing data will improve, leading to greater accuracy in the pricing of used BEVs.
The aftersales market will also be affected by BEVs: in the franchise market, it is suggested is that the servicing of BEVs will fall significantly, up to 40% of the servicing hours sold on an ICE vehicle. However, there will be over-the-air software updates for servicing, enabling the OEMs to sell more services directly to the end consumer.
The small independent aftersales market providers will come under pressure to service BEVs over time. However, there is a shortage of trained technicians in this market. Furthermore, the investment required to service and repair BEVs in the independent aftersales market will be substantial and some independent aftersales service providers may not be able to make this investment and therefore focus on servicing the remaining ICE vehicles in the current car park.
There is a shortage of charging infrastructure in the UK: at present, there are only 29,561 public chargers, of which only 1,365 are ultra-rapid chargers. A significant increase in investment in charging infrastructure is needed. This investment will come from local authorities, UK government and private companies. Charging infrastructure will be one of the largest areas of growth in the next 10 years as the UK struggles to fulfil the commitment set by the current government to have zero tail pipe emissions from all new cars sold by 2035.
Regulation around the disposal or batteries has increased, making it illegal to dispose of batteries in landfill, and therefore the vehicle’s end of life is crucial. A higher requirement for to recycle batteries after the life of the vehicle will result in less exporting of batteries overseas.
BEVs are generating a unique and previously unseen automotive ecosystem that has a large number of unknown component parts. However, all of them are interlinked across the life and death of the BEV. You can see this ecosystem and the closed loop that it generates in this diagram.
For more insight and guidance, get in touch with Owen Edwards.
A full year of production for the new Nissan Qashqai and the Range Rover, as well as the launch of the new Range Rover Sport, should have helped vehicle production climb towards and hopefully over one million units again. However, several factors mean that UK car and van production will now struggle to even meet last year’s disappointing figure of 917,000: geopolitical problems and economic headwinds, manifest in the cost-of-living crisis; the slower-than-expected start at new chip-production facilities, and delays in full production rates for the new Range Rover models.
Lower than expected production is not helped by continued disappointing Jaguar volumes and the end of Astra production in April, with the replacement electric van not coming on stream until next year. Car sales are similarly affected, with importers facing a shortage in new car availability, as much as domestic suppliers – some second-hand cars now sell for more than the official list price for new vehicles in that model.
And while the industry struggles to recover to recent levels of ICE-powered vehicle-production, it also has to transition to electric vehicles. Car plants need heavy investment to make electric vehicles as well as develop a new supply chain, for batteries, motors, and power electronics, but this is only slowly being established in the UK. While Nissan’s battery supplier, Envision, and Ford deciding to make electric motors in Halewood are very welcome investments, they're only two of the many investments required. And, more significantly, if the UK doesn't win this investment soon, vehicle manufacturers here will have no choice but to source EV systems internationally. With an increasingly international supply chain, and rising logistics costs, retaining domestic vehicle production will prove even more challenging than it is now.
Many industry commentators are confident that batteries must be sourced from facilities close to the vehicle assembly plants. This may be true for the delivery of fully assembled batteries: large, heavy, and consequently challenging to transport long distances, but it's not necessarily always the case. In the supply of cells (as opposed to fully assembled batteries), there are already many long-distance supply chains in operation across Europe: Volkswagen and BMW, for example, source cells from Sweden, transported across Europe for assembly close to the car plants themselves. What’s economic and practical for the Germans ought to be workable for UK vehicle plants.
Nissan through its partner, the Chinese company Envision, has located a fully integrated battery plant (including making cells) next to its Sunderland factory. However, fully assembled batteries for Mini come from Poland, via Munich, and there's still no certainty on where Jaguar Land Rover (JLR) will source batteries for the forthcoming electric Range Rover and Range Rover Sport. With an imminent production start it wouldn't be surprising if these vehicles started life with batteries, or at least their cells, sourced outside the UK, before being fully assembled in the UK. Batteries for the new Stellantis van will be sourced from outside the UK, first with cells from China assembled into batteries in Spain, and later from the new network of Stellantis cell and battery plants being established now.
The potential overseas sourcing of batteries or cells for JLR – as is already the case for Mini – highlights an inherent weakness in the UK automotive supply chain sector, namely the lack of domestic suppliers ready to invest in supporting the transition to EV production. Cell and battery production is dominated by non-UK companies, especially Chinese and Korean entities – the bullish optimism of Britishvolt and numerous smaller companies supported by the government’s automotive transformation fund (ATF) notwithstanding.
So, 2022 is the year of hoped-for recovery in automotive production for the current sector. It's also the year in which the country needs to see significant progress in the reorientation of the sector to EVs, notably battery assembly, cell-production, and motor-production and assembly. Some initial steps along this road have been made, but these are insufficient for the industry to achieve the necessary scale to be competitive in the new world order of EV production. Government support can help, although the flagship Automotive Transformation Fund (ATF) risks allocating funds too thinly, across large numbers of small operations rather than supporting the build-up of globally competitive companies.
And this is perhaps the crucial issue. There's a deep-rooted fear of or reluctance to be seen as picking winners, given this policy's reputation for having failed in the 1960s and 1970s era of industrial intervention. Such fears or reluctance may well be reasonably grounded, but the UK either needs to support its own potentially world-leading players, and retain them – and their decision making – in the country, or it needs to support global leaders from outside the UK to invest in the automotive manufacturing sector.
The former may be ideologically difficult for the current government, and relevant domestic companies may not exist, meanwhile the latter approach – attracting leading global players – was central to the 1980s revival of the automotive sector, when a conservative government successfully attracted Nissan, Honda, and Toyota to the UK. Attracting similar companies, or yet more investment from the two, Nissan and Toyota, who remain may be the only viable route to follow.
For more insight and guidance, get in touch with Ian Henry.