Drivers for growth

Research suggests that drivers for growth come at different levels. On a governmental level, the motivation for support is driven by three different factors: environmental impact, energy security and economic benefits. Besides the known environmental concerns, many governments consider EVs an opportunity to reduce their dependence on foreign oil supplies. At the same time, the transition to electromobility can offer a range of opportunities for sustainable innovation, growth, and employment,

both in manufacturing and the supply chain. As a result, countries are currently increasing incentives and are formulating policies to foster the BEV market and to ensure its competitiveness against conventional vehicles (e.g., favourable tax systems to BEV owners, preferential parking permits in dense urban centres or the right to drive in bus/taxi lanes).

Incentives on the consumer level are somewhat different in nature. For instance, environmental consciousness is increasing among consumers, and it is one of the most prominent factors when deciding to purchase a BEV. Moreover, ownership benefits provided by the government also play a role in driving the decision for an electric vehicle. Research shows that BEVs are currently the cheapest option in terms of total ownership cost (TOC) over vehicles’ lifetime for medium-sized cars, standing at EUR 75,000. Other elements that are taken into consideration by consumers include:

BEVs have lower noise levels than petrol and diesel vehicles;
maintenance costs are much lower for electric vehicles;
electric cars offer a cheaper mobility solution given the increasing fuel prices;
electric motors can operate unproblematically at much higher speeds than internal combustion engines; and
electric vehicles can be “refuelled” at the comfort of one’s own

Barriers to adoption

On the other hand, the electromobility market’s development also faces several barriers, including social, technical, economic, psychological, and cultural issues.

First and foremost, in the socio-technical list comes the availability of charging infrastructure, as it is a major issue in BEV adoption. Infrastructure currently varies between the EU Member States; for instance, the Netherlands counts over 32,000 recharging points and over 119,000 registered EVs compared to Greece, which has less than 40 recharging points and just over 300 EVs. Linked to this, consumers’ perception that BEVs cannot cover the desired distance without a recharge and concerns about battery performance act as further obstacles to demand.

Moreover, investment in BEV technology was for a long time limited by OEMs. On the one hand, this was a result of manufacturers’ previous investment activity.

Prior to the advancement of electromobility, manufacturers heavily invested in “cleaner” solutions to improve ICE vehicles, such as stop-start systems.

As a result, most of the sunk costs presently faced by OEMs are related to ICE technologies, which makes some manufacturers somewhat reluctant to switch investments to disruptive BEV technologies.

Some resistance towards EVs relates to the fact that carmakers have generally not been able to make profits from their sales, especially in the case of BEVs. Despite government incentives, EVs, and especially BEVs, still have a significantly higher final price compared to similar ICE cars, and consumers’ willingness to pay a premium for electric cars is still limited. Notwithstanding the accelerated fall in the price of batteries in recent years, BEVs are unlikely to reach price parity with ICE technology in the mid- segment of the market before 2025. This fact explains the industry’s strategy of suppressing EVs until the limit of the entry into force of the new regulatory standards for 2020/2021.

Finally, economic and attitudinal factors hindering the transition to electromobility on the consumer side include:

The uncertainty about the payback period of a BEV;
the lack of variety in models and styles in the BEV market compared to conventional vehicles;
the scepticism that still exists among consumers regarding the actual environmental performance of electric vehicles; and
the generally limited consumer awareness regarding costs and benefits, and

It is important to highlight that consumers’ attitudes are improving fast. A recent study by Ofgem indicates that one in four consumers plan to purchase an EV or a plug-in hybrid in the next five years. A recent Consumers Reports’ survey also indicates that 71% of US drivers would consider buying an electric car in the future, while almost a third of them considered an EV as their next vehicle purchase.

Client

GF LTD

Date

January 2022

Services

Financial Services

Related and supporting industries

Batteries are the main single cost component of BEVs, representing around 40% of their manufacturing cost in 2020.

The still relatively high cost of batteries is mainly responsible for BEVs

being significantly more expensive than similar ICE vehicles, which means innovations in battery design and production will be a determining factor in the overall development of the sector.

The fact that, at the time of this study, none of the global top ten EV lithium-ion (Li-ion) battery producers is European means in and of itself that the EU manufacturers are over-exposed to problems within the battery global value chain85. In 2021, China dominates the EV battery global capacity accounting for 77% of the total, and the top producing firms are from Asia86.

However, S&P Global expects geographic diversification to accelerate as more countries become Li-ion battery producers given the preference to manufacture close to the markets due to weight and the cost of shipment. The EC’s European Battery Alliance87, established in 2017, also appears to be offering tangible results in the form of investments in manufacturing capacity and industry consortia. The establishment of battery production in Europe is essential to fill an important gap in electric vehicles value chains, anchoring a very large part of the value-added and jobs generated by the EV industry. Based on current investment announcements, the European production capacity is expected to be enough to satisfy the region’s needs until 2030, escalating to 20-25% of the world’s supply by 203088.

Table 2.2: Rapid pace of EV Li-ion battery Investment in Europe 2020 / 2021

Company	Capacity (GWh)	Status	Country
MES	15	In operation	Czech Republic
Samsung	30	In operation	Hungary
SK Innovation	18	In operation	Hungary
Northvolt Labs	0.5	In operation	Sweden
Envision AESC	1.9	In operation	United Kingdom
Microvost	1.5	Under construction	Germany
Northvolt Zwei	20	Under construction	Germany
SVOLT	22	Under construction	Germany
Tesla	40	Under construction	Germany
Italvolt	70	Under construction	Italy
LG Chem	64	Under construction	Poland
Inobat	10	Under construction	Slovakia
Northvolt	ETT 40	Under construction	Sweden
ACC	24	Planned	France
ACC	16	Planned	Germany

Company	Capacity (GWh)	Status	Country
Varta	Pilot Plant	Planned	Germany
SK Innovation	30	Planned	Hungary
Verkor	16	Announced	France
BMW	Pilot Plant	Announced	Germany
CATL	70	Announced	Germany
Cellforce	1	Announced	Germany
Farasis	15	Announced	Germany
Leclanche	1	Announced	Germany
GS YUASA	Na	Announced	Hungary
FAAM/Lithops	0.2	Announced	Italy
FREYR	43	Announced	Norway
Morrow	32	Announced	Norway
Panasonic	Na	Announced	Norway
AMTE	20	Announced	United Kingdom
Britishvolt	30	Announced	United Kingdom

Source: Fitch Solutions (2021)

There is also an emergence of European initiatives, despite current investment plans pointing that Asian firms will be responsible for a large part of the local supply.

Having European battery manufacturers will be important to leverage the local research and development capacity in battery- cell production and design, recycling, and materials, as well as fostering innovation ecosystems and co- development possibilities in the value chain. It should also leverage the European industry’s role in the transition to the new technologies expected to replace the current Li-ion dominance in the long term, such as solid-state lithium-metal batteries. Northvolt is the most ambitious, advanced, and strategic European battery project, relying on investments and supply agreements with VW, BMW and Volvo and aiming for 25% of the European market. VW, Stellantis and Renault have all announced plans to develop their own independent battery production capabilities in-house or through joint ventures, with pilot or full-scale plants predicted. .

Recently, emphasis has been increasing on ensuring that battery recycling capacity exists to secure Europe’s position as a leader in the circular economy and to build a strong position in an industry wherein scale will be fundamental. Recycling will also be central to diversify the sources of raw materials and create resilience in the value chain. Northvolt has indicated ambitious goals for recycling, and the European Battery Alliance has registered new pilot plant investments addressing what it

considers ‘one of the remaining challenges’ for the European battery industry. Although encouraging, one must observe that these developments are 2-3 years behind China’s selection of 17 cities to begin piloting EV-battery recycling in 2018.

Battery manufacturing equipment is an important component of the value chain that tends to receive less attention. The European position in industrial machinery has been traditionally strong, but this has not been reflected in battery manufacturing thus far. According to a source interviewed for this work, most of the equipment for cell production of European plants is being imported from China and Korea, where battery production for electronics is long present. This account is compatible with reports found in the specialized media. This picture is especially critical because there is a race to invest in battery production now and, therefore, limited time to foster new players in the equipment subsector.

Other components

Electric cars are simpler to assemble than combustion engine vehicles. An ICE powertrain has around 12,000 components versus a few hundred in BEVs. These components are also, in general, simpler to manufacture than the elaborate machining and casting techniques necessary to produce ICE parts. Studies indicate that, if excluded the production of battery cells, the total number of workhours needed for components is 15%-30% lower for BEVs.

In fact, about 31% of the content per vehicle of ICEs, related mostly to the engine and transmission, is completely eliminated in BEVs and replaced with electric motors, battery packs and power electronics. This shift means the set of suppliers that will be demanded by the automotive industry in the future will also completely change. The powertrain components will shift from the mechanical engine and transmission systems, such as gearbox, exhaust pipes and injectors, to mechatronic and electrical systems like e-motor, converters, inverters, and high-voltage wiring. The timing of this transition will largely depend on (i) the adoption of electric vehicles, (ii) the mix between PHEVs and BEVs, since the former still contain ICE mechanical systems, and (iii) the extent to which OEMs will decide to internalize component manufacturing.

Nonetheless, large changes can be expected in the value creation structure of automotive supply chains, with many traditional first-tier suppliers downsizing and losing ground to new firms specialized in power electronics or more successful in transitioning to the high growth segments.

Other aspects of the Green Transition

Li-ion vs Hydrogen Fuel Cells: an Environmental Sustainability Matrix

Views are polarized not only within academia but across the OEMs themselves. VW has already articulated that Li-ion batteries are the winner while Honda, Hyundai and Toyota remain staunch advocates of hydrogen fuel cells (HFCs).

At the time of this study, Li-ion, based on the unprecedented wave of investment in battery manufacturing plants across Europe, is by far the favoured option from an OEM perspective.

Still, there is no outright winner, and essentially the two technologies are likely needed to help significantly lower CO2 emissions to profoundly enhance the ‘greening’ of the sector. Based on multiple sources and our interviews, we developed a matrix (Table 2.3) outlining the pros and cons of the two technologies.

In summary, when it comes to the case for Li-ion batteries and hydrogen fuel cells, it should not be a case of either-or. While both currently fail the ‘greening’ litmus test in terms of pollution when they are made and transported, they are also both a major contributor to sustaining the environment when in ultimate use. Li-ion will continue to be optional for shorter repetitive journeys while longer- haul and greater power requirements will increasingly tip the balance in favour of HFC. While technology, infrastructure, and the environment all matter, shaping perceptions and confidence around electromobility is equally important. We believe that, when the full potential for ‘green’ HFCs is unlocked and when consumers witness investment in HFC infrastructure, the efficiencies, accessibility, and differences between the two sources might become marginalized to the point that it will be the overall supply chain with the lowest carbon footprint that will become a major consumer differentiator. Green hydrogen (zero-carbon hydrogen) is still by far the most expensive hydrogen to produce, but as its cost falls in the coming years, the case for HFCs will strengthen over the next decade. Consequently, it is in the EU’s best interest to further enable the innovation and greening of the two power sources.

Table 2.3: Li-ion vs HFCs environmental sustainability matrix

Li-ion Battery EVs		Hydrogen Fuel Cell EVs
Technological and Efficiency Perspective
Positive Attributes	Concerns Cited	Positive Attributes	Concerns Cited
1. As clean as HFC and as of 2021 is cheaper, easier, and safer to handle. 2. BEVs have an efficiency of 70% to 80% – meaning that around three- quarters of the electricity generated by the grid is actually applied to propulsion. 3. Currently the most commercially viable from a European OEM perspective. 4. OEMs and battery manufacturers are making good	1. Less energy-dense, slower to recharge and creates more ‘range anxiety’ than HFC. 2. Mining for crucial metals like cobalt, lithium, and nickel is raising environmental concerns. 3. Safety concerns increasing due to ‘thermal runaway’ – fire risk and decision by the US National Highway Traffic Safety Administration (Aug 16 2021) to investigate Tesla’s autopilot system over crashes.	1. Old but proven technology (created in 1839 by Sir William Grove). 2. Electricity, heat and (potable) water outputs with hydrogen (the most common element in the universe) and oxygen (which is abundant) as inputs. 3. Energy to weight ratio circa ten times greater than Li-ion batteries – thus, offers much greater range while being lighter and occupying smaller volumes. 4. Quick refuelling times.	1. If the electricity used for hydrogen extraction is not from a renewable energy source, this propulsion can be ‘dirtier’ than a typical gasoline car. 2. Only about 25% to 35% of energy actually makes it to the wheels of an HFC car. 3. Storing hydrogen as a gas is expensive and energy- intensive. 4. Highly inflammable – tends to escape containment and reacts with metals rendering them more brittle and prone to breakage.

Li-ion Battery EVs

Hydrogen Fuel Cell EVs

progress towards improving battery efficiencies and bringing prices to below $100 per kilowatt-hour (kWh) – a rate at which EVs can compete with

traditional ICE vehicles.

4. Lack of charging infrastructure and inconvenience for those with no home charging facility.

5. Risks of bottlenecks in the battery supply chain, which can disrupt production and spike prices for lithium and related minerals and

materials.

5. No harmful emissions from the vehicle – only water.

6. With Airbus aiming to have its three concept hydrogen aircraft in operation by 2035, this will boost consumer and investor confidence in HFCs.

5. Starting and

restarting in temperatures below freezing point can be problematic.

6. Lack of HFC refuelling locations.

Possibilities of large-scale, environmental-friendly and competitive production

· Lithium is mined from different sources, including brine, clay, and rock – it can take 2.2 million litres of water to mine every tonne of lithium.

· Concerns about worker and environmental safety (especially in Africa and the Democratic Republic of the Congo in particular – accounting for circa 70% of the cobalt used in Li-ion batteries).

· Around one-third of the world’s lithium comes from salt flats in Chile and Argentina, where the material is mined using huge quantities of water in otherwise arid areas.

· Battery grade lithium can also be produced by exposing the material to very high temperatures

– a process used in China and Australia – which consumes large quantities of energy.

· 90% of the world’s trade travels by sea, which generates 3% of the world’s greenhouse gasses

and thus, neither is the mining nor the shipping of cobalt/quartz / Li-ion ‘green’.

· Hydrogen is only as ‘green’ as the method for production.

· Currently (Q3/Q4 2021), circa 95% of hydrogen is produced from fossil fuels via steam reformation.

· A steep change in renewable energy growth is underway, with renewables set to provide around 30% of global power demand by 2023 – RE will thus improve the environmental credentials of both Li-ion and HFC systems.

· According to IRENA, in the long-term, creating hydrogen fuel via water electrolysis has the potential to become 40 to 80% cheaper.

· New systems of electrolysis will eliminate the need for rare elements like platinum and iridium

Supply chain resilience dynamics

· With the United Nations still maintaining a peacekeeping presence in the DRC where global quartz production is concentrated, the probability of supply chain disruption is high.

· Although merely an investor in many cobalt mines, China controls 70% of the capacity to convert cobalt ore into cobalt chemicals for the battery industry, representing considerable control of the supply chain.

· While Australia alone boasts five of the ten biggest lithium deposits in the world, over 60% of lithium processing occurs in China.

Closing observations

Li-ion Battery EVs

Hydrogen Fuel Cell EVs

· The main observation is that the two technologies must be pursued with alacrity to contribute to a sustainable environmental solution.

· At the start of this decade, Li-ion BEVs are in the clear lead, fuelled by the exceptional successes of Tesla globally and the successes of most European OEMs are achieving in terms of meeting their own individual emissions targets aligned with the EU target of 95g/CO2/km.

· While many analysts are predicting that the Li-ion / HFC car sales ratio will essentially remain over the future decade in favour of the former, this gap may well narrow on account of the following:

a) Even with the increased investment in lithium-ion battery manufacturing plants within the EU, the supply chain is far more dependent on global trade than HFC production. Furthermore, as consumers become better informed and as consumer preferences become more influenced by the entire greenhouse gas footprint from sourcing and manufacturing (i.e. not just the use of it), there will be an increasing awareness that making lithium-ion batteries is an energy- intensive manufacturing process while transportation which can routinely involve shipping lithium from Chile to China to Japan or South Korea in and of itself creates a significant CO₂ footprint on top of which is the shipping to the EU for the inputs for battery production.

b) The dramatic increase in using renewable energy combined with major HFC technological and innovation spill-overs from the aviation sector probably explains why so many automotive executives (62% – KPMG study 2017) believe that hydrogen offers the true breakthrough for electromobility and will overtake lithium-ion related propulsion. Nonetheless, based on 2016 and 2017 analysis by the Copenhagen Centre on Energy Efficiency, compared to BEVs, HFC vehicles energy losses were considerable in terms of electrolysis, storage/distribution, and especially the H₂ to electricity conversion manifesting in an overall efficiency rating of only 23% for HFC vs 76% for BEVs.

· Both lithium-ion batteries and HFCs do not pollute when they are being used in EVs, but both pollute when made and transported. A study by Circular Energy Storage reported that ‘if an electric vehicle is using a 40 kWh battery, its embedded emissions from manufacturing alone would be the equivalent to the CO2 emissions caused by driving a diesel car with fuel consumption of 5 litres per 100 km in between 11,800 km and 89,400 km before the electric car has even driven one metre. At the higher range, an electric car would first have a positive climate impact only after seven years for the average European driver.

· In terms of HFC contributing to green mobility in the future, McKinsey Vienna opined that most large OEMs have teamed up to work on the technology with associated systems development. For commercial vehicles, McKinsey models show that fuel-cell EVs can break even with BEVs within the next five years and will also achieve a lower total cost of ownership than diesel by 2030.

Sources: FURO Systems (2021) Lithium-ion Batteries vs Hydrogen Fuel Cells in Electric Vehicles.

Green Car Reports. (2020). Battery-electric or hydrogen fuel cell? VW lays out why one is the winner. AMS Composites. (2020). Hydrogen Fuel Cell vs Lithium-ion – The Future of Transports.

Nature. (2021). Lithium-ion Batteries need to be greener and more ethical.

Holmefjord, K. (2021). The Engineers: Clean Energy: BBC World / Corvus Energy (Norway).

Melin, H. (2019). Analysis of the climate impact of lithium-ion batteries and how to measure it: Circular Energy Storage.

Tsakiris. A. (2019) Analysis of hydrogen fuel cell and battery efficiency: Copenhagen Center on Energy Efficiency. Fitch Solutions. (2021) Batteries Investment Round Up: New Players and Countries Begin to Make Their Mark.

McKinsey & Company. (2020) McKinsey Electric Vehicle Index: Europe cushions a global plunge in EV sales.

Energy Sector Management Assistance Program. (2018). Electric Mobility and Development – an Engagement Paper from the World Bank and the International Association of Public Transport.

IRENA. (2020). Green Hydrogen Cost Reduction: scaling up electrolysers to meet the 1.5 C climate goal.

There is also an emergence of European initiatives, despite current investment plans pointing that Asian firms will be responsible for a large part of the local supply.

Other components

GREENING OF THE EU AUTOMOTIVE SECTOR

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