Carmakers’ battery plans in peril as raw material costs soar

In the race to electrify the car industry, Silvia-Luna Yzaguirre Sánchez’s battery cell development expertise is in ever higher demand.

But the Spaniard — armed with a double degree in engineering and an MBA — has spurned Silicon Valley and Asian hubs for the outskirts of the small north German city of Salzgitter, where she is spearheading a late surge into battery cell manufacturing by Volkswagen, the world’s second-largest carmaker.

“If I go somewhere where there are 1,000 like me, what is the point?” Yzaguirre Sánchez said of VW’s tech rivals. With VW and its partners committing to €20bn in investments for six European battery plants, she hopes to get in on the ground floor of the group’s “global battery offensive”. 

Yet VW, along with most other traditional car manufacturers, is playing catch-up. In 2018 — even as Tesla was producing its own battery cells with the help of Panasonic in Nevada, and the largest global battery maker, China’s CATL, announced it was building a factory in VW’s back yard — former boss Matthias Müller dismissed the idea of the group doing the same, preferring to sign procurement deals with mostly Asian producers.

“This is not one of our core competencies,” he said of battery cell production, adding that “others can do it better than we can”. A few months later, VW invested €450mn in Sweden’s Northvolt, before deciding to bring battery cell manufacturing in-house after all, as the EU’s stricter emissions regulations forced it to build “significantly more” capacity by 2030.

American competitors GM and Ford have, conversely, continued to follow Müller’s mantra. They have signed deals with Korean battery producers LG and SK On respectively to supply parts for their electric ambitions and, in General Motors’ case, help build four dedicated plants in the US with a total of 160 gigawatt hours of production by the middle of the decade.

Stellantis, the group behind Peugeot, Fiat Chrysler and Jeep, has established similar partnerships with LG and Samsung SDI.

Ford, which says it has secured 60 GWh of annual cell production by late 2023 for 600,000 electric vehicles, also placed a big bet last month on a partnership with CATL to supply lithium iron phosphate batteries, a cheaper option with less range than a rival chemistry that uses more nickel and cobalt.

Neither strategy is a guarantee of success, according to Tim Bush, an analyst at UBS in Seoul. “Even the players who have been in the industry for 20 years are struggling to bring scaled facilities online at greenfield locations,” he said, referring to the obstacles that the likes of Korea’s LG and Japan’s Panasonic have faced in Poland or Nevada and Tesla’s struggles to ramp up production of its next-generation 4680 battery cells.

“Right now, 85-90 per cent of materials that go into a battery are coming from China,” Bush added, and the incumbents have locked up most of the available supply. Ford’s recent agreements to secure the minerals and cathode materials for its batteries were largely non-binding.

The cost of critical raw materials that remain on the market is soaring. The price of lithium carbonate hit an all-time high in April and is still eight times what it was at the start of last year.

More crucially, availability of minerals is a looming problem for latecomers VW, Ford and GM, with the latter agreeing last week to pre-pay $200mn to lithium producer Livent for supplies. Scott Yarham of S&P Global Commodity Insights predicted that along with the lithium supply crunch, shortages of nickel and cobalt are likely to follow later this decade.

“There’s a lot of investment in battery cell manufacturing in Europe and the US, but not sufficient enough in the raw materials,” he said.

“There’s going to be a big disconnect.”

Things look no better farther down the manufacturing chain. Mathias Miedreich, chief executive of Umicore, one of Europe’s few makers of vital cathode active materials used in batteries, and a VW partner, says that car manufacturers are scrambling to build relationships with suppliers after the “traumatic experience” of semiconductor shortages.

He warns that there will be “a scarcity of supply” of battery cell component manufacturing, even if there is enough investment in mining and battery plants, due to the intricacies of the production process.

At Salzgitter, VW, whose electric strategy accounts for half of all cars sold in 2030 being battery-powered, has added further complexity by choosing to convert an existing diesel engine plant rather than build on a new site and retrain staff there to work on battery technology.

“It’s both a blessing and a curse,” said Frank Blome, chief executive of PowerCo, VW’s newly formed battery production unit. “The change is stressful because we still have to mass produce, develop and update the combustion engines. And we’re doing batteries in parallel.

“On the other hand, we have everything here at the site to build a new plant, all the infrastructure, all the experts.”

VW hopes to start production at Salzgitter in 2025 and scale up to 40 GWh of annual production at the site, enough for about 500,000 electric vehicles, and reach a total of 240 GWh across six locations five years later.

The ramp-up comes at a time when Europe’s industrial competitiveness is under threat, with energy supplies increasingly constrained by the war in Ukraine. Were Russia to cut off all gas supplies to Germany this winter, battery plants would be forced to cease production immediately, ZVEI, which represents the country’s electrical industry, has warned.

Yet the conflict has also strengthened the resolve of western governments to reduce their reliance on foreign suppliers. The US and Europe have pledged billions of dollars in subsidies to companies who build plants in their countries and will incentivise local sourcing of raw materials and battery components.

“Not so long ago, many in Germany believed that battery cells . . . could always be ordered from Asia,” said German chancellor Olaf Scholz during a visit to Salzgitter last month. “Now we know better. The coronavirus pandemic and Russia’s brutal assault on Ukraine have made it clear that a reliance on global supply chains in certain strategic areas is a big risk.”

The risk was underlined last week by reports that China’s CATL had postponed a decision on a US site slated to supply Tesla and Ford, following a visit to Taiwan by Nancy Pelosi, the Speaker of the US House of Representatives.

That move came a few weeks after GM partner LG said it would rethink a planned plant in Arizona due to “unprecedented economic conditions and investment circumstances in the United States”.

Ford’s partner, Korea’s SK On, the world’s fifth-largest battery-maker, will lose roughly $760mn this year on $5.3bn in revenue, according to UBS’s Bush, as the higher costs of production begin to bite.

Rising costs could also hurt VW’s standalone plans. A further €10bn investment would be needed to secure raw materials for its six factories, chief financial officer Arno Antlitz said in March.

He did not rule out an initial public offering of PowerCo or tie-ups with other companies to help pay for battery production, as further sites in Sweden and Spain come online following the transformation of Salzgitter.

None of this deters Yzaguirre Sánchez, who insists the group’s delayed entry into battery technology need not hold it back.

“We don’t need to be the ones to invent the wheel,” she said of VW’s plans. “We just have to create the right partnerships.”