China has been the world’s biggest exporter of goods since 2009, sending more than US$2 trillion worth of goods abroad each year. But as the Covid-19 outbreak has shown, such dependence on China in integrated global value chains has created an unprecedented risk to the global economy.
The Institute for Supply Management says that the pandemic has caused supply chain disruptions for nearly three-quarter of US companies. This includes quarantines, factory closings, delays in receiving orders from China, delays in moving goods within the country and loading them at Chinese ports.
The US and other countries since have introduced similar lockdowns to global supply chains in the hope of containing the spread of the disease. It looks now that things will get much worse before they can get better.
For the Electric Vehicle (EV) industry, this presents acute challenges. In the lead up to the COP-26 global climate change meeting in London in November later this year, 2020 was supposed to be the breakthrough year for EV. Data firm IHS Markit reckoned the number of EV models available to European buyers would jump from fewer than 100 to 175 by the end of 2020, rising to more than 330 by the end of 2025. EV sales would rise from 3.4% of all vehicles sold in 2019 to 5.5% in 2020 in the UK, according to forecasts from Bloomberg New Energy Finance. Some forecasts said that by 2026 electric vehicle sales will account for a fifth of sales in the UK, while others are even more optimistic, saying 2022 would be the tipping point.
New European Union (EU) rules came into force on 1 January this year, heavily penalising carmakers if average carbon dioxide emissions rise above 95g per kilometre. The fine for exceeding this limit is of €95 for every gram over the target, for every car sold. Based on 2018 sales figures, the excess emissions bill could be nearly £30 billion.
The Coronavirus pandemic has thrown a spanner in the works. On the demand side, a potential global recession will mean falling incomes and a rise in unemployment. Discretionary purchases like new cars will take a back seat, and falling global oil prices mean the incentive to switch from diesel or petrol to EV is diminished. This will particularly impact sales in price-sensitive markets such as China and India, but also in Europe, which has turned into the global epicentre for the pandemic.
On the supply side, carmakers, auto parts suppliers and others in the industrial value chain in China have applied for a record number of force majeure certificates to try to get out of contracts they can no longer fulfil.
Tesla has said recently that is had to downgrade some parts used in Chinese-made cars because of a lack of availability due to the Coronavirus outbreak.
Tesla announced last year that it would seek to localise its supply chains further in China, to meet the rise in demand in the country.
Consultants Deloitte say that new Chinese entrants to the EV market will form the largest individual sellers of such vehicles globally by 2030. But many of China’s EV start-ups, faced by the drying of venture capital funding, scaled-down government subsidies and now an anticipated dearth of customers, could face financial challenges. The subsidy cuts have already led to a 54% pummelling to sales numbers in China in January this year, according to the China Association of Automobile Manufacturers. Car sales fell in China by 92% in the first two weeks of February, according to the China Passenger Car Association.
There is precedent for such market shocks. When a powerful earthquake and tsunami hit Japan in 2011, several electronic parts makers for its auto industry were closed. Car assembly operations around the world responded by adding backup facilities local to their local markets, such as in the US, as supply chains were disrupted.
The auto industry has global behemoths from the US, to Germany, to Japan, Korea and China. But in the EV industry, China is very much at centre stage. It policy priority is to control the global EV ecosystem, from battery materials to control systems to manufacturing. Chinese companies control around half of the world’s production of lithium, more than double that of a decade ago. Lithium ion battery cells use minerals such as manganese, nickel and cobalt – more and more of world’s primary cobalt reserves are owned by China. Chinese companies also control of the refinement of lithium-ion cathode minerals and are the world’s leading supplier of the graphite anode and electrolyte.
Deloitte’s research says that both for OEMs and new entrants, the current battery cell production and end-of-life landscape mean that there needs to be close cooperation with battery manufacturers, including with second-life utilisation.
India currently imports the majority of its battery cells from its neighbour China, despite a growing indigenous industry, because China can produce the cells cheaper and better. Instead, Deloitte advocates the Tesla approach, for manufacturers bringing battery cell production closer to home, to enable them to have better control over the entire local supply chain. Moving away from lithium ion batteries, and towards alternatives such as sodium ion, which can be made in lithium-ion facilities, but without the need to rely on rare, finite minerals from around the world, could be a way to secure a significant part of the supply chain.
It is not practical or desirable for the world to decouple from China’s economic might in the EV industry. In addition to mobility, the situation is impacting all areas of electrification including stationary storage and reserve power storage – for example, China controls 80% of worldwide solar module manufacturing. But to better protect itself from such supply side shocks, EV manufacturers may consider greater integration of its local supply chain over the coming year.
