Policy is boosting investment in manufacturing capacity, building confidence for a rapid electrification pathway
Battery and EV manufacturers have faced new challenges and opportunities as major markets including the United States and the European Union introduced new industrial policies. Domestic content requirements introduced by these policies have supported the expansion plans of major battery and EV manufacturers, with billions in investments already committed as of early 2024. Worldwide, reported investment announcements from 2022 and 2023 alone exceed USD275billion in EVs and USD195billion in batteries, with around USD190billion of the total already committed. The level of investments observed in the past 2 years boosts confidence in the electrification of road transport.
In China, committed battery manufacturing capacity is well above what is needed to supply domestic electric car sales in 2030. In fact, just two-thirds of the already-committed battery cell manufacturing capacity would be sufficient to cover 100% of electric car sales in China in 2030. This excess capacity, which is today driving down margins, implies that battery producers are banking on export markets, at least in part. This will bring both opportunities and challenges. Countries that have electrification targets but lack sufficient battery manufacturing capacity could reach these targets through imports from China, whereas companies outside of China will see increased competition from the arrival of Chinese manufacturers. Governments will seek to find the right balance between supporting local producers at the same time as ensuring consumers can benefit from the low prices offered by Chinese manufacturers, which would accelerate road electrification.
In the United States, the Inflation Reduction Act (IRA) revised the requirements for the Clean Vehicle Tax Credit. Now, to qualify for the tax credit of up to USD7500, vehicle assembly must take place in North America and meet the critical minerals and battery components requirements.7 In December 2023, guidance was released defining the "Foreign Entities of Concern” as part of the tax credit exclusions: vehicles with batteries containing components manufactured or assembled by a foreign entity of concern (which includes China) cannot qualify for the tax credit. The number of eligible electric car models has therefore fallen from more than 40 in the second half of 2023 to around 27 from the beginning of January 2024.8 In 2025, restrictions may be expanded such that EVs cannot qualify if their batteries contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern.
From September 2022 to the end of 2023, after the IRA was signed into law, investments of more than USD60billion were announced to support the EV industry, in EV manufacturing, charging and batteries in the United States.9 The vast majority – about 80% – of these investments are for batteries; with just around USD5billion announced for EVs, though there are, of course, strong links between battery manufacturing and EV manufacturing. For example, in February 2024, Volkswagen-backed Scout Motors started building a USD2billion electric sports utility vehicle (SUV) manufacturing plant in South Carolina. In mid-2023, BMW broke ground on their high-voltage battery manufacturing plant (USD700million) to supply batteries for their announced EV production lines (USD1billion) in South Carolina. Hyundai-Kia, which in 2023 overtook GM and Ford in terms of electric car sales share, plans to manufacture EVs in the state of Georgia by October 2024 to qualify for IRA benefits.
Announced battery manufacturing expansions in the UnitedStates, in part resulting from signals sent by the IRA, would be more than enough to satisfy carmaker electrification targets and government ambitions in 2030. Of course, the announced investments in battery manufacturing will first need to be realised, and we estimate that it would require around USD100billion in capital expenditures10 to reach the level of battery manufacturing capacity necessary to meet demand for electric cars in 2030 in the APS. According to the Clean Investment Monitor, actual expenditures in EV battery manufacturing from 2020 to 2023 totalled around USD45billion. Around 45% of the capital expenditure (CAPEX) needed for battery manufacturing has therefore already been spent.
In the European Union, the Net Zero Industry Act and the subsequent relaxing of state aid rules in March 2023 are boosting public support for road transport electrification. For example, in January 2024, Swedish battery maker Northvolt received approval for EUR700million in direct grant and EUR200million in guarantee from Germany, which was described as “proportionate and limited to the minimum necessary to trigger the investment in Europe”. Northvolt’s project is expected to require a total investment of EUR4.5billion, creating 3000 jobs and starting battery manufacturing in 2026. The company also secured a USD5billion green loan – touted as the largest green loan in Europe to date – with the support of European and Korean banks and export credit agencies. The loan will enable further expansion for the production of cathodes, cell manufacturing and a recycling plant in northern Sweden.
As of 2024, the market signals provided by the Net Zero Industry Act have been sufficient to attract enough committed investments in battery manufacturing capacity in the EuropeanUnion to satisfy government electrification targets out to 2030. Across the whole of Europe, committed investments come close to meeting these targets.
While investments that are already committed today tend to be more heavily geared towards battery than to EV manufacturing, it is important to note that battery manufacturing and EV expansion plans typically go hand in hand, often being situated close to demand centres to create integrated supply chains. This close collaboration is important in order to deliver on targets, avoid bottlenecks and decrease costs. In addition, in the event that committed EV battery manufacturing capacity outpaces demand from EV manufacturers, it is unlikely that it would find alternative outlets, as other key battery markets such as consumer electronics are already well supplied and have different technical specifications. Failure to deliver on EV manufacturing capacity and sales therefore creates a risk of massive sunk investment in battery manufacturing, if manufacturers are unable to export significant quantities.
