Fuel For Thought: Warning Signs On The Path To Mass EV Adoption

Republished By Plato

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Just what you wanted: Yet another analysis
regarding vehicle electrification. But bear with us; this one is
necessary reading. Yes, the battery-electric vehicle (BEV) market
is taking off, perhaps at a more rapid clip than some have
predicted. But that does not mean the industry is home-free in
transitioning from the internal combustion era to BEVs. Even if
forecasted market demand crosses the chasm to mass adoption, there
are several major impediments to BEVs becoming the de facto
transportation propulsion technology. Those who do not take heed
are destined to fail.

For all the fervor of early adopters predicting
this transport transition as revolutionary as that of horses to
cars, there’s a certain fragility to the current BEV movement. The
effort and cajoling required to bring fire to life — from
demand- and supply-side incentives to technology-forcing regulation
and legislation — is bound to be more susceptible to roadblocks
compared to one evolving organically.

The equation of reaching mass-market adoption
of electrified vehicles is as-yet unproven. And while certain
markets — be it mainland China or San Francisco —
are embracing a BEV future, inventories of BEVs in
the US market are showing early signs of stacking up on
dealership showroom floors. As such, it is still far from a
realistic mass-market proposition. While BEVs achieving price
parity with their internal combustion engine (ICE) counterparts
will unlock the keys to the door marked “mass-market,” there are
still residual issues that need addressing other than achieving
supply-and-demand equilibrium at mass-market volume. Numerous other
movements in play must be implemented to ensure BEVs are not just a
one-and-done phenomenon.

If successful, however, the electrification
transition will upend the industry’s infrastructure, economics,
technologies and supporting services in a way that stakeholders are
only just starting to address and comprehend. Some will be left
holding the reins of a disappearing business just as owners of
horse-drawn carriage companies experienced over 100 years ago.

The latest S&P
Global Mobility forecast details the key facets of the
electrification push that need careful monitoring to ensure the
smoothest continuing transition for all stakeholders.

A warning about the supply
chain

In the ICE era, the automotive sector became
well-versed in dealing with supply chain risk. Now with
electrification, the parameters have changed; risk is now presented
further upstream from the sector’s normal realms of operation.

Previous supply chain snarl-ups and surprises
— such as the Xirallic pigment shortage from the Japan
earthquake/tsunami in 2011, and the pandemic-triggered
semiconductor crisis — will seem diminutive in comparison.
These disruptions prompted increased focus on supply chain
visibility, but in the electrification era, the reliance on certain
raw materials and parts could present its own set of challenges on
a routine basis.

Efforts by mainland China’s auto industry to
establish a first-mover position throughout the BEV supply chain
have been successful. The main pieces of constructing the EV
battery — the cathode and anode in the traction-battery cells
and the pack itself — as well as significant stakes in
inverters, converters, controllers and charging tech have been
snapped up by the mainland Chinese supplier base. Meanwhile,
laggard regions are planning to use legislative levers for a
semblance of control and to catch up with mainland Chinese
counterparts. We expect some of the gap to mainland China to be
clawed back as the market expands and the diversity of battery
chemistries continues.

However, those components are nothing without
their raw materials, and mainland China also holds an advantage
— either in accessing those elements locally or sourcing them
from other countries via an aggressive trade policy. The following
illustration highlights S&P Global Mobility’s May 2023 forecast
for key raw materials and their sourcing.

In the case of battery raw materials, a supply crunch
could exist within this decade. For lithium, we forecast a sixfold
increase in demand between 2022 and 2030 from some 0.06 million
metric tons to 0.37 million metric tons for light passenger vehicle
applications alone. Together with the S&P Global Commodity
Insights team, we also expect lithium markets will be in deficit by
2027, creating a bottleneck for automotive supply. Resolution will
be slow as lithium takes on average 15.7 years to reach the market
after initial discovery. Hence the recent focus on battery
recycling.

Other composite elements of the cathode —
the most expensive part of the battery — dominate concerns
around raw materials. Our forecast reflects the pursuit of
increased energy density through more nickel-rich chemistry,
coupled with a growing desire to limit its use to applications
where the range is critical. Lithium iron phosphate-derived
technology will be selected with increasing regularity in
lower-cost applications.

However, in addition to lithium and nickel,
cobalt is a key element in battery chemistry. Sourcing of cobalt
— of which 75% of the world’s current supply comes from the
troubled Democratic Republic of Congo — presents a snag for any
company trumpeting an ESG or sustainability
ethos. Companies are looking for alternate ways to source
elsewhere by the end of the decade — as well as to process this
element, as mainland China dominates this link of the supply chain
as well.

It is not only in battery raw materials that
mainland China has established an eminent position. It enjoys a
lofty position for the rare earth elements necessary for electric
motors. This has recently been brought sharply into focus by
mainland China’s announcement that it wants to control exports of
gallium and germanium, resulting in many outside countries quickly
reassessing their supply chain exposure.

Gallium is a material necessary for certain
power electronic components. Power electronics such as inverters,
DC-DC converters and onboard chargers are being reworked to
encompass more efficient designs using silicon carbide (SiC)-based
chips, promising increased semiconductor demand and the
accompanying supply challenges. The growth of silicon carbide-based
inverters is shown in the following chart.

There are also the seemingly mundane metals,
such as copper, which is already under significant pressure, and industry leaders are
predicting a shortage by the end of the decade. Manganese might
also be deemed abundant given its use in the steel industry, yet
battery-grade quantities of the required electrolytic manganese
dioxide (EMD) are in comparatively
short supply, especially in free-trade agreement countries.

Amid this shift, automakers are developing
in-house solutions to assert a degree of security over nascent
supply chains. With such high stakes, relationships between OEMs
and Tier 1s are inevitably strained.

As a consequence of the chip shortage, a richer
portfolio mix has allowed OEMs to achieve higher margins across
their product lines, giving headway to fund BEV transitions. For
Tier 1s, there has been no such dividend. As BEVs are fundamentally
simpler, in-house manufacture of the battery, propulsion system and
power electronics will result in OEMs having responsibility for a
much higher proportion of the vehicle’s value — piling pressure on
suppliers.

There is also the manufacturing side of the
equation that relies on these component parts. Aside from actual
BEV demand, battery capacity per vehicle is a growth vector —
average capacity is forecast to increase from 60 kWh to 78 kWh
— contributing to global demand during 2023-30 increasing from
540 GWh to 3.4 TWh.

Given this increase, battery-cell manufacturing
capacity must increase in tandem. As a result, we expect the total
theoretical manufacturing capacity (for light passenger vehicles)
to increase from 1.35 TWh to 4.5 TWh by 2028, with the number of
battery-cell manufacturing plants rising from 107 to 188 globally.
If construction schedules are met, there will be sufficient
capacity — indeed some underutilization will occur.

Who owns the propulsion
technology?

OEMs traditionally are responsible for their
engine and, in some cases, transmission requirements. But they now face off
against Tier 1 powertrain suppliers to bring e-axles and their
subcomponents in-house. For comparatively low volume
first-generation BEVs, OEMs largely outsourced to Tier 1
specialists. Now they are bringing more of the integrated,
three-in-one (motor, transmission, and inverter) e-Axles to their
own facilities. Our latest data show over 75% of OEMs now perform
the e-Axle integration activities in-house.

Regardless of who builds e-Axles, by 2025, 80%
of eAxle-based motors will need the aforementioned rare earth
elements germanium and gallium. As a result, we estimate that well
over 90% of the world’s production-ready magnets will be mainland
Chinese-manufactured.

Opportunities for suppliers remain in the motor
assembly, with 47% of motors produced in 2023 being outsourced. But
as volumes increase, these supply chain opportunities will evolve
as the motor will be broken into subcomponents like rotor and
stator assemblies. Already Tier 1s are taking advantage of these
opportunities. However, the e-Axle is a cautionary tale as to how
an OEM’s sourcing remit can change — while trying to keep their
employment numbers steady during the transition.

A second issue for motors — garnering fewer
headlines, but the subject of earlier S&P Global Mobility
research — is the lack of thin-gauge electrical steel
capacity required for assembly. Concerns persist, with more
investment in electrical steel capacity needed to meet burgeoning
demand.

There aren’t enough
chargers

Once the vehicles are built, then comes the “refueling” equation. The BEV paradigm opens the opportunity to
recharge the vehicle in a multitude of domains aside from
conventional public refueling infrastructure familiar to gasoline
service stations. However, for now, public charging options are
constrained by not just the quantity of chargers
available but also the reliability of the stations, the
delivery speed of electrical power, and the battery’s ability to
receive it.

There also is the relative first-world nature
of BEV charging, as developing nations may not have the
infrastructure grid to support a mass charging network. Therefore,
much of the underdeveloped world will likely remain an
internal-combustion haven for the foreseeable future.

However, for those countries with a stable,
operational grid, how fast does power need to be delivered into the
vehicles to satisfy customers? The 179 million chargeable vehicles
forecast to operate by 2030 (143.5 million BEVs and 35.5 million
plug-in hybrid electric vehicles) will have varying
requirements.

Grids cannot support fast charging everywhere
all the time. In S&P Global Mobility’s 2022 E-Mobility Consumer
survey, the vast majority of global respondents contended that a
charge time of between 10 minutes and two hours for a full charge
(considered to be 80% by typical industry standards) would be
acceptable. But nearly two-thirds wanted it to be performed in less
than an hour.

BEV charging needs are situation-specific, with
users needing the right speed of power delivery depending on their
dwell time and journey profile. While BEV adopters to date
predominantly charge at home, this will not be a workable solution
for all.

Furthermore, for BEV charging providers,
delivering a fast charge may not always serve their best interests.
A burgeoning ecosystem is developing around the “30-minute retail
economy” concept, which sees the opportunity to supply profitable
services to users while they wait for public BEV charging. Such a
retail ecosystem will provide charge point operators with a reason
to scale, and help advances in charging technology if retail
profits are reinvested.

With the evolution of EVs, charging technology
will improve as higher-voltage architectures are adopted, bringing
faster receipt of power. They will be enabled by the adoption of
superior power semiconductor technology. Our data shows the volume
of silicon carbide-based inverters will increase sixfold between
2023 and 2030 on their way to becoming the dominant inverter type
by 2034.

A summary analysis of our latest forecast
projections can be found in our EV Charging
Infrastructure Report & Forecast.

Optimal range versus thermal
management

Within the context of assessing charging
infrastructure needs, the BEV’s range dictates how often it needs
to be charged and, potentially, where it will be charged. Critical
here is a battery capacity of sufficient size to support range
requirements. Less understood is the significant role of thermal
management in getting a manufacturer’s quoted all-electric range to
reflect the “real world” range.

For BEVs on the market in 2023, the average
all-electric range quoted is some 6.3 kilometers per kWh of battery
capacity. S&P Global Mobility research estimates that some 28%
of the range is lost using air conditioning throughout the drive
cycle. As shown, this can be reduced to 15% using heat pump
technology. Other than how the vehicle is driven, thermal
management is the biggest parasitic loss for a BEV, save for an
exceptional use case such as towing.

Heat pump technologies, integrated thermal
modules (ITMs) and optimized battery preconditioning will also
bring efficiency savings. While coolant-cooled battery solutions
will become commonplace, niche enhancements in battery cooling
technology, such as immersion cooling, will support in the
short-term. As depicted below, thermal management of the BEV is a
growth opportunity for suppliers with the monetary value
contribution of thermal management to an electric vehicle
increasing 83% compared with an ICE equivalent.

Currently, the thermal management system is a
market of few players but presents a major opportunity. Continued
consolidation in this domain through M&A to help suppliers
build scale and countervailing the OEMs’ power can be expected.

EVs for all? And profits for
all?

This confluence of the above technological and
logistical challenges triggers the need for BEVs to be available to
as broad a customer base as the incumbent ICE technology. They must
appeal for their key advantages and not be constrained by existing
hindrances.

To ensure this, the cost of BEV technology must
decline, and margins be sufficient for both OEMs and suppliers to
thrive in a complex geopolitical environment. Recent research using
S&P Global Ratings data showed that EBIT margins for OEMs
are now consistently surpassing those of their suppliers —
bucking historical trends. While multiple factors contribute, OEMs
are squeezing suppliers to ensure sustainable profitability for
their fledgling BEV businesses. Meanwhile, legacy OEMs and
suppliers must manage the transition from ICE to BEV to ensure a
stable glide path and not overextend.

The evolution of battery, charging, propulsion,
and thermal management technology will be crucial for the
ubiquitous adoption of BEVs. While scale inevitably helps,
technological development is still required to make mass-market
BEVs a product evolution inevitability rather than a
subsidy-induced and government-mandated novelty.

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