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European carmakers are over-reliant on imported batteries for their ambitious EV plans. Over the short to medium term, this has bearish implications for their stocks because of pricing and supply risks. Long-term prospects, however, are quite bullish. Various options including partnerships and government help for local battery production are on the table and carmakers will no doubt utilize them all.
When Total's (TOT) chief executive Patrick Pouyanne recently said the supermajor will not invest in EV batteries unless fair competition is ensured with Chinese and U.S. sector players he touched a sore spot for the European carmaking industry. The truth is that Europe is lagging dramatically behind China in battery production capacity and it would take a lot to catch up.
Quartz's Isabelle Niu put it aptly in a recent article, when she said:
"When it comes to making and buying electric cars, there's China and then there's everyone else."
Indeed, China is the biggest single EV market, accounting for over a third of EV sales. The reason for this is government policy: subsidies for carmakers, tax incentives for EV buyers and millions poured in charging infrastructure. China, in other words, has a strategy for EV adoption and is sticking to it closely.
As the Chinese EV industry grows locally, it will use a lot more locally produced batteries. Hypothetically, European carmakers could be facing a battery shortage, especially because of the scale of their EV ambitions. They want to be big in EVs and they want to do it fast, riding the wave of government support. Yet so does China and even a hint of a battery shortage could play them a bad joke and hurt their stocks.
VW (OTCPK:VWAPY) is the most ambitious one: its CEO recently stated the company will at some point have the capacity to produce 50 million EVs, recently said it would pour $50 billion (44 billion euro) in EVs and autonomous cars and related tech. This investment more likely than not involves batteries but details about the location of their production are yet to be disclosed.
But the German major is also the most vulnerable one after its shares sank 40% over the last three years on Dieselgate and rising costs. If it fails to deliver on its EV promises for whatever reason, including a battery shortage, it would hurt badly.
Other European carmakers with plans to take on Tesla (TSLA) stepping on battery supplies from China and South Korea are already getting nervous about it because it's not only the risk of a shortage that threatens their plans. That risk is purely hypothetical. There is also the danger of battery makers deciding to up their prices, which is what LG Chem did to Audi last month. At a time of financial pressure from tighter environmental regulations requiring more investment in fuel efficiency and, yes, EVs, belts are being held tight and any battery price rise would be felt painfully.
The way out some European carmakers have found out is having their Asian partners set up shop in Europe: Chinese CATL, for instance, is building a battery factory in eastern Germany after BMW (OTCPK:BMWYY) placed an initial order for batteries worth $4.56 billion (4 billion euro). But here's the important bit: most of the batteries in this order will still be made in China. Only $1.71 billion (1.5 billion euro) worth will be manufactured at the German site.
And then, here's Total's story. The supermajor owns a battery maker, Saft, which earlier this year said it will allocate more than $233 million (200 million euro) for a research, development and production project for a new generation of solid state lithium-ion batteries. The project would be a partnership with tech giant Siemens (OTCPK:SIEGY), Belgian chemicals leader Solvay (OTCQX:SOLVY), and German engineering company Manz (M5Z.F).
I will not launch the group and Saft in operations worth several billion euros if in the end we do not have the fair competitive framework between us and others.
That's what Total's Patrick Pouyanne said this month, casting a doubt on the EU's preparedness to help its own companies. It is worth noting Pouyanne's statement came less than a month after Germany's government announced an allocation of $1.14 billion (1 billion euro) for EV battery production.
Swedish Northvolt, Reuters reported at the time, citing sources in the know, had already partnered with BMW to build the first gigafactory in Europe with a capacity to churn out 32 GWh of batteries annually by 2023. But that would be peak capacity. Initially, the factory would produce 8 GWh worth of batteries and this first phase alone will cost US$1.7 billion (1.5 billion euro).
The size of this initial investment highlights the financial risk European carmakers are facing: they may be stretching themselves too thin trying to cover all bases in the EV game. If they are to become a main revenue stream, then these EVs need to be: reliable, affordable, with long enough ranges. All this costs money and so does research into cheaper yet more energy dense and durable batteries.
There is also the time factor: you can't build gigafactories in a couple of months and have them produce at peak capacity straight away, at least not at competitive prices and not without a lot of help from the government. So, this is exactly what Total's CEO asked for at a recent industry event.
"Today, if you want to provide an electric vehicle in China with a battery, it must be built in China by a Chinese manufacturer," Pouyanne said, as quoted by Reuters. "That's a problem and for now the dialogue we're having with European governments is to know if we can protect ourselves like that in Europe."
The chief executive of one of the world's largest oil companies may well be talking about protectionism. He is asking governments to step in and protect European battery makers, however few of them there are, from the cheaper-for now-Chinese competition. But will they?
The Vice President of the European Commission Maros Sefcovic recently said the European EV battery market could come to be worth $285 billion (250 billion) annually by 2025, so there is incentive for intervention. Yet the key word here is "could." Turning a nascent market into a mature one over just six years would certainly require tons of government help and protective measures that will probably not sit well with Beijing.
Chinese battery makers will not sit on their hands and watch European rivals overtake them. They will do their best to remain competitive but there is a silver lining: they are most likely to do this through more and bigger partnerships with European battery consumers. Let's bear in mind that for them, battery sales to Europe are a huge revenue stream and they are unlikely to jeopardize it, which makes the risks discussed above limited although clear and present.
In a way, Chinese battery makers are now the equivalent of Gazprom in the EV field in Europe. Curbing their influence would require time, effort and a lot of money. And it may be wiser to make the best of this influence instead of trying to curb it: to extend the Gazprom comparison, Gazprom cannot do without Europe just as Europe cannot do without Gazprom. A mutual dependence, in other words, could be a good solution, perhaps not optimal but good enough while carmakers take their time to build local production. Luckily, batteries, unlike gas, can be made anywhere.
So far this year European carmakers' stocks have had mixed results. While Peugeot and Citroen have posted overall increases, VW and BMW are both down. The reasons for this are multiple but EV plans should be a cause for concern for investors in the sector: they represent a fundamental shift to a new market segment. Having to rely on imports for something as vital as batteries to make this shift successful creates a sense of unease that will continue to pressure stocks over the short to medium term.
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