The push to dominate the battery supply chain

This is an audio transcript of the Behind the Money podcast episode: ‘The push to dominate the battery supply chain’

Michela Tindera
As the world is pushing to move away from fossil fuels, there are many new opportunities for different groups to make a fortune. The FT’s commodities correspondent Harry Dempsey says just look at the electric vehicle sector.

Harry Dempsey
So the electric vehicle market is set to be absolutely enormous. It’s already quite big, but it’s set to grow even more. And by 2028, according to some forecasts, the size of the electric vehicle market could be $1.3tn.

Michela Tindera
But in order to make the most of this transition, all the players involved — from carmakers to countries like China and the US — they all have to figure out their place in the supply chain of this one specific product.

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Michela Tindera
OK, to be clear, I’m not actually talking about the Sony Handycam here. And while I’m sure the home videos film of your childhood piano recital are extremely valuable, I’m really talking about the battery inside of the Handycam, the one that Sony says can record for 12 hours. These batteries are known as lithium-ion batteries.

Harry Dempsey
So lithium-ion batteries were the actual technology that’s used inside of them was being worked on in the 1970s by researchers in labs in the US. But it didn’t actually become commercialised until two decades later. And the first application of it in a commercial product was for handheld cameras that Sony used and produced. So that really helped bring a new product because you don’t want the old form of batteries, which are extremely heavy and then don’t last that long. So if you’re somebody on set and you want to film something all day, you want something that’s light and lasts a long time. And that’s what lithium-ion batteries provided.

Michela Tindera
Harry says these kinds of batteries kicked off a revolution in technology. Smartphones, wireless keyboards, those AirPods you’re listening to this podcast on. You can make lithium-ion batteries for all that stuff. And now those same batteries are playing a starring role in this new energy transition.

Harry Dempsey
I think it seems like we’re on the cusp or in the midst of the second revolution, which is, you know, we brought down the costs of manufacturing different kinds of lithium-ion batteries. And now that means that we will see the proliferation of lithium-ion batteries in electric cars. There’s a huge strategic element in terms of: if you can produce these batteries and the raw materials that go into them, that confers you big geopolitical power. And because this is the next generation of technology, it’s going to form the foundation of corporate and national power on the global stage going forward.

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Michela Tindera
I’m Michela Tindera from the Financial Times. The race to cash in on lithium-ion batteries is under way. Today on Behind the Money, we’re going to talk about which players are winning this race so far and what the groups in danger of falling behind need to do in order to get ahead.

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Michela Tindera
Hi, Harry. Welcome to the show.

Harry Dempsey
Hey, thanks for having me.

Michela Tindera
We’re going to be spending a lot of time talking about lithium-ion batteries. But can you tell me just basically how do they work and what makes them so useful today?

Harry Dempsey
So lithium-ion batteries, very simply, take electrical energy and turn that into chemical energy. And so you create bonds, that are then released and turns into electricity that we can then use. So it’s a storage device basically for electricity. So that’s very useful for electric cars, which are now getting rolled out, as well as for storing excess renewable power from the grid and being able to store that and then give it back when people actually need it in their homes.

Michela Tindera
So there’s a massive market that’s getting even bigger for these batteries. So who are the main groups that are expected to be involved in this new supply chain?

Harry Dempsey
So, I mean, there are four big main players in a very rough, loose sense in this new battery supply chain that’s forming and essentially new people coming to meet each other for the first time in an awkward dinner party. One, you have the raw material producers. Next is the battery producers. Then you have the car manufacturers themselves. And then finally, we’re seeing a bigger role played by governments who are intervening to try and make sure that they have these industries coming on to their shores.

Michela Tindera
OK, got it. So let’s say we want to actually create and build a new lithium-ion battery. What’s our first stop in this supply chain and where do we begin?

Harry Dempsey
So a battery will start its life off as, you know, a piece of ore in the ground, essentially. So there are key minerals that go into the batteries such as lithium, nickel, cobalt and graphite to mention a few. And at first, mining companies will dig these out of the ground and then they will be sent off to chemical processing plants where they are then upgraded to extremely high-purity materials. So that’s considered to be the sort of upstream part of sorting out the raw materials for the battery. And then we have what’s called the midstream, which is where these highly specialised chemical companies will then turn these products from the mining companies and processing companies into materials that you can use in a battery. And they will be sent to the battery production companies. So companies like LG in South Korea or CATL in China, and they will produce the battery. And then they will be sent onwards to the car companies that we all know well of, such as Toyota and Volkswagen, who will then assemble that battery into an electric car.

Michela Tindera
So what is happening with raw material producers right now in the supply chain and how do you see this shaking out in the coming years?

Harry Dempsey
Well, the raw material producers are constantly warning that there won’t be enough of these materials. I mean, mining projects typically take seven to 20 years to get going. Mines, they’re massive, massive infrastructure projects. They take a long, long time. But we want to shift to electric cars in 10 years. So you can see the big problem there. And so if there are these big, big shortages of the raw materials, which there have been in the past few years, then it’s going to be hard to produce as many electric vehicles as everybody wants. But in that scenario, the miners are going to make a lot of money because the prices for the commodities that they supply would go up because there’s not enough of them. But that could be quite a catastrophic scenario because a country’s net zero plans could go into jeopardy and they might roll back when they want to phase out combustion engine vehicles.

Michela Tindera
Now, in this supply chain that we’re talking about here, we’ve collected the materials needed to make these batteries, and then they head to some sort of battery manufacturer to put it all together. So tell me about what’s happening with these groups. What’s the lay of the land right now?

Harry Dempsey
So the battery production is concentrated in a relatively small number of companies that are east Asian. So they are from China and South Korea. And the thing to really note with the battery producers is just how powerful CATL is, which is the Chinese battery producer. They produce about 37 per cent of the world’s batteries and they’re a complete force to be reckoned with. Some of the car companies now are trying to form their own battery companies, particularly in Europe. So people like Volkswagen are doing this. But the problem is it’s really capital intensive. So while Europe is trying to build its own champions, the US is taking a different approach. It appears to be trying to entice the Korean companies to come to the country as it tries to shut out China from entering its market.

Michela Tindera
OK. So then moving on to the carmakers. Where do they fit into this and what’s happening with them now and where do you see that going?

Harry Dempsey
So with the carmakers, you’re seeing a big divergence in strategy. So you have some like Tesla who have really, you know, led on electric cars and took really the whole car industry by surprise by their ability to manufacture EVs, you know, at the cost that they said they would. And Tesla is quite unique in being so vertically integrated. So it does a lot of these steps, whereas others now you’re seeing a starting to form partnerships with battery companies, some of the raw material producers. And so they are racing to catch up and they’re sort of coming late to the dinner party almost. I’d say one other thing to note is it looks very clear that the Japanese are planning to bet their house on solid-state batteries, which is a next-generation battery technology and having a breakthrough there.

Michela Tindera
Now, you mentioned that the fourth main player in all this are the various governments and countries that have also been playing an increasing role in these supply chains. Let’s talk about China first. What have they been doing?

Harry Dempsey
So China has been extremely strategic about this industry and has, you know, 20-year plans for what it wants to do with its economy and has long earmarked batteries as a strategic technology that it wants to develop and that it see . . . It saw the importance of them far before the west did and saw it as an opportunity to leapfrog the west. So rather than trying to compete on producing combustion engine vehicles, it would instead jump to the next generation of technology, which is electric cars. So China, from a long time ago, said it wants to become big in lithium-ion batteries and build an automotive industry off the back of it. China’s made no secret about it. And so in some ways it is unfair when the west is then complaining about these things that China has, you know, flagged it wants to do for a long time. And I think the other thing is it subsidises this industry really heavily. And those Chinese companies are extremely adept at bringing down costs and manufacturing at scale. I think it’s difficult to emphasise enough the advantage that China has manufacturing at scale and how difficult and how big a barrier of entry that is.

Michela Tindera
So the US is trying to catch up to China with its Inflation Reduction Act, which was passed under President Joe Biden last year. How’s that working out for the US?

Harry Dempsey
So the US Inflation Reduction Act introduces discounts on EVs, called tax credits, for EVs that source their raw materials from certain places. So it says if the raw materials come from the US, a free trade partner country or recycling above a certain threshold, then you can qualify for this discount. But you also can’t source any of those raw materials from a foreign entity of concern, which for the US is countries like China or Russia. And so that has galvanised all the carmakers to think how can we satisfy these requirements and essentially build market share in one of their most profitable markets? I suppose what the dilemma is is that the Chinese are so good at this and that even if the US government offers all these incentives, it is still cheaper doing it with the Chinese.

Michela Tindera
So China’s had a plan that’s been in the works for decades and now the US is trying to play catch-up here. How do you see that shaking out as geopolitical tensions between the two countries have increased?

Harry Dempsey
Yeah, I think the broader question is, you know, do we decarbonise as friends with China and use their technology, which is extremely efficient, extremely cost effective, works well, they’ve proven it in that big domestic market. Or are those geopolitical tensions so high that we do not want to use technologies of strategic importance and of huge economic value from the Chinese and allow them to essentially dominate a global industry? So I think that’s the core of the dilemma there. And the US has obviously got a kind of two-pronged strategy to respond to the Chinese threat. One is, you know, the carrot: offer up lots of incentives to companies to come to the US and put their money there. The other is saying, “Chinese companies, if you want to come here, you can’t.” So essentially a stick to protect them.

Michela Tindera
Hmm, OK. So talking more about the geopolitical competition, would you say that the main players in this race are just the US and China, or should we be considering other countries, too?

Harry Dempsey
Well, I think the other player to really talk about is Europe, because Europe has a massive automotive industry like Volkswagen, BMW, Mercedes-Benz, Peugeot. And so it’s a massive strategic importance for Europe as well. I just think that when you compare the response of the US to Europe’s, Europe just is not able to protect its automotive industry in the same way from the entry of China. And China also produces the right kind of battery technology that suits the driving patterns of European consumers. You know, think of Americans. They like these massive F-150 Ford trucks and then they want to drive huge distances between, you know, different towns and settlements. Whereas in Europe, it’s a lot more dense city driving, that kind of thing. And so the kind of car you need will be very different. And that actually shifts the geopolitics quite a lot.

Michela Tindera
How so?

Harry Dempsey
Because the Chinese are good at producing the batteries that are cheaper, but, you know, they don’t necessarily go as far, whereas the Koreans are great at producing the batteries that can go longer distances. So the natural partner for the US is the Koreans. The natural partner for the Europeans is the Chinese.

Michela Tindera
Mmm. OK. So it sounds to me like anyone involved in this new supply chain has the potential for massive success here. But who would you say would be the biggest loser as we shift over to this new type of power? Would that be the oil industry?

Harry Dempsey
I think oil is quite a big loser. But I think the biggest loser is those producers of combustion engine vehicles who can’t shift rapidly enough. I mean, we’ve already seen some signs of how difficult it is because a company like Ford, they’ve just been haemorrhaging money on the new EV business and they’ve actually split up their EV business and their combustion engine vehicle business. And so I think it’s going to be those car companies that struggle to adapt where the pain will be felt the most. And that will be, you know, that will most likely lie on in the US and on some of the European companies, maybe in Germany.

Michela Tindera
So it sounds like, as you were saying, the biggest risk is that all of these car companies, for the most part, are trying to shift into EVs, but it’s a question of whether they can actually do it.

Harry Dempsey
Yeah, it’s a question whether they can do it, and then also whether there will be enough raw materials is the other big, big bottleneck. And so who is managing their supply chain the best? Who’s signing the right deals, doing the right sort of partnerships with the mining companies to ensure that they will have enough raw materials when those really bad shortages if and when they do come to fruition.

Michela Tindera
Well, Harry, thanks for being on the show.

Harry Dempsey
Oh, no worries. Thanks for having me.

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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Our intern is Monique Mulima. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.

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