The gigafactory boom - the challenges in establishing a fully-charged battery supply chain

The electric vehicle market continues to accelerate, and in turn so does the demand for the batteries that power them. With five major European plants already in operation and around 30 other projects in progress, 2022 could well be the beginning of the European gigafactory boom. Government investment is plentiful to secure a position in the race for this accelerating market, where EU battery production needs to quadruple by 2025 to meet demand.

China remains the dominant player in battery manufacture, with many OEMs heavily reliant on Asian partners in their supply chain. This brings with it the connected challenges of cost and logistics, given the spike in shipping container costs on top of the existing expense in transporting heavy industry components of this kind across the world.

Critical to achieving more palatable battery price points for the EV powertrain of the future is the development of gigafactories much closer to home. With OEMs operating on a just-in-time basis, the proximity of these critical parts is essential for optimising demand management and the smoothing of any potential supply chain disruption.

However, several challenges face the rapid creation of new gigafactory capacity across Europe:

• Construction challenges – the construction sector overall is under severe pressure with headwinds of rising raw material costs and demand for supporting services. In the UK alone, multiple projects are competing for materials and labour, such as HS2, Britishvolt, and Rolls Royce’s Nuclear Pods. British Steel’s announcement in 2021 that it was closing its orderbook for structural steel in response to surging demand affecting its capacity levels is unprecedented.
  
• Raw materials – There is fierce competition to secure supply of vital materials required for battery manufacture. The demand for Cathode Active Materials will only accelerate and the International Energy Agency estimates that 65% of the world's cobalt, 58% of lithium, and 35% of nickel is currently processed in China, leaving the EU trailing behind in terms of securing supply.
  
• Equipment – There is huge demand for specialist manufacturing equipment specific to cell production, with a limited supply base to draw upon for what is still a niche set of requirements for battery lines to be built. Our analysis suggests that equipment demand will outstrip supply by factor of two at historical supplier growth rates, meaning the supply base needs to at least double over the next three years to meet demand.
  

With these significant challenges in mind, compounded by more stringent environmental standards than seen historically in Asia, it is clear that there is no short-term fix available to supercharge the impact that near-shored gigafactories could have on battery manufacture in the EU.

However, groundwork should be laid now in nurturing strategic alliances with European suppliers, despite the likelihood of limited experience in some cases. Mixing these nascent relationships in a supply chain that already includes established Asian players will help mitigate the associated risk and provide the opportunity to taper the long-term reliance on the historic supply chain set-up.

Linked to this is the war for talent in this space. As an emerging technology, engaging in the battle for specialist R&D and manufacturing engineering expertise is another pressing issue, and attracting experts from the more mature Asian market will be critical to future success, and the speed at which progress can be made.

A forward view must also be taken with regard to raw materials, which will influence strategies as battery chemistries evolve and reliance on specific materials shifts.

With a clear growth opportunity to harness, supply chain consolidation will be inevitable and opportunities for Private Equity should exist to accelerate the scaling up required, as some suppliers remain constrained by capital yet eminently capable of helping solve the gigafactory dilemma currently faced in the Western world.