EU Countries: Dependence on Chinese Battery Supplies Might Become Achilles' Heel of European EV Manufacturing

The transformation of European automotive industries towards electric vehicles (EV) has accelerated. EV manufacturing in EU economies has increased markedly in recent years, partly driven by external demand. This, however, has led to a reliance on battery imports from China, the global leader in EV battery production. If maintained, the EU's dependence on Chinese batteries would raise downside risks for EV manufacturing in Europe in case of geopolitical or global trade shocks. Moreover, EU battery demand will most likely continue to grow as European EV production is projected to increase markedly over the long-term notwithstanding the recent slowing in EV sales. While EV battery production capacities in the EU and the US are likely to catch up over the next years, the supply of EV battery supplies in the longer-term is subject to substantial uncertainty given the still nascent nature of the industry. The uncertainties relate to the actual scale of future production increases across different regions, the future position of new producers in the global technology race and their price competitiveness. This commentary highlights the concentration risks in the EV battery supplies of the EU economies as a key development to watch in the coming years.

Key Highlights

-- EU export growth in automotives during the past five years was largely driven by exports of electric vehicles and hybrid cars.
-- The IEA estimates China's share at global EV battery production capacities at 81% in 2023.
-- EV battery production capacities are expected to rise markedly in the EU, the US and China over the next decade.

"The reliance on Chinese battery supplies leaves European manufacturers of electric vehicles exposed to geopolitical or trade shocks," said Yesenn El-Radhi, Vice President of the Sovereign Group at Morningstar DBRS. "Reducing the EU's concentration risk in battery supplies requires a step-up in domestic production capacities or a marked diversification in external supplies."

"The outlook for EV battery production in the EU is subject to uncertainty over the actual scale of project execution, with some projects being downscaled over the past year on concerns about EV demand over the medium-term," said Robert Streda, Senior Vice President, European Corporate Ratings at Morningstar DBRS. "In view of these uncertainties, the evolution of the EU's concentration risk in EV battery supplies remains an important factor to watch in the coming years."