The U.S. and Europe Are Moving Toward Battery Self-Sufficiency

As the transition to a low-carbon future makes batteries critically important, countries are making significant headway in reducing China’s dominance over the supply chain, according to a new Goldman Sachs Research report.

Based on announced projects, Europe and the U.S. could achieve localization of downstream cell manufacturing between 2025 and 2027, the authors project. They also write that the recent passage of the Inflation Reduction Act represents a “strong commitment” from the U.S. government to boost the self-sufficiency of batteries. “Battery capacity addition outside of China is set to accelerate,” which could go a long way toward avoiding supply-chain bottlenecks.

China’s lead in battery production—it produced about 70% of global electric vehicle (EV) batteries in 2021—stems from several factors. The country’s market for lithium-ion batteries, used in consumer products such as laptops and phones, provided a foundation. A Chinese ruling in 2011 eliminated patent-licensing costs for a key cathode material, and government policy is supportive of EV production. Manufacturing efficiency completes the picture: it typically takes one third the time to build a battery plant in China versus other locations.   

In spite of these factors contributing to China’s lead in battery production, GS Research see three important trends which will begin to challenge China’s dominance:

• Policy. Regulatory support and protective policies are shifting the battery cost curve outside China. Tax credits in the Inflation Reduction Act, signed in August, could more than offset the 20% to 30% higher operating expenses that manufacturers may incur as they add U.S. production capacity. EV purchase incentives in the U.S. and Europe also will support battery localization.

• Chemistry. New chemistries that require smaller amounts of critical minerals – such as lithium, cobalt and graphite – are being pursued. Manufacturers outside China may benefit if sodium-ion batteries – which use more plentiful and affordable materials – begin to compete with or displace lithium-ion.

• Recycling. A reduction in the need for battery minerals may also result from battery recycling. The GS Research European autos team sees more than 50% of the lithium and nickel for the European EV market coming from recycled batteries by 2040. 

While these trends point to greater self-sufficiency for Europe and the U.S., planned supply expansion outside China of the upstream products used for cathodes and anodes likely won’t be enough to keep up with local demand. GS Research believes $164 billion of cumulative investment will be required to localize the U.S. and European supply – including mining, components and battery production – by 2030. 

In the near term, prices are likely to stay high as demand outstrips supply and U.S. policies seek to keep Chinese batteries out of the U.S. market. GS Research has raised its estimate of 2023 battery prices, in part because of high lithium prices, to US$171 per kilowatt hour of capacity, up from US$164/kWh previously.

But GS Research expects battery-price deflation in the longer term as production outside of China continues to ramp up. The team now estimates battery prices will shrink to US$87/kWh by 2030, a 10 percent reduction from its last published forecast. “In the longer term, we continue to expect the raw-material supply bottlenecks to dissipate, which should contribute to better price deflation amid capacity expansion, manufacturing improvements, and technological innovation,” the authors write .