When regulations shape the future of an industry, the case of the high voltage battery

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Abstract:

Although the political will to reduce internal combustion engine vehicles (ICEVs) emission levels is long-standing and that, by the early 2020s, over 85% of global car sales are subject to appropriate regulations worldwide, a massive and rapid increase in sales of zero-emission vehicles had not yet taken place until recently.
The current fast transition, from ICEVs to electric (battery) powered (BEVs) and plug-in hybrid vehicles (PHEVs), is neither driven by the industry itself nor a consequence of changing consumer expectations: it is a recent, growing and persistent global set of increasingly stringent environmental regulations, resulting from the Paris Agreements in 2015, that force the automotive industry to switch toward electrification.
The three main markets for plug-in vehicles, in 2022 and 2021, are respectively China, Europe and the United States. However, these are the regions that have enacted the most demanding regulations: Europe and California aim at 100% of zero emission vehicles by 2035, the US federal regulation aims at 50% of zero emission vehicles by 2030, while the Chinese “Dual Credit Policy” regulations are pushing automakers to produce more and more efficient BEVs.
We investigate whether and how those related to high voltage batteries could shape the future of the automotive industry. To do so, we undertake a comparative analysis of US, European and Chinese regulations dealing with the transition toward electrification. This comparison is very interesting because, firstly, the observed regions are very different in terms of political systems and institutions: China has a command economy with an interventionist approach, the European Union is a single economic and political union among 27 countries, while the United States is a federal union of 50 states with a liberal approach to market regulation. Second, while western countries have long dominated the ICEV market, they are now China's challengers in vehicle electrification: by the end of 2021, China has the highest battery manufacturing capacity (655GWh) compared with 57 GWH in the United States and 60GWh in Europe and, by the end of 2022, has captured 57% of sales of some 10.3 million plug-in vehicles.
The transition toward electrification is a race against time for the industry, inherently uncertain and even more so, given the very difficult global context (Covid-19 crisis, semiconductor supply constraints, increasing geopolitical risks). Putting apart, for a while, this uncertain context and elaborating on observations of automakers’ strategies, we hypothesize that they have the knowledge and capacity to produce the expected amount of BEVs. Therefore, the ability to scale up mass production of batteries in such a short period of time, while improving product and manufacturing performances, developing new technology (i.e., solid state), and addressing potential raw material scarcity issues, is the real bottleneck in the electrification race.
So far, China is leading the game and taking advantage of a ten years lead over their Western competitors to seize the opportunity to overcome them and shape the future of the automotive global industry turned electric.
With more than 75 percent of batteries currently produced in China, the United States and Europe, to avoid irreversible economic and sovereignty problems, must develop, at a very rapid pace, local champions having the capacity of mass-producing batteries and control the value chain. But the current dynamics of the Chinese industry as well as contracts or alliances already concluded by European and American automakers with Asian battery manufacturers for the coming years will weigh on the pace of development of local champions.
For the first time, in the long history of the automotive industry, the western industries are in position of challengers. They suffer the consequences of their lack of anticipation of regulations adapted to the systemic innovation required by the transition toward decarbonized mobility and of a very comprehensive, pragmatic and impactful set of Chinese regulations.
Consequently, the ability of European and American players to influence the global battery industry seems to be limited in the short term, while Asian players have this ability and use it extensively to expand globally. This forced march toward battery value chains localization could prefigure the subsequent creation of three production hubs serving their regional markets with Asian battery makers, mainly Chinese but also Japanese and Korean, taking the lead in the global market in the meantime. The question of whether the European and American automotive industries will be able to control their local HV battery production hubs remains open.