Where does Europe stand in the global battery race?

China has emerged as a dominant player in the global battery and electric vehicle (EV) market in the last two decades. It is no secret that the Chinese Government has implemented a range of policies and incentives to encourage the adoption of EVs, including subsidies, tax breaks, and favourable regulations.

European Commission President Ursula von der Leyen recently noted that Beijing has embarked on a decades’ long strategy of “hidden subsidies” on strategically important industries including semiconductors, batteries, and EVs. As a result, CATL, BYD, and BAIC have emerged as ‘national champions’, leveraging China’s abundant supply of raw materials, low-cost labour, and government support to gain a competitive edge over their international rivals.

The US has now woken up to the threat of China’s stranglehold on strategic industries. Landmark legislation in the form of the CHIPS Act and the Inflation Reduction Act (IRA) are powerful steps towards reducing Chinese dominance in strategically important industries.

Opportunities for leading European firms in the space will be limited if they cannot compete with the US’ largesse

For batteries specifically, the IRA will transform and redirect the supply chain in a truly holistic sense, and as NGO Transport & Environment put it, “has changed the rules of the industrial game”. Under the IRA, US$45 per kilowatt-hour of a battery’s production costs will be covered, creating a strong incentive for companies developing these highly technical and cost-intensive products. The battery industry is constantly evolving, so more financial support for battery production will allow companies to invest more in R&D and enhance competitiveness.

Beyond intra-industry competition, the future success of the transition to e-mobility will rest upon the ability of battery producers to innovate and deliver more efficient cells which utilise more recycled materials and lower percentages of finite, critical metals. In fact, 40% of the materials contained in an EV battery must be extracted, processed, or recycled in the US, or a country with which the US has a free trade agreement. This figure increases to 80% after 2026, a move which will transform the global battery industry by ‘nearshoring’ the industry and its processes into the US’ sphere of influence.

What about Europe?

Opportunities for leading European firms in the space will be limited if they cannot compete with the US’ largesse. Leading European companies have already highlighted the need for Europe to respond. In early March, Volkswagen warned the EU that it would put a planned battery plant in Eastern Europe on hold and prioritise a similar facility in the US after estimating it could receive €10bn (US$10.8bn) in relevant incentives since the passage of the IRA.

The Eurozone is a shrewd political and economic force which can match the ambition and scale of the US, but the regulatory environment has often been slow to adapt to innovation. This has created a challenging environment for developers of cutting-edge technologies which need the support of the EU to build continental champions. This is especially true in an industry like advanced battery development, where smaller and independent cell developers risk being shut out by existing large automotive firms able to redirect billions into their gigafactory development plans. A lack of support for nimble and technologically advanced battery cell developers will lead to further delays in innovation and investment.

The EU’s new Green Industrial Plan, announced in February, is a statement of intent, but may not go far enough to meet the scale of the challenge from the US and China. Funding pathways for clean industry are largely drawn from existing sources such as the EU Recovery Fund, which could lead to imperfect economic competition within the bloc as larger economies absorb funding at the expense of smaller economies. The EU Recovery Fund was a significant step towards supporting the revival of the European economy in the wake of the COVID-19 pandemic and could assist the ongoing integration of the EU. However, it is important to understand the scale of the challenge posed by competition from the US and China.

New funding lines will need to be extended, focusing exclusively on the opportunity for economic growth and development in clean technologies such as advanced battery development. Under the Green Industrial Plan, the EU Commission is turning to unspent funds from its €800bn recovery package and will offer tax breaks for green firms under the REPowerEU fund. Many regard this as an overly cautious approach that does not instil confidence in a long-term solution for the EU’s clean energy ambitions.

What’s at stake

Failure to recognise and swiftly adapt to the changing macroeconomic environment could have dire consequences for the EU. Europe’s dependence on imported batteries will undermine its energy security and strategic autonomy. Europe’s automotive and energy sectors will struggle to remain competitive if they are unable to access the latest battery technologies. The battery industry is expected to be a major contributor to the European Union’s (EU) economy in the coming years. According to a report by the European Battery Alliance, by 2025, the EU’s battery market could be worth €250bn, creating up to four million jobs in the process.

The demand for batteries, particularly in the automotive industry, is skyrocketing, and Europe cannot afford to fall behind. Failure to establish a competitive battery industry could result in the loss of millions of jobs across the continent. This would be compounded by a deeper economic decline as Europe would lose its edge in all other adjacent industries, such as manufacturing and technology, where advanced batteries will be used. This could have a knock-on effect on jobs, investment, and innovation in these sectors, as well as on the wider European economy, potentially endangering the EU’s plan for a Just Transition.

Fostering the right environment

Calls are growing for the EU to allow for each country to foster an environment where highly specialised clean tech industries can be developed in line with each country’s strengths and potential for growth. Europe is home to a well-educated and highly skilled population; many European countries also have a long history of manufacturing and engineering excellence which is vital for the development of clean tech industries, which will require significant economic and scientific resources.

For example, Italy is a prime candidate for advanced industrial development in clean technologies, as a result of its historically strong industrial base. The country is home to a number of companies that specialise in advanced materials, electronics, and engineering. With adequate and targeted support from the EU, this expertise can be leveraged to develop and manufacture advanced batteries for a range of applications, from EVs to grid-scale energy storage.

Italy is also home to a number of world-class research institutions and universities, such as Politecnico di Milano, which are at the forefront of research in areas such as battery chemistry and materials science. These institutions can help partner with key industries to provide knowledge and expertise required to develop new, more efficient battery technologies.

Such initiatives will not only accelerate the development of advanced battery technologies and e-mobility solutions, but they will also create jobs and stimulate economic growth while delivering a clean and sustainable future.

Europe can start by providing fresh funds on par with the IRA delivered on a long-term basis. Providing funding and grants to research institutions and private companies working on battery and EV technology will deliver confidence to the European clean tech industry and set a tone for European ambition. Europe can capitalise on its place in the global battery race, but it must be ambitious, laser-focused and act now.

About the author: Lars Carlstrom is Chief Executive of Italvolt