ELECTRIC VEHICLES Archives

02/05/2024by EOS Intelligence EOS Intelligence No Comments

Time Is Ripe for the Adoption of Electric Heavy-Duty Trucks in Europe

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As of 2023, 5,279 electric heavy-duty trucks (HDTs) were on the roads in Europe, representing merely 1.5% of total HDTs in the region. Despite being in its early stages, the adoption of electric HDTs is expected to accelerate due to a combination of factors, including increasing regulatory support and advancements in charging infrastructure. As these factors converge, the electrification of HDTs is set to gain momentum, contributing to the decarbonization of the transportation sector and the achievement of EU climate goals.

Ambitious EU regulations toward a zero-emission future promote electric HDTs adoption

The EU aims to reduce CO2 emissions from heavy-duty vehicles by 45% in 2030, 65% in 2035, and 90% by 2040 compared to 2019 levels. The European Automobile Manufacturers’ Association (ACEA) suggested that more than 400,000 zero-emission trucks will have to be on the roads by 2030 to achieve a 45% CO2 reduction. There is a considerable gap to fill, considering only a few thousand electric HDTs were on the roads in 2023.

Additionally, to combat high pollution levels, specifically in urban areas, several European cities have implemented low-emission zones (LEZs) that restrict the entry of high-emission vehicles such as diesel trucks. As of June 2022, there were over 320 LEZs, about 40% more than in 2019. The number is set to increase to 507 by 2025. Obligations towards these regulations compel the European trucking industry to switch to electric HDTs.

Decreasing the cost gap between diesel and electric HDTs is likely to boost the adoption

The commercial vehicle market is price-sensitive, and hence, economic viability is essential for a smooth transition of HDTs from diesel to electric.

According to a study published in November 2023 by the International Council on Clean Transportation (ICCT), an independent environmental research organization, long-haul HDTs with an average daily travel range of 500 km powered by diesel were found to be cheaper. They had about a 5% lower total cost of ownership (TCO) compared to electric HDTs in 2023. However, the TCO difference between electric and diesel HDTs with an average daily travel range of 1,000 km was 10%. The TCO encompasses direct and indirect expenses, including acquisition, fuel or energy, maintenance and repairs, insurance, depreciation, financing, taxation, and operating costs.

ICCT estimated that for long-haul HDTs (both 500 km and 1,000 km range), electric battery-powered HDTs will reach parity with diesel between 2025 and 2026. Comparable long-term economic performance with diesel HDTs makes a favorable case for switching to electric HDTs.

However, the high retail price of electric HDTs remains a challenge, especially for small and medium fleet operators. ICCT indicated that in 2023, the retail price of a diesel HDT (500 km range) was EUR 152,000, while the cost of an electric HDT was more than double, EUR 354,000. The difference was even higher for HDT (1,000 km range), where the electric model was available for EUR 457,000, about 260% more expensive than the diesel model.

Acknowledging high upfront costs as one of the key barriers to the uptake of electric HDTs, as of 2022, 16 European countries, including the UK, were offering purchase incentives to the buyer to purchase zero-emission trucks such as electric HDTs to cover the price differential. Austria, France, Germany, Spain, Ireland, the Netherlands, Malta, and Denmark offered financial aid bridging 60% to 80% of the retail price gap, making a lucrative proposition for fleet operators to switch to electric HDTs.

In the countries not offering adequate financial support to cover the upfront costs, the adoption is likely to be moderate till the retail price of electric HDTs comes down. According to Goldman Sachs, battery pack prices are expected to fall by an average of 11% per year from 2023 to 2030, and about half of this price decline will be driven by the reduction in lithium, nickel, and cobalt prices. In the wake of rising demand for electric vehicles, the supply of these raw materials has been increasing, pushing the costs down. According to CME Group, a US-based financial services company, cobalt prices have dropped by more than 50%, from US$40 in 2022 to US$16.5 per pound in 2023, while lithium hydroxide prices have dropped nearly 75%, from US$85 to US$23 per kg during the same period.

Time Is Ripe for the Adoption of Electric Heavy-Duty Trucks in Europe by EOS Intelligence

Declining raw material costs will significantly lower production costs for electric HDTs, as battery packs account for a significant portion of the total production cost. As per BCG analysis, battery costs accounted for 64% of the total electric HDT production cost in Europe in 2022. This reduction will enable manufacturers to offer electric HDTs at more competitive prices.

At the same time, experts predict there might be a lithium supply deficit by the 2030s. This is likely to lead to pressure for increased production, as Benchmark Mineral Intelligence estimates a 300,000 tLCE deficit by 2030. Such a deficit can be expected to drive the raw material price up, negatively impacting the lithium-ion battery prices.

Read our related Perspective:
 Lithium Discovery in Iran: A Geopolitical Tool to Enhance Economic Prospects?

Robust charging infrastructure is necessary for the adoption of electric HDTs

The widespread adoption of electric HDTs hinges on the availability of adequate charging infrastructure, and the industry stakeholders have already been investing in this direction.

In July 2022, Daimler Truck, the TRATON Group, and the Volvo Group formed a joint venture company, Milence, with an initial funding of US$542 (EUR 500) million, aiming to set up 1,700 high-performance public charging points in Europe by 2027. At the end of 2023, Milence opened its first charging hub in the Netherlands. In January 2023, the British oil giant BP opened public charging stations for electric HDTs on the 600 km long Rhine-Alpine corridor in Germany, one of the busiest road freight routes in the region. The company installed 300 kW charging stations, enabling electric HDTs to add up to 200 km range in 45 minutes of charging time.

However, establishing a well-planned charging infrastructure and ensuring accessibility across the region requires more coordinated efforts. In 2023, the EU Council and the European Parliament passed a new regulation for deploying alternative fuels infrastructure (AFIR). This regulation mandates the installation of fast charging stations with 350 kW output for heavy-duty vehicles. The stations are required to be installed every 60 km along the Trans-European Transport Network (TEN-T) system of highways. The TEN-T system is the EU’s primary transport corridor, accommodating 88% of long-haul HDT operations, according to 2018 data. The target is to deploy charging infrastructure for heavy-duty vehicles at least 15% of the length of the TEN-T road network by 2025, 50% by 2027, and 100% by 2030.

Foreign players are in good position to enter Europe’s electric HDT market

Non-EU manufacturers offering cheaper trucks, e.g., from the USA and China, are in a good position to address the increasing demand for electric HDTs in the EU. A study published by BCG in September 2023 indicated that the US and Chinese manufacturers could take over 11% of the European electric HDT market by 2035.

EU imposes a 22% import duty on diesel HDTs, while electric HDTs are subject to only 10%. Manufacturers from outside of the EU who are capable of producing battery packs at a lower cost can leverage the cost advantage and find it profitable to export electric HDTs to the EU despite paying import duties.

According to Bloomberg New Energy Finance, China produced heavy-duty vehicle batteries at a 54% lower cost than the rest of the world in 2022. A crucial factor contributing to this cost advantage is China’s significant control over the supply of lithium, a critical component in electric vehicle batteries. Additionally, China has strategically directed investments into cobalt mining ventures, notably in nations such as the Democratic Republic of the Congo. China oversees the processing of approximately 60-70% of both lithium and cobalt globally, underscoring its significant role in the processing of these critical materials by 2023, according to International Energy Agency (IEA) analysis in 2023. By securing access to raw materials such as lithium and cobalt, Chinese battery manufacturers are able to effectively manage costs, mitigate supply chain risks, and ultimately reduce the production cost of their battery packs. Even after adding a 10% import duty, China can potentially offer electric HDTs to the EU market at a more attractive price than EU manufacturers.

Similarly, the USA offers generous tax credits for producing clean energy components through the Advanced Manufacturing Production Credit (AMPC), making battery costs more competitive in the USA than in the EU.

Foreign manufacturers that may not have the cost advantage might potentially look at partnerships and collaborations to grab a piece of Europe’s booming electric HDT market. For instance, in March 2024, Hyundai, a South Korean automotive manufacturer, and Iveco, an Italian transport vehicle manufacturer, signed a Letter of Intent reinforcing their commitment to collaborate on developing and introducing electric HDT solutions for European markets. By partnering with Iveco Group, Hyundai aims to leverage Iveco’s existing market presence, local expertise, and production capabilities to develop and introduce competitive solutions for the European commercial heavy-duty vehicle market.

EOS Perspective

While still at the starting line, the adoption of electric HDTs is expected to sprint off in the EU, given the continuous efforts to achieve climate goals. Regulations pushing for zero-emission transport, increasing investment in charging infrastructure, and the shrinking difference between the TCO of diesel vs. electric HDTs will contribute to the widescale adoption of electric HDTs in the EU.

Amidst all the hype around electric HDT, hydrogen-powered HDT is also gaining some attention as a zero-emission alternative. Hydrogen HDTs have higher load-carrying capacity and can be refueled within minutes adding over 1,000 km range, making them suitable for long-haul transport of heavy loads. Leading truck manufacturers, such as Daimler Truck, Volvo Group, and Iveco, have come together to support a research project called H2Accelerate Trucks, aiming to deploy 150 hydrogen HDTs with a 1,000 km range and carrying capacities of up to 44 tones across the EU. As a part of this project, the first hydrogen HDT is likely to hit the roads in 2029.

However, hydrogen-fuel technology is still developing, and the hydrogen fuel cell HDT is far away from achieving cost parity with its diesel and electric counterparts. ICCT report indicates that hydrogen fuel cell HDT will achieve TCO parity with diesel HDT in 2035, but it is not expected to achieve TCO parity with electric HDT even by 2040. Underdeveloped technology and higher upfront costs associated with hydrogen fuel cell HDTs play a significant role in hindering their journey toward achieving TCO parity with electric counterparts. According to ICCT, hydrogen-powered HDTs are projected to have an average TCO of US$1.23 (EUR 1.14) per kilometer in 2035, compared to just US$0.99 (EUR 0.92) per kilometer for battery-electric HDTs. This disparity persists into 2040, with hydrogen-powered HDTs still trailing behind at US$1.15 (EUR 1.06) per kilometer, while battery-electric HDTs maintain a lower TCO of US$0.98 (EUR 0.91) per kilometer. This discrepancy poses implications for adoption, potentially hindering the widespread uptake of hydrogen-powered vehicles until significant advancements and cost reductions are achieved in the hydrogen sector.

In 2023, the CEO of MAN, Europe’s second-largest truck manufacturer, suggested that hydrogen HDTs will play a small role in the EU’s zero-emission commercial transport future. Considering the economic performance of hydrogen HDT, this opinion is likely to turn out to be correct. This suggests that electric HDT is the way forward.

01/03/2024by EOS Intelligence EOS Intelligence No Comments

Lithium Discovery in Iran: A Geopolitical Tool to Enhance Economic Prospects?

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Iran possesses significant mineral reserves, but its mining industry grapples with issues, including machinery shortages and international sanctions. The recent lithium discovery in Iran holds the potential to boost its mining sector and economy, depending on the viability of lithium extraction and processing, as well as geopolitical factors. It can serve as a bargaining chip to lift sanctions imposed by the Western world. China is poised to benefit the most from Iran’s lithium discovery due to its strategic partnership and expertise in lithium refining and extraction technologies. However, despite Iran’s strong mining potential, high infrastructure costs, technological limitations, and sanctions hinder its mining industry development.

Lithium discovery to help drive mining industry and economic upliftment in Iran

Iran is home to more than 7% of the world’s total mineral reserves and is rich in minerals, including zinc, copper, iron ore, coal, and gypsum. However, Iran’s mining industry is still nascent and barely contributes to economic growth due to a lack of necessary machinery and equipment as well as international sanctions.

In the past, Iran exported various minerals, such as iron ore, zinc, and copper, to Western countries. However, prolonged international sanctions, initially imposed in 2006 to restrain Iran’s nuclear development program, resulted in insufficient investment in the mining sector.

Lithium Discovery in Iran, a Geopolitical Tool to Enhance Economic Prospects by EOS Intelligence

Announced in March 2023, the discovery of lithium deposits holding up to 8.5 million tons of lithium in Iran, if proven accurate, is expected to strengthen the country’s mining sector and overall economic growth. Iran is the first country in the Middle East to discover lithium deposits.

Lithium is a crucial component of lithium-ion batteries used in smartphones and electric vehicles. The increasing adoption of electric vehicles is fueling the demand for lithium at a significant rate globally. There is a great need to scale up lithium mining and processing to meet the demand, particularly for the manufacturing of electric vehicles.

International Energy Agency (IEA), in its global EV outlook for 2022, indicated that about 50 new average-sized mines need to be built to fulfill the rising lithium demand for electric vehicles and meet international carbon emission goals. There are already signs of lithium shortage as demand for lithium increases globally. The lithium reserve found in Iran holds the potential to reverse the lithium supply shortage into surplus in the coming years.

Read our related Perspective:
Electric Vehicle Industry Jittery over Looming Lithium Supply Shortage

Hope for the lifting of sanctions and reestablishment of diplomatic relations

The lithium discovery in Iran is expected to redirect focus toward mining activities in the Middle East. Iran can leverage this discovery to persuade Western nations, such as the USA and the EU countries, to lift sanctions imposed for its nuclear program, support for terrorism, and human rights violations. These sanctions include restrictions on Iran’s access to the global financial system, travel bans on targeted individuals and entities involved in concerning activities, and limitations on trade in certain goods and technologies.

In August 2023, Iran and the USA reached an agreement wherein Iran intended to release detained Americans in exchange for the release of several imprisoned Iranians and access to frozen financial assets. Fulfillment of commitments demonstrates mutual trust among the countries, which could pave the way for improved relations, reduced tensions, and future diplomatic initiatives. The US government also permitted Iran to enrich uranium up to 60%. This can be interpreted as allowing Iran to meet their nuclear aspirations, which could encourage Iran to comply with the agreement signed with the USA. As cooperation and trust between the nations strengthen, this agreement could ease sanctions. Moreover, if relations continue to improve, Iran could potentially seek assistance from the USA for its lithium venture.

Also, in March 2023, Saudi Arabia and Iran, with the help of China, reached an agreement to resume their diplomatic relations, re-open embassies, and implement agreements covering economy, investment, trade, and security. With the reestablishment of cordial relations, Saudi Arabia is likely to engage in joint ventures within Iran’s mining sector, providing mutual benefits for both nations.

It can also be expected that India will seek to strengthen its ties with Iran by building strong collaborations to ensure a regular lithium supply, considering that India is one of the largest importers of lithium-ion batteries. Iran and India share strong and multifaceted relations across various areas, such as trade, energy, connectivity, culture, and strategic cooperation. As India strives to transition to renewable energy sources and reduce its carbon footprint, access to lithium reserves from Iran could facilitate the development and deployment of energy storage solutions, such as grid-scale batteries and off-grid systems.

Potential to disrupt the global lithium race and geopolitical relations

The announcement of lithium deposits in Iran is likely to impact the global competition for lithium resources significantly. It holds the power to disrupt the existing power dynamics in the global lithium race, as it is estimated to be the second-largest lithium reserve in the world after Chile.

Many countries compete to control lithium supply chains due to its strategic importance, particularly in the EV industry. A few countries dominate the global lithium production, including Australia, Chile, and China. The emergence of Iran as a significant lithium producer could diversify the global supply chain. China, the largest importer and processor of lithium and manufacturer of lithium batteries, holds a substantial share of the lithium market. China is particularly reliant on foreign lithium suppliers, including Australia, Brazil, Canada, and Zimbabwe, accounting for around 70% of its total lithium imports.

With China’s well-established economic and political relations with Iran, there is potential for collaborative ventures in the clean energy transition supply chain. In addition, China’s expertise in technological advancements in lithium-related technologies, particularly lithium-ion battery manufacturing, purification and refinement of lithium, battery management systems, and development of battery materials, will likely play a crucial role in gaining access to Iranian lithium. Increased access to lithium will reduce its dependence on the current lithium suppliers and gain dominance in the lithium supply, impacting the trade balance and economic growth of countries supplying lithium to China.

At the same time, Australia, which stands out as China’s current primary source of lithium, exporting around 90% of its lithium to China, might encounter political and economic challenges. Australia, being a close ally of the USA, is likely to face pressure to curb its lithium exports to China, aiming to limit China’s access to sources of lithium. Chile, also being the key supplier of lithium to China, may face similar pressure from the USA. The USA is likely to exert such pressures, as China’s strong position could undermine the USA’s technological competitiveness and leadership in the EV market, accelerating the existing tensions and disrupting power dynamics in the global lithium race.

Major influencing countries such as the USA, Canada, France, Japan, Australia, the UK, and Germany also formed the Sustainable Critical Minerals Alliance in 2022. The alliance aims to secure supply chains of critical minerals, including lithium, nickel, and cobalt, from countries with more robust environmental and labor standards to reduce dependency on China. Such initiatives are expected to impact China’s dominant global lithium supply chain position.

Inevitably, Iran’s lithium discovery and China’s potential involvement in securing access to the resource can influence international relations, particularly between China and the USA, and China and Australia.

China to deepen ties with Iran

China and Iran have established an extensive partnership focused on China’s energy needs and Iran’s abundant resources. China has remained Iran’s primary trading partner for more than a decade. Their relationship grew stronger, specifically after the USA pulled out of the nuclear agreement and reintroduced sanctions on Tehran in 2018. Both China and Iran are confronted with sanctions from the USA, which is expected to strengthen collaboration between the two to mitigate the impact of sanctions and to counterbalance US influence in the Middle East and Asia.

In March 2021, China and Iran signed a 25-year strategic collaborative agreement to reinforce the countries’ economic and political alliance, particularly focusing on investment in Iran’s energy and infrastructure industry and assuring regular oil and gas supply to China. This is expected to further strengthen the relations between Iran and China.

China, the most trusted strategic ally of Iran and a significant lithium producer will likely act as a critical partner in building up Iran’s lithium industry. As the global leader in electric vehicle adoption (in absolute terms), the demand for lithium in China has increased dramatically in recent years. Also, China stands out as the only trade partner capable of accessing and refining lithium on a large scale. This will strengthen the Iran-China relations further.

High infrastructure costs and lack of FDI to challenge the Iranian mining sector

Despite the presence of a vast mining potential in the country, certain factors such as inadequate access to essential machinery and equipment, lack of exploration facilities, lack of sufficient infrastructure and investment, absence of advanced technologies, and shortage of financial resources limit the growth of the mining sector in Iran.

Lack of access to new cutting-edge production technologies, exacerbated by international sanctions, results in inefficient utilization of resources, particularly water, fuel, and electricity in mining operations. In addition, high production costs, mandatory pricing, and lack of skilled labor further pose obstacles in mining operations. This, together with the fact that the lithium extraction process is generally expensive and time-consuming, has led to various small and medium-sized mines opting to cease their operations.

The absence of foreign investment due to international sanctions poses challenges in conducting mining operations in the country. The government seeks to attract foreign investment in the mining sector, a difficult task amid structural challenges, human rights abuse accusations, and international sanctions.

Exploitation of lithium reserves discovered in the country will be difficult due to the lack of advanced technologies required for extraction, processing, and refining. The assessment of lithium grade and its economic feasibility will play a crucial role in determining whether to exploit the reserve.

EOS Perspective

The scale of lithium reserves discovered in Iran is significant, but the exploitation of the mineral is not likely to happen in the near future. Its viability, economic feasibility, actual quantity, and grade are yet to be ascertained. Also, the country does not have access to the necessary technologies required to process and refine lithium, so it has to rely on foreign investors.

Foreign investment in Iran is hindered by the sanctions imposed by the USA and the EU against Iran’s nuclear development program. Back in 2015, Iran agreed to scale down its nuclear program and allow broader access to international inspections to its facilities in return for billions of dollars in sanctions relief. But that ended in 2018 when the USA withdrew from the deal. With the recent agreement signed in 2023, there is hope that it could pave the way for the relaxation of sanctions on Iran.

Additionally, considering lithium’s pivotal role in multiple industries and concerns about China’s dominant power in the lithium supply chain, the US government might consider easing sanctions. EU is not likely to ease or lift sanctions and invest in Iran immediately due to uncertainties about the viability of the reserve, its impact on the environment during extraction, and lack of energy investments in the country. However, the EU may consider easing sanctions in the future if the USA moves in that direction.

Russia and China, having economic and diplomatic ties with Iran, are more likely to show interest in Iran’s lithium discovery. Russia is focusing on expanding its presence in the lithium market to meet the increasing demand for lithium in vehicles and energy storage systems. As a step in this direction, in December 2023, Rosatom, a Russian state corporation, signed a deal to invest US$450 million in Bolivia to construct a pilot lithium plant. Russia is also likely to explore investment opportunities in Iran’s lithium sector.

China is expected to benefit the most from the lithium discovery in Iran, considering its longstanding relations with Iran. At the same time, Iran is also more likely to be eager to collaborate with China, considering China’s strength in the lithium industry and international sanctions.

However, Iran should not solely rely on China, considering China’s track record of engaging in debt-trap diplomacy to exert influence and dependence, particularly over low-income countries. For instance, in 2013, China launched its infamous Belt and Road Initiative (BRI), under which it started funding and executing several infrastructure projects in developing and underdeveloped countries across the globe. However, over the years, the BRI initiative has been criticized for resulting in an increased dependence and trapping of the partner countries in heavy debt through expansive projects, non-payment of which may lead to a significant economic and political burden on them. A collaborative agreement spanning 25 years was also signed by China with Iran, primarily focusing on investing in Iran’s energy and infrastructure sectors, facilitating Iran’s involvement in the BRI. Iran could also fall into a similar debt trap, having no viable alternative partner, a fact that China can take advantage of.

Read our related Perspective:
China’s BRI Hits a Road Bump as Global Economies Partner to Challenge It

Many countries are likely to be interested in investing and building strong collaboration with Iran if the reserves’ viability is confirmed and the grade and quality of lithium are suitable for use. This could change the entire dynamics of the lithium supply chain and also lead to a decrease in lithium prices, which have been skyrocketing due to a significant surge in global lithium demand.

07/08/2023by EOS Intelligence EOS Intelligence No Comments

Electric Vehicle Industry Jittery over Looming Lithium Supply Shortage

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The transition to Electric Vehicles (EVs) is picking pace with concentrated efforts to achieve the net-zero carbon scenario by 2050. The International Energy Agency (IEA) estimated that global EV sales reached 6.6 million units in 2021, nearly doubling from the previous year. IEA projects that the number of EVs in use (across all road transport modes excluding two/three-wheelers) is expected to increase from 18 million vehicles in 2021 to 200 million vehicles by 2030, recording an average annual growth of over 30%. This scenario will result in a sixfold increase in the demand for lithium, a key material used in the manufacturing of EV batteries, by 2030. With increasing EV demand, the industry looks to navigate through the lithium supply disruptions.

Lithium supply shortages are not going away soon

The global EV market is already struggling with lithium supply constraints. Both lithium carbonate (Li2CO3) and lithium hydroxide (LiOH) are used for the production of EV batteries, but traditionally, lithium hydroxide is obtained from the processing of lithium carbonate, so the industry is more watchful of lithium carbonate production. BloombergNEF, a commodity market research provider, indicated that the production of lithium carbonate equivalent (LCE) was estimated to reach around 673,000 tons in 2022, while the demand was projected to exceed 676,000 tons LCE. In January 2023, a leading lithium producer, Albemarle, indicated that the global demand for LCE would expand to 1.8 million metric tons (MMt) (~1.98 million tons) by 2025 and 3.7 MMt (~4 million tons) by 2030. Meanwhile, the supply of LCE is expected to reach 2.9 MMt (~3.2 million tons) by 2030, creating a huge deficit.

There is a need to scale up lithium mining and processing. IEA indicates that about 50 new average-sized mines need to be built to fulfill the rising lithium demand. Lithium as a resource is not scarce; as per the US Geological Survey estimates, the global lithium reserves stand at about 22 million tons, enough to sustain the demand for EVs far in the future.

However, mining and refining the metal is time-consuming and does not keep up with the surging demand. According to IEA analysis, between 2010 and 2019, the lithium mines that started production took an average of 16.5 years to develop. Thus, lithium production is not likely to shoot up drastically in a short period of time.

Considering the challenges of increasing lithium production output, industry stakeholders across the EV value chain are racing to prepare for anticipated supply chain disruptions.

Electric Vehicle Industry Jittery over Looming Lithium Supply Shortage by EOS Intelligence

Automakers resort to vertical integration to tackle supply chain disruptions

At the COP26 climate meeting in November 2021, governments of 30 countries pledged to phase out the sales of petrol and diesel vehicles by 2040. Six automakers – Ford, General Motors, Mercedes-Benz, Jaguar Land Rover, Quantum Motors (a Bolivia-based automaker), and Volvo – joined the governments in this pledge. While Volkswagen and Honda did not officially sign the agreement, both companies announced that they are aiming to become 100% EV companies by 2040. Other leading automakers have also indicated EVs to be a significant part of their future product portfolio. Such commitment shows that EVs are indeed going to be the future of the automotive industry.

Automakers have resorted to vertical integration to gain better control over the EV supply chain – from batteries to raw materials supply, including lithium, to keep up with the market demand.

Building own battery manufacturing capabilities

Till now, China has dominated the global battery market. The country produced three-fourths of the global lithium-ion batteries in 2020. At the forefront, automakers are looking to reduce their reliance on China for the supply of EV batteries. Moreover, many automakers have invested in building their own EV battery manufacturing capabilities.

While the USA contributed merely 8% to global EV battery production in 2020, it has now become the next hot destination for battery manufacturing. This is mainly because of the government’s vision to develop an indigenous EV battery supply chain to support their target of 50% of vehicle sales being electric by 2030. As per the Inflation Reduction Act passed in August 2022, the government would offer up to US$7,500 in tax credit for a new EV purchase.

However, half of this tax credit amount is linked to the condition that at least 50% of EV batteries must be manufactured or assembled in the USA, Canada, or Mexico. Taking effect at the beginning of 2023, the threshold will increase to 100% by 2029. To be eligible for the other half of the tax credit, at least 40% of the battery minerals must be sourced from the USA or the countries that have free trade agreements with the USA. The threshold will increase to 80% by 2027. In October 2022, the Biden Administration committed more than US$3 billion in investment to strengthen domestic battery production capabilities. While some automakers had already been planning EV battery production in the USA, after the recent announcements, the USA has the potential to become the next EV battery manufacturing hub.

BloombergNEF indicated that between 2009 and 2022, 882 battery manufacturing projects (with a total investment of US$108 billion) were started or announced in the USA, of which about 25% were rolled out in 2022.

In September 2021, Ford signed a joint venture deal with Korean battery manufacturer SK Innovation (BlueOvalSK) to build three battery manufacturing plants in the USA, investing a total of US$11.4 billion. Once operational, the combined output of the three factories will be 129 GWh, enough to power 1 million EVs.

In August 2022, Honda announced an investment of US$4.4 billion to build an EV battery plant in Ohio in partnership with Korean battery manufacturer LG Energy Solutions.

As of January 2023, GM, in partnership with LG Energy Solutions, announced the build of four new battery factories in the USA that are expected to have a total annual capacity of 140GWh.

Toyota, Hyundai, Stellantis, and BMW are a few other automakers who also announced plans to establish EV battery production facilities in the USA during 2022.

Automakers are also expanding battery manufacturing capabilities in the regions closer to their EV production base. For instance, Volkswagen is aiming to have six battery cell production plants operating in Europe by 2030 for a total of 240GWh a year.

In August 2022, Toyota announced plans to invest a total of US$5.6 billion to build EV battery plants in the USA as well as Japan, which will add 40 GWh to its global annual EV battery capacity.

Focusing on securing long-term lithium supply

While vertically integrating the battery manufacturing process, automakers are also directly contacting lithium miners to lock in the lithium supply to meet their EV production agenda.

Being foresightful, Toyota realized early on the need to invest in lithium supply and thus acquired a 15% share in an Australian lithium mining company Orocobre (rebranded as Allkem after its merger with Galaxy Resources in 2021) through its trading arm Toyota Tsusho in 2018. As a part of this agreement, Toyota invested a total of about US$187 million for the expansion of the Olaroz Lithium Facility in Argentina and became an exclusive sales agent for the lithium produced at this facility. In August 2022, a Toyota-Panasonic JV manufacturing EV batteries struck a deal with Ioneer (operating lithium mine in Nevada, USA), securing a supply of 4,000 tons of LCE annually for five years starting in 2025.

Since the beginning of 2022, Ford secured lithium supply from various parts of the world through deals with multiple mining companies. This included deals with Australia-based mining company Ioneer, working on the Rhyolite Ridge project in Nevada, USA, US-based Compass Minerals, working on extraction of LCE from Great Salt Lake in Utah, USA, Australia-based Lake Resources, operating a mining facility in Argentina, and Australia-based Liontown Resources operating Kathleen Valley project in Western Australia.

GM is also among the leading automakers that jumped on the bandwagon. In July 2021, the company announced a strategic investment to support a lithium mining company, Controlled Thermal Resources, to develop a lithium production site in California, USA (Hell’s Kitchen project). The first phase of production is planned to begin in 2024 with an estimated lithium hydroxide production of 20,000 tons per annum, and under the agreement, GM would have the first rights on this. In July 2022, GM announced a strategic partnership with Livent, a lithium mining and processing company. As part of this agreement, Livent would supply battery-grade lithium hydroxide to GM over a period of six years beginning in 2025. The automaker continues to invest in this direction; in January 2023, GM announced a US$650 million investment in the lithium producer Lithium Americas, developing one of the largest lithium mines in the USA, which is expected to begin operations in 2026. As a part of the deal, GM will get exclusive access to the first phase of lithium output, and the right to first offer on the production in the second phase.

Other automakers also invested heavily in partnerships with mining companies to secure a long-term supply of lithium in 2022. The partnership between Dutch automaker Stellantis and Australia-based Controlled Thermal Resources, Mercedes-Benz and Canada-based Rock Tech Lithium, and Chinese automaker Nio and Australia-based Greenwing Resources are a few other examples.

There are also frontrunners who are directly taking charge of the lithium mining and refining process. In June 2022, the Chinese EV giant BYD announced plans to purchase six lithium mines in Africa. If all deals fall in place as planned, BYD will have enough lithium to manufacture more than 27 million EVs. American Tesla recently indicated that it might consider buying a mining company. In August 2022, while applying for a tax break, Tesla confirmed its plan to build a lithium refinery plant in the USA.

This vertical integration is nothing new in this sector. In the early days of the auto industry, automakers owned much of the supply chain. For instance, Ford had its own mines and steel mill at one point. Do we see automakers going back to their roots?

Battery makers are also looking for alternatives

Some of the battery makers, especially the Chinese EV battery giants, are going upstream and expanding into lithium mining. For instance, in September 2021, Chinese battery maker Contemporary Amperex Technology (CATL) agreed to buy Canada’s Millennial Lithium for approximately US$297.3 million. Another Chinese battery maker, Sunwoda, announced in July 2022 that the company plans to buy the Laguna Caro lithium mining project in Argentina through one of its subsidiaries.

However, being aware that the lithium shortage is not going to be resolved overnight, battery makers are ramping up R&D to develop alternatives. In 2021, CATL introduced first-generation sodium-ion batteries having a high energy density of 160 watt-hours per kilogram (Wh/kg). This still does not match up to lithium-ion batteries that have an energy density of about 250 Wh/kg and thus allow longer driving range. Since sodium-ion batteries and lithium-ion batteries have similar working principles, CATL introduced an AB battery system that integrates both types of batteries. The company plans to set up the supply chain for sodium-ion batteries in 2023.

Zinc-air batteries, which are composed of a porous air cathode and a zinc metal anode, have been identified as another potential alternative to lithium-ion batteries. Zinc-air batteries have been proven to be suitable for use in stationary energy storage, mainly energy grids, but it is yet to be seen if they could be as effective in EVs. The application of zinc-air batteries in EVs – either standalone or in combination with lithium-ion batteries – is under development and far from market commercialization. A World Bank report released in 2020 indicated that mass deployment of zinc-air batteries is unlikely to happen before 2030.

EOS Perspective

Despite all the measures, the anticipated lithium shortages will be a setback for the transition to EV. One of the major factors will be the escalating costs of lithium, which will, in turn, impact the affordability of EVs.

Lithium prices have skyrocketed in the past two years on account of exploding EV demand and lithium supply constraints. The price per ton of LCE increased from US$5,000 in July 2020 to US$70,000 in July 2022.

One key reason driving the adoption of EVs has been the cost of EVs becoming comparable to the cost of conventional internal combustion engine vehicles because of the continually decreasing lithium battery prices. By the end of 2021, the average price of a lithium-ion EV battery had plunged to US$132 per kilowatt-hour (kWh), compared to US$1,200/kWh in 2010.

Experts project that EVs will become a mass market product when the cost of the lithium-ion battery reaches the milestone of US$100/kWh. Being so near to the milestone, the price of lithium-ion batteries is likely to take a reverse trend due to the lithium supply deficit and increase for the first time in more than a decade. As per BloombergNEF estimates, the average price of the lithium-ion battery rose to US$135/kWh in 2022. Another research firm, Benchmark Mineral Intelligence, estimated that the cost of lithium-ion batteries increased by 10% in 2022. This would have a direct impact on the cost of EVs, as batteries account for more than one-third of the cost of EV production.

Read our related Perspective:
 Chip Shortage Puts a Brake on Automotive Production

Automakers are still healing from the chip shortage. They are now faced with lithium supply constraints that are not expected to ease down for a few years. There is also a looming threat of a shortage of other minerals such as graphite, nickel, cobalt, etc., which are also critical for the production of EV components. While the world is determined and excited about the EV revolution, the transition is going to be challenging.

06/10/2022by EOS Intelligence EOS Intelligence No Comments

Africa’s Mining Industry Gaining Momentum

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Africa is home to 30% of the world’s mineral reserves, 8% of the world’s natural gas, and 12% of the world’s oil reserves. Despite being endowed with abundant resources, the continent accounts for only 5% of the global mining production. Mining in Africa was often overlooked because of the unstable political environment, opaque regulations, and poor enforcement capacity. Despite these challenges, investments in Africa’s mineral wealth have been steadily increasing in recent years. The massive swings in mineral demand due to the accelerated clean energy transition along with the rising geopolitical tensions have made countries across the globe diversify their sources of minerals and venture into highly challenged regions such as Africa.

Clean energy – A major force driving mineral extraction in Africa

The globally accelerating clean energy transition is set to unleash unprecedented mineral demand in the coming decades. Demand for minerals such as lithium, copper, cobalt, nickel, and zinc is expected to increase exponentially since they are required in the production of batteries, electric vehicles, wind turbines, and solar photovoltaic plants, all of which are the cornerstone of clean energy development. Among all clean energy technologies, electric vehicle manufacturing and energy storage are likely to account for about half of the global mineral demand over the next two decades.

Lithium

The African continent hosts many of the global mineral reserves required for manufacturing electric vehicles and batteries. Zimbabwe and the Democratic Republic of the Congo are among the top ten countries with the largest lithium reserves in the world. Lithium is a crucial component of lithium-ion batteries, which are used in smartphones and electric vehicles. In Zimbabwe, a mine named Bikita holds more than 11 million tons of lithium ore. Despite being bestowed with massive lithium reserves, the region is largely unexplored due to the lack of investment. However, as the lithium demand is on the rise, the government of Zimbabwe has been actively promoting the development of lithium mines to attract foreign investments. At the same time, an increasing interest in electric vehicles and lithium-ion batteries is driving the lithium demand, pushing many global economies to invest in lithium mining. One such example is an investment from December 2021, when a Chinese-owned mineral production and processing company, Zhejiang Huayou Cobalt, acquired a 100% stake in the Zimbabwean Arcadia lithium mine.

Cobalt

Cobalt is another important metal, used in energy storage technologies and electric vehicle production. Most lithium-ion batteries depend on cobalt, which is a by-product of copper and nickel production. The Democratic Republic of the Congo supplies almost 70% of global cobalt, while Australia and the Philippines supply 4.2% and 3.3% of global cobalt, respectively. The growth of the electric vehicle industry has driven major cobalt producers to ramp up the output at multiple mine sites in the Democratic Republic of the Congo.

Graphite

Like lithium and cobalt, graphite is another significant mineral used in electric vehicle manufacturing. A lithium-ion battery needs 10 times more graphite than lithium. China produces around 82% of the global graphite, followed by Brazil at 7%. Due to the increasing demand, many countries with graphite reserves are launching their graphite mining projects. Mozambique is expected to increase its flake graphite 2021 production levels fivefold by 2030. The country has around 20% to 40% of total global graphite reserves.

Copper

Copper also holds a significant position in a range of minerals used in renewable energy technologies. It plays a vital role in grid infrastructure due to its efficiency, reliability, and conductivity. Around 60% of copper demand is driven by wind turbines, solar panels, and electric vehicle manufacturing. Increasing copper demand along with the rising global copper shortage has made many global producers expand their production and venture into new regions for mining. Consequently, Africa’s Zambia, one of the largest copper producers in the world, has attracted a significant number of investments recently. The country aims to take its annual copper production levels from 830,000 metric tons in 2020 to 3 million metric tons in the next ten years.

Africa also hosts many other mineral reserves such as platinum, manganese, nickel, and chromium, which are used in a variety of clean energy technologies. The continent is poised to take advantage of the growing demand for these minerals and has already started to attract significant foreign investments.

Africa’s Mining Industry Gaining Momentum by EOS Intelligence

High commodity prices and rising geopolitical tensions favor Africa’s mining

Africa has experienced a boom in mining since 2000 when the commodities super cycle (a phenomenon where commodities trade for higher prices for a long period) began. Along with the commodity boom, the African mining industry has grown substantially, attracting investments in exploration, acquiring new concessions, and opening new mines. The recently spiking prices of commodities such as aluminum, zinc, nickel, copper, gold, and coal are further fueling investments across the continent.

The Russian war on Ukraine further benefits Africa as many countries started to diversify their supply chains away from Russia. In March 2022, the USA and the UK imposed a ban on Russian oil imports. Europe also has plans to cut its Russian gas imports by two-thirds before the end of 2022. These could lead to supply shortages of oil and gas in many countries. Russia also supplies 7% of the world’s nickel, 10% of the world’s platinum, and 25-30% of the world’s palladium, which are critical to the globally accelerating clean energy transition. The US and European governments are looking closely at further sanctions against Russia which could disrupt these critical minerals supply. The situation has made many developed countries diversify and secure their sources of minerals. This will be a huge opportunity for Africa to promote its resources.

Massive African gold reserves attract global gold producers

Gold is often perceived as a safe haven asset and its demand is constantly rising, pushing major global gold producers to ramp up their production. Additionally, as many of the global gold reserves are depleting, mining companies find it imperative to explore new gold deposits across the world. Interestingly, the Birimian greenstone belt of West Africa hosts huge deposits of gold but remains highly underexplored. Many leading global gold producers started exploring the region due to the favorable mining regulations and mining codes implemented recently. Between 2009 and 2019, approximately 1,400 metric tons of gold reserves were discovered in West Africa, while about 1,000 metric tons and 680 metric tons were found in Canada and Ecuador, respectively. A total of US$470 million was invested in West Africa’s gold resource exploration in 2020. This was the third-largest global gold exploration expenditure in 2020, behind that of Australia and Canada.

Investments in Africa’s mining

Countries such as Australia, China, Canada, the UK, and the USA have invested heavily in Africa’s mineral extraction over the years. Emerging economies such as India, Russia, and Brazil also have sizeable investments in Africa’s mining, creating more competition for resources. Among all the countries that have invested, China has demonstrated a significant presence across the continent. The rise of industrialization in China has driven increased demand for mineral exploration and extraction in Africa over the past decades. China’s investment in exploring African mineral resources multiplied to a remarkable extent between 2005 and 2015. In 2021, China’s total outbound foreign direct investment (FDI) was US$145.2 billion, of which a quarter was dedicated to African mining.

Many of the mining projects in Africa are funded by international stock exchanges. For instance, in 2015, Deloitte analyzed the funds of 29 major mining projects which were in development across the continent. The Toronto Stock Exchange funded 28% of these projects, followed by the Hong Kong Stock Exchange funding 17%, and the National Stock Exchange of India funding 10% of the projects.

A 2019 report published by PricewaterhouseCoopers states that, in 2018, total mining deals in Africa amounted to US$48 billion. Out of this, West Africa received the largest share of investment worth US$16.2 billion for its oil, gas, and gold reserves, followed by Southern Africa, which received US$14.7 billion worth of investment for its gold, platinum, nickel, and cobalt. East Africa and Central Africa received the least amount of mining investment.

Challenges

Asia constitutes approximately 60% of the world’s total mining production, followed by North America (14%). Africa, despite being endowed with abundant mineral reserves, constitutes only 5% of the global mining production. The continent has failed to achieve real mining expansion due to many challenges prevailing in the continent. One of the prime challenges is the poor infrastructure (rail and port) that causes trade blockages. High levels of political instability, unstable regulations, and corruption are other significant challenges hindering mining across Africa. Other challenges impacting the African mining industry include poor geological data management, illegal mining, lack of mineral processing facilities, unreliable power supply, and weak local markets.

EOS Perspective

With the world’s increasing appetite for clean energy, Africa has a chance to establish itself as a key player in the mining industry. Significant investments in extraction and exploration are required to get the most out of the continent’s resources, and this is happening to a certain extent. Most significantly, the countries involved must build a robust value chain to promote industrialization and boost their economies, instead of just supplying raw materials. Governments should consider fostering joint ventures and partnerships with foreign companies to bridge the technical skill gaps that prevail in the continent. The industry itself must ensure that it shares the mining benefits with the people, thereby improving their welfare.

The African countries must also address challenges such as poor infrastructure to participate effectively in the value chain. Many projects are already underway to boost the transport infrastructure. China has built significant inroads in Africa under its Belt and Road Initiative. Deloitte estimates approximately US$50 billion would be invested in over 830 infrastructure projects between 2003 and 2030.

Along with infrastructure development, strong governance, and a stable and reliable regulatory environment are critical to attracting foreign investments. Several governments across Africa are revising mining codes and regulations and providing tax incentives to stimulate manufacturing. The mining industry is at a critical stage where it needs to satisfy an increased demand for minerals while also curbing the environmental impact of mining operations. This process seems to be complex, but it also provides many opportunities. For instance, mining companies can utilize the adoption of renewable, energy-efficient systems for power generation. Technologies such as artificial intelligence, automation, and big data could be adopted to mitigate rising costs.

There is still a long way for the region to achieve the desired mining growth and economic development, with multiple challenges across the entire value chain. However, with stronger governance, more stable regulations, and considerable foreign investments, Africa could position itself as one of the largest mining economies in the world. The opportunity for Africa is huge, but it needs to be utilized properly.

27/04/2022by EOS Intelligence EOS Intelligence No Comments

Morocco’s Auto Industry Is in Full Gear

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Over the past few years, Morocco has established itself as a leading manufacturing hub for automobiles in Africa, surpassing South Africa as the biggest exporter of passenger cars on the continent. The North African country is well-placed geographically as well as economically (thanks to the African Continent Free Trade Agreement) to export cars to European markets, especially France, Spain, Germany, and Italy. While the market continues to grow and gain importance among auto manufacturers, it is to be seen if it can disrupt Asian auto manufacturing hubs in the future.

With the capacity to produce over 700,000 vehicles per year and employing about 220,000 people in the sector, Morocco has gained mass appeal as a leading automotive manufacturing hub in the African region. Several international auto manufacturers, such as Renault, Peugeot, and Volkswagen have set up units in Morocco and have been growing their exports from the market. The Moroccan government signed 25 separate trade agreements with several auto and auto parts manufacturers across the EU and the USA and this is estimated to drive the Moroccan automobile market to be worth US$22 billion by 2026. Moreover, the government has stated that it wants to reach a production capacity of 1 million vehicles by 2025.

Investments

Several companies have established presence in Morocco as a cost-effective gateway to the European markets, the largest of them in terms of production numbers being Renault. Renault was the first global auto manufacturer to enter Morocco in 2012 and has plants in Tangier and Somaca (Casablanca). The plants have a respective capacity of about 400,000 vehicles and 85,000 vehicles annually. The automaker has already exported more than 1 million vehicles from its Morocco plants and has further signed agreements with the Moroccan government to expand auto production in the country.

French automaker Peugeot (Group PSA) is another major automobile manufacturer in this country. In 2019, Peugeot opened a US$600 million plant in Kenitra, north of Rabat, which produces the Peugeot 208 at a capacity of 200,000 vehicles annually.

Other carmakers operating in Morocco include Volkswagen, which shut down its plant in Algeria in 2019 and moved it to Morocco. In a similar move, in 2021, Korean automobile giant, Hyundai, decided to suspend its production in Algeria and move it to Morocco, cementing Morocco’s position as the go-to manufacturing hub for automobiles in North Africa.

In addition to the presence of several leading car manufacturers, the country also houses a large number of parts manufacturers and has successfully leveraged backward integration. An American player, Lear, operates 11 production sites here for the production of automotive seating and electrical systems. Similarly, Chinese aluminum automotive parts manufacturer, Citic Dicastal, set up two plants in the Kentira region for the production of six million aluminum rims annually that it aims to supply to the Peugeot plant. In addition, auto part companies such as France-based Valeo, US-based Varroc Lighting Systems, and Japan-based Yazaki and Sumitomo also established presence in Morocco.

Morocco’s Auto Industry Is in Full Gear by EOS Intelligence

Apart from large international parts manufacturers, the country also houses several local players that support and provide parts to the automobile giants. The government has been promoting partnering with local suppliers to provide a boost to the domestic industry. In 2021, Morocco’s leading automobile manufacturer, Renault, entered into a strategic agreement with the government to increase local sourcing to US$2.9 billion by 2025 (from 2023 forecast of US$1.7 billion) and increase local integration to 80%, up from 2023 forecast of 65%.

While Morocco continues to cement its place as a leading auto manufacturing hub in Africa, it is simultaneously aiming to position itself as a preferred hub for EV and EV component production. In 2017, the government signed a deal with a Chinese electric automobile manufacturer, BYD Auto, to build a new plant in the Tangier region. The plant will be spread over 50-hectare and will employ about 2,500 personnel. However, its opening is facing delays and no date of completion has been announced yet.

In October 2021, a leading EV manufacturer, Tesla, deployed its first two supercharger stations in Morocco, marking its first foray into the African continent. While the EV giant has not announced its formal entry to the market yet, usually deploying supercharging stations and service centers has been its first step in entering a market.

In addition to this, in 2021, STMicroelectronics, an EV chip producer announced that it was set to open a new Tesla-dedicated EV chip production line at its facility in Bouskoura, Morocco, following a win of a contract with Tesla. Following this, STMicroelectronics also signed a strategic cooperation agreement with Renault to supply electric and hybrid vehicle advanced semiconductors for Renault’s Dacia Spring EVs range, starting 2026. While currently the Dacia Spring EV model is produced in China, chip production in Morocco raises prospects of the current electric model or any future models to be manufactured in Morocco, especially for the European market. This places Morocco in a strategic position to also become a leader in EV manufacturing in the African subcontinent.

Government initiative

While Morocco has a strong geographic advantage, given its proximity to several European countries that makes it an ideal export market, political stability is another factor contributing to the sectors growth. The Moroccan government offers a single window outlet at its Ministry of Industry and Trade, which makes it much easier for international players to do business as compared with other countries that are more bureaucratic and complex in their dealings. Moreover, the government is known to be consistent with their policies, which is critical for auto manufacturers looking to make long term investments.

The government has made tremendous efforts and investments in developing Morocco into a global auto manufacturing hub. Morocco has about 60 free trade agreements with Europe, the USA, Turkey, and the UAE, a fact that facilitates easy trade and exports.

In addition, the Moroccan government provides several tax benefits to companies setting up manufacturing units in the country. It offers zero tax for the first five years and 15% tax for the subsequent years. Moreover, it provides full exemption on value added tax and a 15-year exemption on business and occupation tax.

Apart from fiscal benefits, it has also constantly invested in infrastructure to ensure smooth operations with regards to both manufacturing and transportation. In 2015, the government allocated US$7.8 billion towards development of infrastructure including roads, airports, etc.

Moreover, in 2018, the government inaugurated the US$4 billion Al-Boraq high-speed rail line linking the two key auto manufacturing hubs, Casablanca and Tangier. The Al-Boraq line is also linked to the Tanger Med port, which is a key port for all exports to Europe. The Tanger Med port has also become the largest port in the Mediterranean region post its phase II development in 2019. The port now has a capacity of 9 million twenty-foot equivalent units, surpassing Spain’s Algeciras and Valencia ports in capacity. The development and expansion of the rail link and the ports have facilitated smooth export from Moroccan manufacturing plants to European markets.

Furthermore, the government also facilitates staff training through the creation of the Automotive Industry Training Institutes (Instituts de Formation aux Métiers de l’Industrie Automobile (IFMIA)). The training support centers address recruiting and competency development needs of companies operating in the sector. While three of the centers are managed by the Moroccan Automotive Industry and Trade Association (AMICA) at Casablanca, Kenitra, and Tangiers, the fourth center is run by Renault and is located at Renault’s Mellousa plant. The Moroccan government provided about US$10 million for the construction of the Renault training center, which has more than 5,000 students (about 4,200 of them work for Renault). This way the government provides comprehensive and all-encompassing support to the sector, which in turn is expected to permeate to the development of the local vendors and suppliers as well.

Other than this, Morocco enjoys the obvious advantage of low cost labor (although this is something common to the entire African region). The cost of labor in Morocco is about US$1.5 per hour, which is about one-fourth of that in Spain and much lower than many East European nations. Since companies such as Renault produce their entry level cars in Morocco, labor constitutes a high portion of the overall costs.

EOS Perspective

With strong political support, advantageous geographical location, and low labor costs, Morocco seems to have all the right ingredients for a booming auto industry. The sector has been witnessing exponential growth over the past few years and has already overtaken South Africa as the largest automobile manufacturer in Africa.

While the industry currently caters to the manufacturing of low cost models, it is also slowly creating a niche space for itself in the EV market, which is considered the future of the automobile sector. Moreover, the sector is creating an entire automobile ecosystem by encouraging and promoting backward integration, especially through the participation of local auto part suppliers and vendors.

There is clearly no contention that the North Africa is the leader in the automobile space in the region, however, it is still a long way before the region is a serious competitor in the global auto export market to countries such as China, India, Korea, or Mexico, which are global leaders. A lot will depend on how it manages to develop competencies beyond cheap labor and supportive policies, especially with regards to attracting premium and luxury models. While it has the potential, it will be difficult to displace leading hubs that are already competent in the space.

25/02/2021by EOS Intelligence EOS Intelligence No Comments

UK Paves The Way for A Greener and Carbon-Free Future

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The UK is working to create a policy for building a more sustainable future for itself through the New Green Industrial Revolution, aiming to attain net-zero emissions in the UK by 2050. As the country separated itself from the EU through Brexit, it is also setting its own environmental goals and in that, its own version of the EU’s 2019 Green Deal (we wrote about it in The EU Green Deal – Good on Paper but Is That Enough? in March 2020). With highly ambitious targets, the proposed investments are worth GBP12 billion, creating 250,000 jobs in the process. While this seems like a promising funds allocation, the plan’s success will actually depend on significant investments in next-generation technologies, which have currently not been proven commercially. Moreover, a lot will depend on an equal involvement from the private sector that might be more cautious with investments than the public sector.

The UK is in a bid to position itself at the forefront of global markets for green energy and clean technologies. To achieve this, it proposed a 10-point Green Industrial Revolution in November 2020, which aims to mobilize GBP12 billion funds and create 250,000 jobs in the UK. Through this plan, the UK aims to achieve net zero carbon emissions by 2050. The key areas covered under the plan include offshore wind, hydrogen, nuclear, electric vehicles, public transport, jet zero and greener maritime, homes and public buildings, carbon capture, nature, and innovation and finance.

Offshore wind

The new Green Industrial Revolution outlines the UK government’s commitment to put offshore wind energy at the forefront of the country’s electricity needs. It has increased the offshore wind targets from previous 30GW to 40GW by 2030, aiming to produce enough energy to power all homes in the UK by 2030.

In addition to this, the government plans investments of about GBP160 million to upgrade ports and infrastructure in localities that will accommodate future offshore wind projects (e.g. Teesside, Humber, Scotland, and Wales).

This investment in developing offshore wind energy is expected to support about 60,000 direct and indirect jobs by 2030 in construction and maintenance of sites, ports, factories, etc.

While the government’s plan is great on paper, meeting the 40GW target will require 4GW of offshore wind projects to be commissioned every year between 2025 and 2030, which is extremely ambitious and challenging. Moreover, just developing offshore wind projects will not be enough until works are also done to update the electricity grid. Further, the target 40GW generation is calculated based on current electricity demand by households, which in reality is bound to increase as a shift towards electric vehicles is being encouraged.

Hydrogen

With the help of industry partners, the UK government plans to develop 5GW of low carbon hydrogen production capacity by 2030 for industries, transport, and residences. The government is expected to publish a dedicated Hydrogen Strategy in 2021, to position the UK as a front runner in production and use of clean hydrogen. It plans to develop 1GW (of the planned 5GW) hydrogen production capacity by 2025.

A central part of the UK’s Hydrogen Strategy is expected to have hydrogen potentially replace natural gas for the purpose of heating. The government is undertaking hydrogen heating trials, commencing with building a ‘Hydrogen Neighborhood’ and potentially developing a plan for the first town to be heated completely using hydrogen by 2030.

In addition to this, works with industry partners are under way to develop ‘hydrogen-ready’ appliances in 2021, such that new gas boilers can be readily converted to hydrogen if any future conversion of the gas network is commissioned. To facilitate this, the government is working with Health and Safety Executives to enable 20% hydrogen blending in the gas network by 2023. However, this is subject to successful trials.

In transportation, an investment of GBP20 million in 2021 is planned to test hydrogen and other zero emission freight truck technologies in order to support the industry in developing zero-emission trucks for long-haul road freight.

To achieve these targets, a GBP240 million Net Zero Hydrogen Fund is planned to be set up. It will provide capital co-investment along with the investment from private sector to develop various technologies. These will include carbon capture and storage infrastructure for the production of clean hydrogen that can be used in home, transport, and industrial requirements. The policy is expected to support 8,000 jobs by 2030 and push private investment worth GBP4 billion by 2030.

However, the government’s ambitious 2030 hydrogen policy requires significant investment and participation from the private sector. While several global companies such as ITM Power, Orsted, Phillips 66, etc., have come together to collaborate on the Gigastack project in the UK (which aims to produce clean hydrogen from offshore wind), such private participation will be required on most projects to make them feasible and meet the targets.

Nuclear power

In search of low-carbon electricity sources, UK plans to invest in nuclear energy. In addition to development of large-scale nuclear plants, the investments will also include small modular reactors and advanced modular reactors.

To this effect, the government has set up a GBP385 million Advanced Nuclear Fund. Of this, GBP215 million is to be used towards small modular reactors, i.e., to develop a domestic smaller-scale nuclear power plant technology that could be built in factories and assembled on site. Apart from this, GBP170 million is to be used towards research and development of advanced modular reactors. These are reactors that could operate at over 800˚C, and as a result, unlock efficient production of hydrogen and synthetic fuels. These are also expected to complement the government’s other investments and initiatives with regards to hydrogen and carbon capture.

While the government expects the design and development of small modular reactors to result in private sector investment of up to GBP300 million, these next generation small reactors are currently considered a long shot as no company has created them yet. While Rolls Royce has offered the government to design one, it is conditional on them receiving a subsequent order worth GBP32 billion for 16 such reactors as well as the government paying half of the GBP400 million design cost.

Moreover, nuclear power plants are expensive and long-term investments and are considered to be one of the most expensive sources for power. Thus it is very important to evaluate their economic feasibility. While the government is bullish on the role of nuclear power in decarbonizing electricity, it is very important for large-scale projects to be economical, while small-scale projects still remain at a conceptual stage.

Electric vehicles

It is estimated that cars, vans, and other road transport are the single largest contributor to the UK’s carbon emissions, making up nearly one-fifth of all emissions emitted. Thus the government is committed to reducing carbon emissions produced by automobiles. To achieve this, the country plans to ban the sale of all new petrol and diesel cars and vans by 2030 (10 years earlier than initially planned). However, hybrid cars will be allowed to be sold till 2035.

The government has planned a support package of GBP2.8 billion for the country’s car manufacturing sector, which in turn is expected to create about 40,000 employment opportunities up till 2030. Of this, GBP1 billion will be used towards the electrification of vehicles, including setting up factories to produce EV batteries at scale. In addition to this, GBP1.3 billion is planned to be spent to set up and enhance charging infrastructure in the country by installing a large number of charge points close to residential areas, office and commercial spaces, highways, etc., to make charging as convenient as refueling. The government plans to have a network of 2,500 high-power charging points by 2030 and about 6,000 charging points by 2035. Lastly, grants are planned to the tune of about GBP582 million up till 2023 to reduce the cost of EVs (cars, vans, taxis, and two-wheelers) for the consumer. In addition to the investment by the government, private investment of about GBP3 billion is anticipated to trickle into the sector by 2026.

While this is considered to be a very important step in the right direction, it is estimated that it will still leave about 21 million polluting passenger vehicles on the UK roads by 2030 (in comparison to 31 million in 2020). Moreover, the government continues to allow the sale of hybrid cars for another five years beyond 2030, which means that carbon emissions-producing vehicles will still be added to UK roads even after the target dates set in the New Green Industrial Revolution plan.

Green public transport

In addition to reducing carbon emissions from passenger cars, the government also wants to make public transport more approachable and efficient. It plans to spend about GBP5 billion on public transport buses, cycling- and walking-related initiatives and infrastructure.

In addition, funding of GBP4.2 billion is planned on improving and decarbonizing the cities’ public transport network. This will include electrifying more railway lines, integrating train and bus network through smart ticketing, and introducing bus lanes to speed up the journey. The plans also include investment in about 4,000 new zero-emission buses in 2021, as well as funding two all-electric bus towns (Coventry and Oxford) and a completely zero-emission city center. While York and Oxford have shown interest in becoming the UK’s first zero-emission city center, the government has not yet formally announced the city for the same.

Improvements in public transport networks in other cities are also planned to bring them on par with London’s system. A construction of about 1,000 miles of segregated cycle lanes is in plans to encourage people to take up this mode of transportation for shorter distances.

While it is expected these investments will encourage people to use public transport more, the current COVID pandemic has created apprehensions when considering such shared transportation. Although this is expected to be a short-term challenge, it may be a slight damper to the government’s plan for the next year or so.

Jet zero and green ships

Apart from road transport, the government also aims at decarbonizing air and sea travel. It plans to invest GBP15 million in FlyZero – a study by Aerospace Technology Institute (ATI) aimed at identifying and solving key technical and commercial issues in design and development of a zero-emission aircraft. Such an aircraft is expected to be developed by 2030. In addition to this, the government plans to run a GBP15 million competition for the development of Sustainable Aviation Fuel (SAF) in the UK. The plans also include investing in upgrading airport infrastructure so that it can service battery and hydrogen fueled aircrafts in the future.

In addition to aviation, the government is also investing GBP20 million in the Clean Maritime Demonstration Programme to develop clean maritime technology.

While the plans to develop greener fuel for aircraft and ships is a step in the right direction, it is still somewhat of a long shot as a lot more investment is required into this than proposed. Moreover, the shipping industry in particular has shown little interest in wanting to reform in the past and it is likely that both the sectors will continue to follow international standards (that are high in carbon emissions) to remain competitive globally.

Greener buildings

The UK has a considerable number of old and outdated buildings that the government wants to put in the center of its Green Industrial Plan, thus making existing and new buildings more energy efficient. The plan is to slowly phase out carbon-heavy fossil fuel boilers currently used for heating buildings and instead promote the use of more carbon efficient heat pumps. For new buildings, an energy efficiency standard is to be developed, known as the Future Home Standard. To achieve this, the domestic production of heat pumps needs to be ramped up, so that 600,000 heat pumps are installed annually by 2028. This is expected to support about 50,000 jobs by 2030. In addition to this, the government is providing GBP1 billion to extend the existing Green Home Grant (launched in September 2019) by another year, which is aimed at replacing fossil fuel-based heating in buildings with more energy efficient alternatives.

While the subsequent shift to heat pumps from gas boilers will definitely help reduce the buildings’ carbon footprint, heat pumps are currently much more expensive and more difficult to install. Thus, the government must provide ongoing financial incentives for consumers to make the switch.

Carbon capture, usage, and storage

Carbon capture, usage, and storage (CCUS) technology captures carbon dioxide from power generation, low carbon hydrogen production, and industrial processes, and stores it deep underground, such that it cannot enter the atmosphere. In the UK, it can be stored under the North Sea seabed. A the technology has a critical role to play in making the UK emission free, a GBP1 billion investment is planned to support the establishment of CCUS in 4 industrial clusters by 2030 to capture 10Mt of carbon dioxide per year by 2030. Developed alongside hydrogen, these CCUS will create ‘SuperPlaces’ in areas such as the North East, the Humber, North West, Scotland, and Wales. The development of the CCUS is expected to create 50,000 jobs by 2030.

CCUS is a very new technology, with no large-scale or commercially successful projects operational across the world. While the technology has been proved in pilot projects, its feasibility is yet to be seen. Also, a significant amount of private investment will be required to carry through the proposed project. While some private players, such as Tata Chemicals Europe have begun constructing the first industrial-scale CCU plant (expected to capture 40,000 tons of CO₂ per year) in Northwich, the government needs several more private players to step up to meet its ambitious targets.

Nature

In addition to the above mentioned programs, the government plans to safeguard and secure national landscapes as well as restore several wildlife habitats to combat climate change. To achieve that, it plans to reestablish several of the nation’s landscapes under National Parks and Areas of Outstanding Beauty (AONB), as well as create new areas under these two heads. The National Parks and AONB program is expected to add 1.5% of natural land in the UK and will help the government in reaching the target of bringing 30% of the UK’s land under protected status by 2030.

In addition to this, the government plans to invest GBP40 million in nature conservation and restoration projects, which in turn is expected to create several employment opportunities across the country. Moreover, it plans to invest GBP5.2 billion over six years into flood defenses, which will help combat floods and damage to homes as well as natural environment. This is also expected to create about 20,000 jobs up till 2027.

Green finance and innovation

The last agenda on the 10-point Green Industrial Revolution entails developing new sources of financing for supporting innovative green technologies. To this effect, the government has committed an R&D investment of 2.4% of its GDP by 2027. This will extensively be used towards developing high risk, high reward green technologies, which will help the UK attain net zero emissions by 2030.

Additionally, the government launched a GBP1 billion Net Zero Innovation Portfolio that will focus on commercialization of low-carbon technologies mentioned in the 10-point agenda, including development of floating offshore wind, nuclear advanced modular reactors, energy storage, bioenergy, hydrogen, greener buildings, direct air capture and advanced CCUS, industrial fuel switching, and other disruptive technologies. In November 2020, the government launched the first phase of this investment, GBP100 million, towards greenhouse gas removal and in the coming year it plans to invest another GBP100 million towards energy storage. It also plans to invest GBP184 million for fusion energy technologies and developing new fusion facilities. Moreover, GBP20 million will be directed towards development and trials of zero emission heavy goods vehicles.

Apart from this the government plans to issue the UK’s first Sovereign Green Bonds in 2021. These bonds, which are likely to be first of many, are expected to finance sustainable and green projects and facilitate the creation of ‘green jobs’ in the country. Furthermore, similar to the EU Green Deal, the government plans to implement a green taxonomy, which helps define economic activities into two categories – the ones that help limit climate change and others that are detrimental to the environment – to help investors make better investment choices.

EOS Perspective

The UK’s Green Industrial Revolution seems to be a comprehensive policy with a multi-pronged approach to tackle climate change, promote green technology and investments, and achieve net zero emissions by 2050. With Brexit in action, it seems like a worthy counterpart to the EU’s Green Deal, which the UK was initially a part of. Moreover, it is an important framework for the UK to show its commitment towards controlling climate change, especially with the country hosting the upcoming 26th session of the Conference of the Parties (CoP 26) to the United Nations Framework Convention on Climate Change summit in Glasgow in 2021.

However, currently the UK’s Green Industrial Revolution is not a legally binding policy document but more of a proposal, which would need to go through several legislative procedures to become binding. Moreover, while the plan is ambitious, it depends heavily on next generation innovative technologies that require hefty investments to achieve the targets. Thus, its success depends on whether the government is seriously committed and prepared to spend heavily on commercializing these technologies along with managing to attract significant amount of private investment to complement own efforts. While few aspects of the 10-point approach have already received investment from the private sector and first phase of funding from the government, it is yet to be seen if the UK’s ambitious net zero emission goals are truly feasible.

01/08/2019by EOS Intelligence EOS Intelligence No Comments

China Accelerates on the Fuel Cell Technology Front

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For the past decade, China has been on the forefront of the New Energy Vehicles (NEVs) revolution. Although most of its focus has been on battery-powered electric vehicles (BEVs), the government has recently also begun to put its financial might behind hydrogen fuel cells for vehicles. Unlike battery-powered vehicles that need regular and long-periods of charging (therefore are more suitable for personal-use vehicles), hydrogen fueled vehicles do not need frequent refueling and their refueling is quick. This makes them ideal for long-distance buses, taxis, and long-haul transport. However, the existing infrastructure to support fuel cell-powered cars is limited. Thus, despite having inherent benefits over electric vehicles (especially in case of commercial vehicles), fuel cell vehicles fight an uphill battle to build a market for themselves in China, owing to the challenges in acceptability, infrastructure availability, and sheer economies of scale.

Over the last decade, the Chinese government heavily backed the production and sale of electric vehicles through substantial subsidies, investment in infrastructure, and favorable policies. This resulted in the sector picking up rapidly and reaching 1.2 million vehicles sold in 2018. However, the government has begun to reduce the subsidies provided to the sector and the focus is slowly shifting to fuel cell vehicles.

How do fuel cell vehicles work?

Fuel cell vehicles use hydrogen gas to power their electric motor. Fuel cells are considered somewhat a crossover between battery and conventional engines in their working. Similar to conventional engines, fuel cells generate power by using fuel (i.e. pressurized hydrogen gas) from a fuel tank.

However, unlike traditional internal-combustion engines, a fuel cell does not burn the hydrogen, but instead it is chemically fused with oxygen from the air to make water. This process, which is in turn similar to what happens in a battery, creates electricity, which is used to power the electric motor.

Thus, while fuel cell vehicles are electric vehicles (since they are solely powered by electricity), they are similar to conventional vehicles with regards to their range, refueling process, and needs. This makes them ideal for long-haul commercial vehicles.

Chinese government bets big on fuel cell vehicles

Under China’s 13^th Five-Year Plan, the government has laid out a Fuel Cell Technology Roadmap, in which it aims to operate over 1,000 hydrogen refueling stations by 2030, with at least 50% of all hydrogen production to be obtained from renewable resources. In addition, it has set a target for the sale of 1 million fuel cell vehicles by 2030.

To achieve these ambitious targets, the Chinese government plans to roll-out a program similar to its 2009 program – Ten Cities, Thousand Vehicles, which promoted the development and sale of battery electric vehicles and hybrid vehicles. It currently plans to promote fuel cell vehicles in Beijing, Shanghai, and Chengdu. Considering the vast success garnered by this program, it is likely that the government will also be successful in achieving similar targets for fuel cells.

Moreover, while the government is phasing out subsidies for BEVs, it is continuing them for fuel cells. As per the government guidelines issued in June 2018, US$32,000 purchase subsidy is available for fuel cell passenger vehicles, while US$48,000-US$70,000 purchase subsidies are available for fuel cell buses and trucks. However, for the buses to receive subsidy, they are required to drive a minimum of 200,000 km in a year.

While the government is phasing out subsidies for BEVs, it is continuing them for fuel cells. As per the government guidelines issued in June 2018, US$32,000 purchase subsidy is available for fuel cell passenger vehicles, while US$48,000-US$70,000 purchase subsidies are available for fuel cell buses and trucks.

Moreover, the government also provides subsidy for the development of hydrogen refueling stations. A funding of US$0.62 million is available for hydrogen refueling stations having a minimum of 200kg capacity.

In addition to these national subsidies, state-wise subsidies are also available for several regions such as Guangdong, Wuhan, Hainan, Shandong, Tianjin, Henan, Foshan, and Dalian. Local subsidies differ from region to region and are given as a ratio of the national subsidy. For instance, it equals 1:1 in Wuhan, while it is 1:0.3 in Henan province. On the other hand, local or state subsidies are cancelled for BEVs (except buses).

Apart from subsidies given to fuel cell infrastructure and vehicle manufacturers, the price of hydrogen is also heavily subsidized, making it cheaper than diesel in many cases.

China’s fuel cell vehicle market picks up steam

The government’s backing and subsidies have stirred interest of several international players towards China’s fuel cell vehicle market. Considering its success and dominance of the BEV market, these players are placing their bets on China achieving similar volumes and success in the fuel cell sphere.

Chinese companies have also begun to invest heavily in fuel cell technology companies globally. In May, 2018, Weichai Power, a Chinese leading automobile and equipment manufacturer, purchased a 20% stake in UK-based solid oxide fuel cell producer, Ceres Power. Similarly, in August 2018, Weichai Power entered into a strategic partnership with Canada-based fuel cell and clean energy solutions provider, Ballard Power Systems. As part of the strategic partnership, the company purchased 19.9% stake in Ballard Power Systems for US$163.3 million. In addition, they entered into a JV to support China’s Fuel Cell Electric Vehicle market, in which Ballard holds 49% ownership. Through this partnership, Weichai aims to build and supply about 2,000 fuel cell modules for commercial vehicles (that use Ballard’s technology) by 2021.

Global leader in industrial gases, Air Liquide, has also partnered with companies in China to be a part of the fuel cell movement. In November 2018, the company entered into an agreement with Sichuan Houpu Excellent Hydrogen Energy Technology, a wholly-owned affiliate of Chengdu Huaqi Houpu Holding (HOUPU), to develop, manufacture, and commercialize hydrogen stations for fuel cell vehicles in China. In January 2019, the company also partnered with Yankuang Group, a Chinese state-owned energy company, to develop hydrogen energy infrastructure in China’s Shandong province to support fuel cell vehicles in that region.

Another global player, Nuvera Fuel Cells (US-based fuel cell power solutions provider) has also engaged with local companies to foster growth in China’s fuel cell vehicle market. In August 2018, the company entered into an agreement with Zhejiang Runfeng Hydrogen Engine Ltd. (ZHRE), a subsidiary of Zhejiang Runfeng Energy Group based in Hangzhou. Under the agreement, Nuvera will provide a product license to ZHRE to manufacture the company’s 45kW fuel cell engines for sale in China. While the fuel cells will be initially manufactured in Massachusetts, it is expected that they will be locally manufactured by 2020.

In December 2018, the company signed another agreement with the government of Fuyang, a district in Hangzhou (in Zhejiang province), to start manufacturing fuel cell stacks locally in 2019. The agreement also includes an investment by Nuvera to establish a production facility in Fuyang region. These fuel cell stacks will be used to power zero-emissions heavy duty vehicles (such as delivery vans and transit buses), which comprise 10% of on-road vehicle fleet, but account for 50% fuel consumption.

In addition to the fuel cell energy producers, global car manufactures have also shifted their attention to fuel cell vehicles market in China. In October 2018, Korean car manufacturer, Hyundai, entered into a MoU with Beijing-Tsinghua Industrial R&D Institute (BTIRDI) to jointly establish a ‘Hydrogen Energy Fund’. The fund aims to raise US$100 million from leading venture capital firms across the globe to spur investments in the hydrogen-powered vehicle value chain. This agreement will help the Korean automobile manufacturer identify and act upon new hydrogen-related business opportunities in China and will eventually help pave the way for Hyundai Motors to make a foray into the Chinese fuel cell vehicle market in the future.

A bumpy road ahead for fuel cell vehicles

While the industry players are working along with the government to meet the ambitious targets set by the latter, fuel cell vehicles must overcome several challenges for them to be a realistic alternative to conventional and electric vehicles.

Currently, the infrastructure for fuel cell vehicles is by far insufficient. More so, it is extremely costly to develop, costing about US$2 million to build a refueling station with a capacity of about 1,000 kg/day. While the government is investing heavily in developing hydrogen refueling stations (for instance, China Energy, China’s largest power company, has been building one of China’s largest hydrogen refueling stations in Rugao City, Jiangsu Province), it requires long term partnerships and investments from private and global players to meet its own targets. Until an adequate number of refueling stations is constructed, especially on highway routes (facilitating truck and bus transportation), fuel cell vehicles will remain in a sphere of concept rather than commercial and mass use.

Another challenge faced by the industry is that hydrogen, the main fuel, is also considered to be highly hazardous, and storing and transporting it is currently difficult. Moreover, it is difficult to convince customers to purchase hydrogen-powered vehicles because of this perceived notion of hydrogen being unsafe. In addition to providing subsidies and incentives for building fuel cell vehicles, the government must also invest in marketing campaigns and enact policies that raise awareness about hydrogen in fuel cell vehicles as a safe and green energy.

In addition to providing subsidies and incentives for building fuel cell vehicles, the government must also invest in marketing campaigns and enact policies that raise awareness about hydrogen in fuel cell vehicles as a safe and green energy.

A lot of new technologies are also being explored to further make transporting and storing hydrogen safer. A German company, Hydrogenious Technologies, has developed a carrier oil that can carry hydrogen in a safe manner. This oil is non-toxic and non-explosive and thus makes transporting, storing, and refueling hydrogen safe. Moreover, using hydrogen mixed with this carrier oil to refuel fuel cell cars follows a similar refueling process as that of a conventional car, with one cubic meter of the oil carrying about 57kg hydrogen, which in turn is expected to give a car a driving range of 5,700km. However, the carrier oil is still in its nascent stage of development and would take time and resources to gain commercial applicability.

However, one of the largest challenges that fuel cell vehicles face is direct competition from battery electric vehicles. BEVs have a 10-year head start over fuel cell vehicles whether it comes to government support, technological development, infrastructure, or acceptability. Moreover, BEVs are cheaper both in terms of cars price and cost of running, which is an important factor for consumers. In addition, BEV players are constantly working towards reducing charging time and increasing driving range. Since both are green technologies, it is likely that the consumer prefers the one which has now proven to be a successful alternative to conventional vehicles in terms of pricing and supporting infrastructure. Although higher subsidies for fuel cell vehicles may help bridge the gap, it is yet to be seen if fuel cell cars will be able to give stiff competition to their green counterparts.

EOS Perspective

There is no doubt that the Chinese government intends to throw its weight behind the fuel cell technology for automobiles. In 2018 alone, the central and local governments spent a total of US$12.4 billion in supporting fuel cell vehicles. This has helped attract the attention of several local and international companies that want a share of this growing market.

It also helps that hydrogen as a fuel has several benefits when compared with battery power, the key advantages being short refueling time and long driving range. Moreover, some consider hydrogen to be a cleaner fuel when compared with battery power as the electricity required to create hydrogen (which is created by pumping electricity into water to split it into hydrogen and oxygen) can be derived from renewable sources from China’s northern region, which are currently going to waste.

Despite these inherent benefits, it will be difficult for fuel cell vehicles to catch up with battery-powered vehicles as the latter have significantly advanced over the past decade (leaving fuel cell vehicles behind).

Moreover, China’s model of promoting green energy is yet to pass its ultimate test, i.e., to sustain and flourish without government support. Since the government has now begun to phase out its support to BEVs, it is to be seen if the large group of domestic electric vehicle makers can survive in the long run or the market will face significant consolidation along with slower growth. Thus it becomes extremely critical for the Chinese government and companies in this sector to understand the feasibility of the market post the subsidy phase. Fuel cell vehicle market should take advantage of learning from the experience of battery powered vehicles sector, which was the pioneer of alternatives to conventional combustion vehicles.

12/02/2018by EOS Intelligence EOS Intelligence No Comments

Commentary: Indian Automotive Sector – Reeling under the Budget

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The Indian automotive industry has been witnessing a period of recovery and growth over the past couple of years. Every year, automakers look towards the government to provide a stimulus in the form of favorable policies and budget allocations, to spur growth in the sector. A week has passed since the announcement of Indian budget for FY 2018-2019. We take a look at its short and long-term impact across the automotive value chain.

Supply-side scenario (component manufacturers and OEMs)

The current Indian government under Prime Minister Modi has been focusing on promoting domestic production of automobiles and auto components, as a part of its “Make in India” campaign. A 5% increase in customs duty on imported completely knocked down (CKD) cars and automotive components for assembly and sale in India is seen as another step in this direction.

While international OEMs such as Volkswagen and Skoda have been left reeling under the burden of additional costs, this provides an opportunity to spur growth particularly in the domestic components manufacturing.

Another positive news for domestic automotive components manufacturers, most of which are small and medium scale enterprises, is the reduction in corporate tax rate by 5% percentage points (for companies with a turnover of under INR 250 Crores / USD 38.83 million). These tax savings can provide companies with additional capital to invest in their business, aiding their long-term growth.

Investments in road and rural electrification infrastructure also encourage OEMs to bring new products, particularly electric vehicle (EV) portfolio, to the Indian market. However, lack of an established EV infrastructure means that this market development is likely to occur only over a long-term horizon.

Demand-side scenario (individual and corporate consumers)

The key factor impacting the demand for automobiles is perhaps how deep the consumers’ pockets are (or can be) after bearing all the tax burdens – in other words, how high the disposable income is in India. This is even more relevant for the lower-end of the market (or the so-called “mass spectrum”).

Minimal income tax incentives to individuals, coupled with rising inflation, are likely to limit the disposable income of most people (particularly in the low and medium income brackets), which form the largest consumer base for automobiles in terms of volume.

A booming stock market in India attracted several consumers in the middle income group to invest their capital in equities. Levy of a 10% long-term capital gain tax (LCGT) on returns from these equities (although grandfathered till INR 1 Lakh / USD1,553) is likely to put even further pressure on consumers’ pockets, especially for those looking to finance their automobile purchases by getting the most out of their investments.

Moreover, the knee-jerk reaction to this year’s budget was also observed on the equity market. The negative sentiment has led India’s two leading stock exchanges – BSE and NIFTY – witnessing a 5% decline within a 7 day period from the announcement of the budget, thereby eroding consumer’s wealth, which may further impact consumers’ short-term decisions to purchase vehicles.

On the other hand, the support provided to the agricultural sector is likely to spur demand for tractors and small passenger vehicles in rural areas, however this demand growth is dependent on the agricultural output, and derived from it incomes, in the coming year.

Aftermarket scenario (recyclers)

For the past couple of years, automotive companies as well as aftermarket recyclers have been expecting the government to bring in the scrapping policy, which would allow consumers as well as OEMs to benefit from voluntary replacement and scrapping of vehicles older than 15 years. However, lack of any announcements related to this policy has left the aftermarket recyclers and OEMs disappointed. They will need to wait to tap the demand expected to come from voluntary replacement of old vehicles in exchange of monetary benefits.

EOS Perspective

The scenario for electric vehicles (EVs) looks bright over a long term with significant investments going into development of rural electrification infrastructure, which will impact the development of the EV ecosystem beyond the metros as well. OEMs look at this as an opportunity, and this is evident from the number of EVs and electric concept cars to be unveiled at the Auto Expo 2018, India’s largest automotive exhibition. However, in a short to medium term, the adoption of EVs is likely to be limited to the corporate sector. General mass adoption is likely to lag behind due to vehicles’ high prices, and limited distance range/capacities offered by the current EVs available in the market.

As the mass automobile demand is expected to remain lull in the short term, the market will be driven by luxury and premium segments, which is largely unaffected by the budgetary challenges. A push is evident from OEM-side as well, with a number of premium, high-end products (such as SUVs, large displacement motorcycles, and luxury vehicles) launched at the Auto Expo 2018.

While the budget has left a lot to be desired, there are positives which bode well over the long term. The market is likely to witness a downturn in demand over a short term, as the consumers are likely to turn to preservation of wealth till the negative market sentiment prevails. Moreover, as the government invests in infrastructure projects, demand for both commercial and private vehicles is likely to pick up in the future.

It remains to be seen how soon the market witnesses a recovery in terms of automobile demand. One thing is certain, as always, when the budget comes next year, expectations will be high, partially fed by this year’s disappointments.

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