The writer is CEO of Dunne Insights
China is the undisputed king of the electric vehicle (EV) business. The US and Europe trail far behind. Their EV makers — aside from the mighty Tesla — look like awkward court jesters, fumbling in their efforts to catch up.
If this needed to become any clearer, on November 21, Northvolt — Europe's most promising battery start-up — stunned the industry by filing for bankruptcy. The company, founded in 2015 by former Tesla executive Peter Carlsson, has run out of cash while accumulating debts of more than $5bn.
Things were not supposed to end badly for Northvolt. Blue chip investors like Baillie Gifford and Goldman Sachs found Mr Carlsson’s original vision — to develop the world’s greenest battery cell — simple and compelling.
Northvolt was rumoured to be valued at $20bn as recently as 2023, ahead of an expected listing. In the end, it failed because it could not match Chinese competitors on quality, cost or speed to market.
Other western EV start-ups have faced financial troubles this year, too. Lucid posted a $992m loss in the third quarter of this year, Polestar a loss of $539m loss in the first half of the year; and Canoo’s share price is down 94% year-to-date.
Collectively, these cases serve a chilling reminder to investors: competing with China in the EV arena is hard. Very hard.
A Chinese business
Investors have understood for some time that China is the global EV leader. But only now are they beginning to appreciate the sheer magnitude of the country’s dominance.
Today’s EV and battery business is essentially a Chinase business. A quick scan of capacity, production and market share numbers reveals the country’s overwhelming power.
China will produce an estimated 12 million EVs in 2024. That is more than all other countries combined. By comparison, the US will build fewer than one million. Half of Tesla’s EVs built this year will be manufactured at its Shanghai gigafactory. Mr Musk knows that China offers unmatched efficiency.
And China’s battery makers control 70% of global production. CATL and BYD supply not only Chinese EV makers, but also Mercedes, Volkswagen, GM and Tesla. As a group, Chinese battery makers have enough capacity to supply 100% of global demand.
Finally, Chinese companies process 70–90% of the critical minerals — like graphite, cobalt, nickel and lithium — needed for battery cells. So even if you invest in a world-class battery plant in Europe or Korea or the US, chances are you must still ship your critical minerals to China for processing. That adds time, cost and — as we learned during Covid — supply chain risks.
Intensive concentration of battery supply chains inside China also allows Chinese companies to produce EVs at cost that’s 25–30% lower than anywhere else. Who can compete with that?
China’s strength in EVs is beginning to hurt legacy automakers both inside and outside the country. In recent weeks, Volkswagen, Nissan, Ford and GM have announced plant closures and major layoffs. They cite not only tougher competition inside China, but also intensifying pressure from Chinese carmakers in markets like Brazil, Mexico, the UK, Australia and Thailand.
The leadership teams at American and European automakers sense an existential threat. Executives have told me that they understand the urgency. Privately they ask: “How can we close the gap? Is it even possible?”
The US is making the most concerted effort to catch up. The Inflation Reduction Act has ignited a record level of investments in battery plants stretching from Michigan to South Carolina.
And the EU’s renewed efforts to compete include its recently announced plans for a Clean Industrial Deal, which aims inter alia to encourage more investment in European clean tech start-ups.
But both regions are hampered by underwhelming consumer enthusiasm for electrics. This is where China enjoys perhaps its most decisive advantage.
EVs will account for more than 50% of new car sales this year in China, which is the world’s largest car market. In contrast, the penetration level in Europe is 23% while the US’s is just 10%. BloombergNEF recently reduced its 2030 projection for EV market penetration in the country from 52% to 33%. With the Trump administration expected to remove tax credits on EV purchases, even that 33% projection looks optimistic.
Without strong demand, even the most advanced plants, products and technologies will not get traction.
If you are investing in EV batteries and supply chains in the West, you are right about the future direction of transportation. EVs will eventually dominate global markets.
But you better have great patience, deep pockets and contingency plans. Just ask the folks who backed Northvolt.
