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Analysis

Europe overpowers China in EV production charge

Europe is set to lead the world in electric vehicle production by the end of the decade, and significant FDI will be required to support the major carmakers’ plans.

volkswagen-ev-europe
Companies such as Germany’s Volkswagen are leading the European EV production charge. (Photo by Jens Schlueter/AFP via Getty Images)

Following a series of announcements by leading automotive original equipment manufacturers (OEMs), Europe looks set to overtake China as the top region for electric vehicle (EV) production by 2030.

Europe’s largest carmaker, Volkswagen of Germany, announced plans in March 2021 to build six electric battery and EV component factories, also known as gigafactories, before the end of this decade. All six will be built in Europe, vastly expanding the continent’s production capacity.

The announcement was one of several EV initiatives announced recently by OEMs as they try to keep pace with market leader Tesla.

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This rapid change in the automotive sector will unleash a flurry of foreign direct investment (FDI), although it is likely to be component suppliers rather than OEMs creating most of the greenfield activity.

Legislation drives EV production expansion

Europe is on course to overtake China, which accounts for about half of global EV sales, by 2030, according to figures from GlobalData.

“The main driver is really legislation,” says Calum Macrae, head of automotive research and analysis at GlobalData. “A lot of the OEMs were hedging their bets on the future powertrain mix. They had hybrids, plug-in hybrids, a few BEVs [battery electric vehicles], 48V mild hybrids. They were keen to see which way the wind would blow with consumers.”

In Europe, nearly all OEMs make their own engines and [these manufacturing facilities] are all located near to their vehicle plants. That is also going to happen with batteries. Calum Macrae, GlobalData

With dates set for bans on internal combustion engine vehicle sales in France, Norway and the UK, and the threat of an EU-wide ban being introduced, OEMs have accelerated EV-only strategies.

“I think they have finally bitten the bullet and said BEV is the future and we will no longer look at a portfolio of options to get us to the EU carbon dioxide limit of 59g [per km] by 2030,” says Macrae. “So they have gone in with two feet now rather than a little toe in the water.”

Macrae says plug-ins accounted for roughly one-quarter of vehicle sales in Europe in the fourth quarter of 2020, following the introduction of tax incentive schemes in France, Spain and Germany in response to Covid-19.

In contrast, China’s government began reducing subsidies for EVs in June 2019, which lead to a decline in sales. Having paused on further subsidy withdrawals following the outbreak of Covid-19, China announced in January 2021 that it would cut subsidies by another 20%.

A new supply chain and infrastructure for EVs

FDI decisions for new production facilities will be heavily linked to where battery factories are built.

“In Europe, at the moment, nearly all OEMs make their own engines and [these manufacturing facilities] are all located near to their vehicle plants,” says Macrae. “That is also going to happen with batteries, which are essentially the new engines.”

The first two gigafactories from Volkswagen will be located in Skellefteå, Sweden, and Salzgitter, Germany. Each gigafactory is expected to supply batteries for about 300,000 vehicles a year.

Tesla, the world’s leading EV manufacturer, has plans to open as many as 20 gigafactories globally and cities around the world are competing to host these plants. Tesla has two gigafactories in operation in the US, one in Shanghai, and has confirmed its intention to build two further facilities near Berlin and in Texas.

Investment in components and infrastructure

The global switch to EVs will spur investment not just in gigafactories but also in other components necessary for production.

A manager at one Germany-based parts supplier told Investment Monitor that most investment by OEMs will be for repurposing existing facilities for EVs, with little greenfield investment.

Toyota putting a gigafactory in the UK to supply the whole of Europe wouldn’t make much sense because of the tariffs, so that is a headwind for the UK industry. Calum Macrae

“You will see FDI inflows, not at the OEM level but at the supplier level because the elements the OEMs need to build a car are changing dramatically and the infrastructure just isn’t there,” the manager says.

Significant investment will be required in EV charging infrastructure and in creating new supply chains for components.

Macrae says the auto industry has always treated some components strategically and some as commodities but attitudes may be changing. The semiconductor chip shortage caused by Covid-19 may lead to supply chains being shortened for these types of components.

“A chip that might be worth only a few dollars is treated as a commodity when it is actually quite a strategic and central part of the vehicle,” says Macrae.

He adds that despite being “the purveyors of lean” and known for keeping inventory low, Toyota has been virtually the only manufacturer to stockpile chips. This means it  has only been hit by a chip shortage in one of its plants, in San Antonio, Texas.

Winners and losers in EV production

While the main hubs for automotive investment are likely to stay the same during the transition to a predominantly EV market, one country that could suffer is the UK.

Brexit poses significant challenges for automotive OEMs that have previously exported from the UK into mainland Europe.

“Toyota putting a gigafactory in the UK to supply the whole of Europe wouldn’t make much sense because of the tariffs, so that is a headwind for the UK industry,” says Macrae.

Nissan did commit in January 2021 to manufacture batteries for its Leaf EV in the UK. This is in order to meet the terms of the Brexit agreement, which requires 55% of a vehicle’s material value to be from the UK or EU to avoid tariffs. Batteries for the model, which is produced in Sunderland, are currently imported from the US.

In February 2021, Coventry City Council confirmed it is seeking pre-emptive planning permission for a battery factory that would support Jaguar Land Rover, which is based in the region and has committed to switch its Jaguar brand to pure electric by 2025 and cease production of all diesel and petrol vehicles by 2036.

However, with EV investments in the rest of Europe ramping up, the UK will need to attract EV and component manufacturing operations to keep pace with the mainland.

Jon Whiteaker

Jon Whiteaker

Senior editor

Jon Whiteaker is a senior editor at Investment Monitor focusing on FDI in the energy sector.