The transition to electric vehicles will happen far faster than is commonly understood. Legacy auto companies are not likely to be competitive in the brave new world of electric vehicles. China’s new export bans put pressure on the two US companies – Tesla and Rivian – best positioned for leadership in the EV market.
Beginning on December 1st, China released plans to restrict graphite exports that can be sent to the US. Graphite is a critical input in EV batteries. Citing security and national interests, China will ban all high-quality, high-purity, high-density artificial graphite materials and related products from being exported out of the country without official permission, according to a joint announcement from the country’s Ministry of Commerce and the General Administration of Customs. 80% of the world’s Graphite is mined in China.
And in a move that affects all US auto manufacturers, China has banned the exports of three key rare minerals — gallium, germanium, and antimony – used to make semiconductors. According to Elon Musk, the chief executive officer at Tesla, “a car is essentially a computer on wheels.”
The move by China occurred after Washington expanded its list of Chinese companies subject to export controls on computer chip-making equipment, software and high-bandwidth memory chips. It is also seen as a new way of countering President-elect Trump. On November 25, he threatened to impose an “additional” 10% on the imports of Chinese goods in the US.
EVs Will Dominate the Automotive Industry
Michael Lenox, a Professor of Business Administration at Darden School of Business, University of Virginia, explained that industries typically have a technology S-curve associated with them. At the bottom of the S curve, performance and cost issues limit the adoption of the new technology. As performance increases and costs decrease, the new technology – electric vehicles in this case – rapidly replaces the incumbent technology.
The increased competitiveness of EVs has been driven by the “incredible decrease in the price of lithium-ion batteries over the last decade. In part, that is why this industry has become viable,” Dr. Lenox explained in a speech given to University of Virginia alumni. “The price decreases are continuing, but at a lower rate. It is not unreasonable to guess that in the next 2 or 3 years, the batteries will be cheap enough that these cars will be cheaper than internal combustion engines at the point of sale.” Restrictions of critical inputs, like graphite, could affect that progress.
The total cost of ownership for EVs is now lower than ICEs because of lower fuel/electricity costs, maintenance, and taxes. Based on “merit,” the number of new electric vehicles sold worldwide has experienced exponential growth.
US Legacy Auto Companies Face Obsolescence
Not all types of electric vehicles will have the same success in the market. “The plug-in hybrid is a transition technology that will be quickly replaced by battery-powered electric as range improves,” Mr. Lenox asserts. In terms of manufacturing, the hybrid plug-ins – built by legacy automakers like GM and Ford – consist of two systems. “You are building an internal combustion engine and an electric battery. There is no bending of the cost curve to make that cheaper than a pure EV. As range improves and the charging infrastructure improves, the logic of the plug-in hybrid goes away.”
Mr. Lenox also points out that the pure-play EV is much easier to assemble. “These are simple, simple machines.” In an internal combustion engine, you have a fuel injector, an exhaust system, a coolant, and a lubrication system. “All of these systems are expensive to make and maintain. An EV is a battery stack and an electric motor.” Because of this, factory automation can be more extensive in an EV plant. “We are already seeing the unions at GM and Ford fight this transition to EV because they know you will need far fewer people in the manufacturing plant.”
“I do worry about Ford and GM – about our legacy auto companies. They are pulling back on their EV production. I think it’s shortsighted. And it makes me very worried about whether they will survive a disruption like this.” In an attempt to survive the coming disruption, the professor believes we will start to see mergers and acquisitions among the legacy auto companies in the coming years. “History has not been kind to companies in this position.”
China versus the US
Tesla is the US company best positioned for long-term leadership in the EV market. Tesla’s Model Y is the top-selling vehicle in the world.
When Americans think of electric vehicles, the first company they think of is Tesla. However, a Chinese company called BYD is the top global manufacturer of EVs. BYD sells a mixture of pure-play EVs and plug-in Hybrids.
BYD’s Seagull is listed at $11,000 in both China and Europe. This car is “clearly a disruptor.” Mr. Lenox points out that companies selling low-priced products initially deemed inferior have succeeded in moving up the quality curve and becoming market leaders in many industries. He points to the emergence of Toyota and Honda as leaders in the 1980s.
BYD’s U8 is now “competing at the highest luxury level. “Don’t dismiss BYD as a cheap Chinese car manufacturer.” They could well up being the world’s leading automaker.
Chinese EV manufacturers have a couple of other advantages. First off, the world’s largest market for EVs is China. Chinese consumers buy over 4 times as many EVs as Americans.
Secondly, the upstream supply chain for EV manufacturing strongly favors China. “The battery is far and away the critical component of these cars,” and Asian manufacturers dominate this market. The largest lithium battery manufacturer globally is China’s CATL. They have a market share of 35%. Other leading Chinese manufacturers include BYD, SK On, and CALB. The US is not competitive in this market.
However, Korean and Japanese companies do play here – companies like LG, Panasonic, and Samsung – so in the event of a worsening trade war with China, US EV makers have companies they can buy from. Nevertheless, 60% of the market is controlled by China.
But the situation becomes even more dire if you go further upstream in the lithium battery supply chain. The lithium, cobalt, and nickel supply chains – all of these are key materials in these batteries, are not a problem. However, graphite is also a core raw material. 80% of the world’s graphite is produced in China.
Then, after these ores are mined, they are processed into components used in the batteries – cathodes, anodes, separators, and electrolytes. These markets are also dominated by Chinese companies. Chinese market share dominance ranges from a low of 70% for cathodes up to 85% for anodes.
In short, the US could be at a real disadvantage in retaining leadership in the EV industry as geopolitical issues spike between the US and China.
