The global energy transition towards renewable resources requires the mass deployment of battery storage technologies. Lithium-ion (Li-ion) batteries are expected to play a crucial role due to their superior energy density over alternative forms of battery technologies. In terms of applications, Li-ion batteries are already widely used for large-scale stationary energy storage, portable electronic devices, the development of energy-intensive military equipment, and as a critical component in the ongoing electrification of personal mobility. Consequently, despite decreasing lithium supply and increasing mineral prices, the demand for Li-ion batteries has experienced dramatic surges in recent years. With the uptake of battery-powered Electric Vehicles (EVs) accelerating globally, economic activity centered on high-tech lithium-ion battery production is poised to become the new engine of growth in the 21st century.
At present, State-backed Chinese companies dominate the world’s Li-ion supply chain from end to end (i.e., upstream and downstream). Considering the increasingly tense relations with Beijing over the past years, European countries and the US are wary of the risks that continued reliance on China for Li-ion batteries entails. The ongoing Russian invasion of Ukraine has further highlighted the risks associated with dependence on authoritarian states for critical resources. In both the EU and the US, the need to develop domestic lithium-ion battery supply chains is emerging as a national security concern. As the ‘battery arms race’ is showing no sign of cooling down, it is therefore imperative to assess the effectiveness of the EU and US strategies to the risks posed by China’s dominance over the global Li-ion battery supply chain.
The ‘white oil’ of the 21st century
In 2021, the global consumption of lithium amounted to 100,000 metric tons, an increase from 82,500 metric tons in 2020. Growing demand for Li-ion batteries for use in EVs and dwindling supplies of known reserves have pushed the price of lithium to a record high For instance, the price of lithium rose from $6,124 per ton in December 2020 to $16,500 per ton in late August 2021. Despite surging prices, the International Energy Agency (IEA) expects the world’s lithium demand in 2040 to reach nearly 43 times the demand volume in 2020 as per IEA’s Sustainable Development Scenario (SDS). In this context, Li-ion batteries are heading towards a tipping point.
Unlike the US-led rise of oil as the dominant form of energy of the mid-19th century, China is in control of the global supply chain of this new era-defining energy source. China has the world’s sixth-largest lithium reserves, right behind Bolivia, Argentina, Chile, Australia, and the United States. Yet, state-backed Chinese mining consortiums control about 80 percent of the global raw lithium production and 50 percent of the world’s lithium processing and refining processes. The country is also the world’s largest consumer of lithium. With 93 ‘giga-factories’ operating inside its borders, Chinese manufacturers were responsible for 77 percent of the world’s Li-ion battery production output in 2021.
The Chinese government is continuously working to further consolidate its dominant position with a robust strategy. For instance, 6.4 million metric tons of lithium supplies were secured by Chinese companies around the world in 2021. In addition, Argentina is expected to participate in China’s Belt and Road Initiative (BRI) as of 2022, potentially granting Chinese mining consortiums access to the vast Argentinian lithium reserves. Moreover, 101 of the 136 battery manufacturing plants scheduled to enter operation in the next eight years will be based in China. In terms of manufacturing capacity, the number of planned battery plants will enable Chinese companies to double their current output within the next five years. At around 2 terawatt-hours, Chinese companies will be capable of supplying Li-ion batteries for more than 20 million EVs in 2026.
Assessing the US and EU’s responses
In the US, the Biden Administration has outlined the National Blueprint for Lithium Batteries (2021-2030) which will support the goal of achieving a clean and climate-neutral economy by 2030. The development of a US lithium-ion battery value chain is identified as critical to the electrification of the transport sector and the installation of large-scale battery-based energy storage, powered by renewable energy resources. The US strategy combines “supply-push” (i.e., providing public financing for manufacturing and research of Li-ion batteries) and “demand-pull” (i.e., incentivizing EVs’ uptake with subsidies and tax breaks).
The EU, for its part, has sought to develop a sustainable European battery value chain through the adoption of the European Battery Alliance (EBA) in 2017. In line with the EU’s overall green strategy to become the first carbon-neutral continent by 2050, the EBA includes 440 industrial stakeholders in public-private partnerships (PPP) with participating EU member-states. The EU also launched a similarly structured European Raw Materials Alliance (ERMA) in 2020. The ERMA is designed to help the EU achieve strategic autonomy on critical raw materials, including self-reliance on battery-grade lithium, by 2025.
These strategies represent major policy shifts. If the stated targets of strategies are to be met, the transportation and the energy sectors of the US and the EU must undergo fundamental restructuring. Besides building hard infrastructures, new radical legislation and revision of existing policies will be required at the European/federal, national, and local levels. However, despite the enormous scale and ambitious targets, market-driven mechanisms remain central to both strategies. Consequently, when compared to China’s state-backed approach, both the EU and the US are at risk of suffering from competitive disadvantages for several reasons.
Firstly, political considerations in China often take primacy over economic objectives. The central government formulates national policies that require long-term political commitments, providing a stable regulatory framework and favorable business environment for the country’s private sector. Unconstrained from the need to make a short-sighted profit for their respective stakeholders, Chinese companies can instead undertake far-sighted long-term investments in yet-to-emerge sectors with support from the government.
In comparison, extreme political partisanship in the US has created a highly volatile regulatory environment, where public policies are regularly politicized along party lines. For instance, the Republican party has historically been against the proliferation of EVs and the adoption of renewable energy resources, as many Republican lawmakers have financial ties to the US fossil fuels industry. Consequently, the prospect of a Republican mid-term election victory and /or a second Trump presidency in 2024, will most likely jeopardize the Biden Administration’s efforts to establish a US lithium-ion battery supply chain. While EU policies are generally more resilient due to their longer time frame, their rigidness tends to reduce Brussels’ capacity to respond timely to unexpected developments and challenges. In addition, rising tensions and disagreements between the interests of Brussels and the priorities of individual member-states might prevent the bureaucratic machinery of the EU from making necessary breakthroughs on some critical issues further down the road.
Secondly, China is estimated to have spent between $60 and 100 billion over the last decades to foster the development of its domestic Li-ion battery supply chain. The combined effect of generous state subsidies, weak enforcement of environmental regulations, and abundance of cheap labor, have enabled Chinese mining companies and Li-ion battery manufacturers to gain cost advantages over foreign-owned competitors. To challenge China, the investments made by the EU and the US must at least match the country’s aggregated investments. Given the absence of outlined investment targets strategies of the EU and the US, as well as taking into account the common gap between pledges and actions, the issue of finance will likely remain an unresolved stumbling block moving forward.
Finally, the development of robust Li-ion battery supply chains is time-intensive and difficult. Chinese policymakers began using vertical integration as a strategy in the early 1990s, investing in capacity-building at every stage of its domestic Li-ion battery supply chain. China has spent decades building domestic infrastructures (i.e., battery manufacturing facilities, lithium mining, and processing facilities) and securing lithium supplies in foreign countries through acquisitions. In comparison, the strategic importance of access to lithium supplies and domestic Li-ion battery supply chains was only recently given serious attention by EU and US policymakers. In the mid-2000s, the US was more focused on expanding its domestic oil production, finally becoming a net exporter by 2019. Meanwhile, the EU steadily increased its reliance on natural gas from Russia as part of the union’s decarbonization effort, which includes the phase-out of coal and nuclear from the continent’s energy mix. Consequently, given China’s almost three-decades-long head start in developing its domestic Li-ion battery supply chain, the US and the EU will need to make much greater strides before they can catch up with China.
Reducing the reliance on China
China is projected to hold onto its dominant position well into 2050. To safeguard energy independence in a future without fossil fuels, EU and US policymakers would benefit from a shift in policy approach. Instead of simply emulating China’s vertical integration-based approach, EU and US policymakers can focus on adopting new policies that leverage and maximize the comparative advantages of the EU and the US.
One alternative would be for the EU and the US to adopt strategies based on horizontal integration – i.e., capacity-building at selected levels of the Li-ion battery supply chain. US- and EU-based companies possess the financial capital, talent pool, technological know-how, and advanced manufacturing capabilities, making them well-positioned to outperform their Chinese counterparts in areas such as battery R&D or manufacturing of batteries and battery anodes. In other words, horizontal integration serves to level the uneven playing field, allowing the EU and the US to specialize in critical areas of the Li-ion battery manufacturing process, while China continues to control the global mining and processing of raw lithium.
Speeding up the development of alternative battery technologies is another policy available for the EU and US to decrease their China reliance. At the moment, the five most promising non-lithium-based alternative batteries are sodium-ion, sodium-seawater, iron-oxygen, lithium-silicon, and magnesium battery technology. Nevertheless, these alternative battery technologies are at an experimental phase, requiring technological breakthroughs to become commercially worthwhile.
A third policy option would be to facilitate the continued expansion of Li-ion battery recycling capacities in the US and EU. The number of Li-ion battery recycling factories worldwide has increased significantly in recent years. The boom of the EVs market and the rising prices of critical minerals has rendered Li-ion battery recycling economically viable. Nonetheless, the global recycling rate remains low, hovering at approximately 5 percent. For this reason, using recycling of spent Li-ion batteries as a second source of battery-graded lithium can help the EU and the US cut their reliance on Chinese-controlled lithium supplies.
As the transition from fossil fuels to renewable energy resources and Li-ion batteries continues, it is evident that the “race for lithium” is very much guided by geopolitical thinking and strategies. Unfortunately, what is also increasingly clear is that the current strategies employed by the EU and the US will not enable them to scale their battery production fast enough to match China. Consequently, both the EU and the US would stand to benefit from a change of approach if they are serious about cutting their reliance on China. Whether such an approach will be based on one of the three aforementioned options outlined or something entirely different does not matter, as long as it helps the EU and the US move beyond the notion of emulating China’s vertical integration approach.