The race to build gigafactories has begun

The battery market is dominated by Asia, which accounts for more than 85% of global production, but Europe is hustling to make up for lost time.

By Bertrand Beauté

With the war in Ukraine raging and gas shortages looming in Europe, Olaf Scholz travelled to Salzgitter, in Lower Saxony, in early July to attend the construction kick-off for Volkswagen’s first battery factory. The German chancellor wanted to mark the occasion.

For the automobile manufacturer, this event was the start of a major offensive in the industry. The German group plans to build six battery gigafactories in Europe by 2030, investing €20 billion.

"Today is a big day for the automobile industry in Germany and in Europe," said Olaf Scholz. And a major turning point for Europe. Until now, the global market has been widely dominated by Asia, which accounts for more than 85% of global production of battery cells, leaving only crumbs for the United States (12% of production) and Europe (3%). And yet: "Lithium-ion batteries were developed in Western laboratories several decades ago," says Giacomo Fumagalli, an analyst at Robeco. "But at the time, the technology wasn’t considered to be strategically important. So production was outsourced to Asia where consumer electronics were being made – and as a result, we saw the first prospective applications of lithium-lion batteries at that time." The companies that are currently industry leaders have primarily reached that status due to mass consumer electronics, such as Chinese company BYD, Korean groups LG and Samsung, and Japan’s Panasonic.

Chinese company CATL benefited from significant support from Beijing to create the country’s own automobile industry as part of the "Made in China 2025" strategy. "Very favourable government programmes in Asia and particularly China have led to a situation where the cost of investing in a battery factory is much lower than in Europe or the United States," says Fumagalli. And as a result, CATL – founded in 2011 – has become the global battery leader in less than a decade, with a market share of 32.5%, ahead of LG Energy Solutions (21.5%) and Panasonic (14.7%), according to figures from Korean firm SNE Research.

The problem is that batteries have since become a critical component. They are at the heart of all of our daily devices, and they are the cornerstone of the energy transition. "The pandemic, the semi-conductor supply chain crisis and the war in Ukraine have demonstrated that it was risky for countries to depend on others for strategic supplies," says Michael Pye, an investment manager at Scottish firm Baillie Gifford. "Batteries are strategic. Given this context, Europe can, and in some ways should, respond by creating a local and diversified supply chain." Especially given that, in the automobile industry, batteries are also a vital economic component, because they make up between 20% and 40% of the price of an electric vehicle.


"The quality of batteries produced, meaning the ability to ensure they don’t explode, is one of the biggest barriers to entry in this market"

Christina Woon, director of investments for Asian assets at Abrdn


In 2017, the European Union created the European Battery Alliance (EBA) which aims to encourage Europe to develop its industry and produce its own batteries in order to capture 25% of the global market by 2030, compared to 3% today. And the results are starting to show. Created in 2015 by Peter Carlsson and Paolo Cerruti, two former Tesla employees, the private Swedish company Northvolt produced its first battery cells in its Skellefteå factory in December 2021 and began shipments in May 2022, becoming the first European company to supply the automobile industry with battery cells. Northvolt has big-name clients and partners, such as Swiss group ABB and German companies BMW, Scania and Volkswagen. The factory that the VW group is building in Salzgitter is also partnering with Northvolt.

And the Swedish startup isn’t the only company throwing its hat into the ring: approximately 40 gigafactories are currently being planned in Europe. If all of these factories are completed, Europe will be home to a production capacity of 1000 to 1500 GWh in 2030 – enough to equip 15 to 20 million electric vehicles per year. This is sufficient to satisfy local demand: according to figures from the European Automobile Manufacturers’ Association (ACEA), 14 million consumer cars were manufactured in European factories before COVID.

Besides Northvolt and Volkswagen, the most ambitious projects are being led by ACC (Automotive Cell Company), a co-enterprise that includes Total, Stellantis and Mercedes, and plans to build three factories in Europe in Douvrin (France), Kaiserslautern (Germany) and Termoli (Italy) for a total production capacity that is expected to reach 120 GWh in 2030. In another flagship project, the global leader in electric vehicles, Tesla, plans to produce 100 GWh per year in Germany.

It still remains to be seen whether this enthusiasm will be enough to catch up to Asia. "Producing batteries at an industrial level is not easy. It requires lots of expertise. CATL, LG, Panasonic and Samsung have been manufacturing batteries for a long time. They have many years of experience," says Christina Woon, director of investments for Asian assets at Abrdn. "For newcomers, entering this market is very complicated. It’s not impossible, but it’s a long journey.


"European companies have a long way to go to catch up to their Asian counterparts"

Giacomo Fumagalli, analyst at Robeco


The quality of batteries produced, meaning the ability to ensure they don’t explode, is one of the biggest barriers to entry in this market."

Indeed, if a battery is poorly made, particularly as a result of the presence of impurities, clusters of lithium crystals can form on the anode during charging and discharging cycles, and can eventually reach the cathode. This causes a short circuit, which can lead to a fire. To avoid this possibility, battery design must be extremely rigorous. This challenge requires specific expertise, as battery chemistry continues to evolve and gigafactories must produce tremendous volumes. To see the difficulties that the manufacturing process can bring, take a look at the run of bad luck that occurred at the Tesla and Panasonic gigafactory in Nevada. According to an investigation published by Business Insider in 2019, the factory had to scrap 500,000 of the 3 million cells it produced daily due to imperfections. To solve the problem, Panasonic had to send Japanese specialists to the United States.

"Many automobile manufacturers hope to eventually have internal production capacities, because batteries are an essential component," says Woon. "But for the time being, given the difficulties of developing expertise starting from nothing and creating a large production volume quickly, they can’t do it alone. In the short term, forming partnerships with battery experts is the way to go."

The giant Stellantis – which came from the merger of PSA Peugeot- Citroën and Fiat Chrysler Automobiles – entered into a partnership with LG Energy Solutions in May 2022, in order to build a factory in Canada. Toyota and Tesla did the same thing, both creating joint ventures with Panasonic. "Having decades of experience is an enormous advantage in the battery sector. European companies have a long way to go to catch up to their Asian counterparts," says Fumagalli. "We’ll see if Europe can do it, but the race will be even more difficult as the current leaders continue to advance and invest heavily." But one aspect may be in Europe’s favour: legislation. In March 2022, EU environment ministers adopted legislation encompassing the entire battery life cycle, including production, collection and recycling. And on this specific point, European companies have an advantage over their Chinese competitors: Northvolt, which began construction on its recycling facility Revolt Ett in early 2022, has already pledged that its batteries will be produced using at least 50% recycled material in 2030.

The world is going giga

industry right now. No one’s talking about factories, production facilities, or manufacturing plants any more... just gigafactories. The term refers to gigantic factories that specialise in very high volume production. The expression was made popular in 2014 by Tesla, when the US automobile manufacturer began construction on Gigafactory Nevada (or Gigafactory 1), a battery manufacturing plant for its vehicles. Since then, the word has been adopted by the rest of the industry. But why is it so important to have gigafactories in the battery sector? "It’s a very difficult, very competitive industry, where some companies don’t have significant margins," says Fumagalli, the Robeco analyst. "In this context, having gigafactories is important because it increases yields. With a higher production volume, companies are able to produce batteries at a lower cost." Yet another advantage for traditional industry players that already have large factories, whereas newcomers need to invest massively to catch up and become competitive.