EV Supply Chain: A Thorny Issue in EU–China Relations

Visitors look at a Tesla Model 3 electric vehicle at the third China International Consumer Products Expo in Haikou, Hainan Province, China, on April 12, 2023. (Casey Hall/Reuters)

China’s move last week to restrict graphite exports, a vital material in electric vehicle batteries, will not only compel European automakers to accelerate their efforts to develop alternate sources and materials; given that the European EV sector continues to depend on batteries from China, the EV supply chain is also emerging as a new source of tensions between Beijing and the European Union.

Already, China’s dominance in the EV market has become a bone of contention for the region as the EU accelerates the switch to EVs by practically prohibiting the sale of new petrol and diesel automobiles in the bloc from 2035. In September, Brussels also pledged to shield Europe’s auto industry from a “race to the bottom” by investigating Chinese state subsidies for electric vehicle manufacturers.

Ursula von der Leyen, head of the European Commission, expressed concern that China’s state subsidies for its automaker could undermine competitiveness in the bloc and threaten Europe’s manufacturing sector.

Speaking before the EU Parliament in Strasbourg in her capacity as EU president, Ms. von der Leyen said that global markets are now flooded with cheaper Chinese electric cars and that substantial government subsidies keep their prices artificially low.

The investigation is the first step toward probable increased import duties on Chinese-made cars. The EU now imposes a 10 percent tariff on imported cars from China.

“[With China’s export curbs on graphite], the EV supply chain has become a source of escalating feud between Beijing and the West,” ING said last week in a client note viewed by The Epoch Times.

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In 2020, the EU identified natural graphite as an essential raw material for the bloc. It’s also regarded as a critical and strategic mineral by the United States.

Last week, the U.S. government tightened restrictions on Chinese companies’ access to semiconductors, including halting sales of Nvidia’s more advanced artificial intelligence chips.

That week, U.S. President Joe Biden also met with EU officials to discuss essential minerals as part of a broad series of agreements.

Moreover, Fitch Ratings said in a note on Oct. 23 that luxury EV brands, including those of Mercedes, BMW, and Volkswagen, sell about a third of their EVs in China. “This dependence may [also] expose European automakers to possible retaliatory measures over the EU probe into Chinese production subsidies or other potential protectionist measures,” the ratings agency said.

Graphite for National Security

Citing national security concerns, Beijing announced on Oct. 20 that beginning on Dec. 1, special export permits for certain kinds of graphite will be required. It added that this curb wasn’t targeting any specific country.

But under the new restrictions, exporters must apply for permits to ship two types of graphite: high purity, high hardness, and high intensity synthetic graphite material; and natural flake graphite and its products.

Meanwhile, temporary limits on five less sensitive graphite goods used in core industries such as steel, metallurgy, and chemicals were lifted.

China dominates global supply chains of graphite, a basic element required for manufacturing EV batteries. Besides being the mineral’s largest producer and exporter, China also refines more than 90 percent of the world’s graphite into anode material for EV batteries. According to Chinese Customs data, the other top buyers of graphite from China include the United States, South Korea, Japan, Poland, and India.

The Race

From material processing to the fabrication of cell and battery components, China leads the worldwide supply chain of essential minerals required to manufacture EV batteries.

For years, the Chinese government has emphasized electric vehicle technology, investing billions of dollars in government subsidies and tax exemptions to assist the industry.

Early on, Beijing announced that electric vehicles would be a strategic national priority, prompting Chinese companies to invest in mining, raw material refinement, and battery technologies.

Considering that China is by far the world’s largest car market, Chinese manufacturers have a strong incentive to enter the sector. In addition, partly because of China’s strong manufacturing base and effective logistics infrastructure, EV companies have been able to rapidly scale up output.

For years, the EU, like China, has also been advocating a local EV battery industry. For example, in 2017, the EU formed the European Battery Alliance to jumpstart domestic production. By 2030, the goal was for European providers to supply 90 percent of the region’s battery demands.

European countries such as Germany have also created critical technologies for specific portions of the EV battery tech value chain, such as recycling, and have been at the forefront of testing innovative battery chemistries such as sodium-ion batteries.

However, Europe’s battery sector lacks scale and faces challenges in moving from initial development to widespread commercialization. Europe today is virtually totally reliant on China for procurement in certain portions of the value chain, such as raw material refining.

“European EV makers’ supply chains will continue to depend on batteries procured mostly from China (and South Korea) until they successfully establish sourcing from other regions, which will likely take place around 2030,” the Fitch Ratings’ client note read.

As the world races toward adoption of EVs, the International Energy Agency predicts that graphite demand is to increase 20 to 25 times between 2020 and 2040.

Chinese Dependence

According to Fitch, EV imports from China into Europe have been growing rapidly over the past year, although China-produced EVs are still only a small portion of new EV sales.

However, Tesla-branded EVs produced in China have the largest share of the European market, even as Tesla’s total share in Europe more than doubled in August year on year, while China-based brands have less than 1 percent of the market share each.

Still, “the EU has launched the probe into the fairness of Chinese EV production-side subsidies, which may spur EU trade protectionist actions and retaliatory measures by China,” Fitch said, noting that the probe isn’t limited to Chinese brands and can affect European EV brands produced in China as well.

China Pushing Back

China’s retaliatory measures, though, have already begun.

Experts consider China’s graphite export curbs imposed last week similar to the export curbs it imposed in July on gallium and germanium materials used in computer chips and other components.

The curbs are also widely interpreted as retaliation for U.S. restrictions on technology sales to China and have heightened Western concerns that China may limit shipments of other commodities, notably rare earth metals whose production the nation also dominates.

Nevertheless, reports suggest all major European automobile manufacturers have embraced batteries as they scramble to meet EU regulations of phasing out the internal combustion engine by 2035. Mercedes-Benz, BMW, and Volkswagen, for example, are heavily investing in research and development of the so-called solid-state battery.

These batteries use a solid electrolyte instead of a liquid electrolyte, which eliminates the requirement for a heavy separator component to protect the positive and negative electrodes from coming into contact. These batteries could eliminate the need for graphite and other key materials currently used in EV batteries that are under China’s control.