Morningstar
RecommendedSign Up to Our Newsletters Open Window IconMorningstar's Guide to Investing in Stocks Arrow Right
ESG

EVs Face a Supply Chain Risk Conundrum

Tension between China and Taiwan is reviving chip shortage fears while batteries and raw materials still face supply bottlenecks 

Sara Silano 22 August, 2022 | 9:02AM Sunniva Kolostyak
Facebook Twitter LinkedIn
Font-Size

electric car charger

For the past two years, global supply chains have been surrounded by a perfect storm. In an environment where this should show signs of easing, the electric car industry is becoming increasingly exposed.

Electric vehicles, or EVs, are one of the cornerstones of the green transition in many countries, and many governments are promoting policies to increase both adoption and production. Last year, EVs accounted for 5% of new cars being sold globally. This year, adoption rates and sales are expected to be even higher as they become (supposedly) both cheaper and more functionally comparable to an internal combustion engine (ICE) vehicle.

Morningstar equity strategist Seth Goldstein chairs the company's electric vehicle committee. He says a recession shouldn't impact EV sales negatively.

"As more EV models are released by not only Tesla (TSLA) but by the legacy automakers and new entrants, consumers have more options and more EVs will get sold," he says.

"Even if we entered a global recession, EV sales would likely either remain flat or even move higher just due to more models being converted from traditional ICEs to EVs."

But, while demand is indeed increasing, the production aspect is not as straightforward. According to the International Energy Agency (IEA), China is a major player in the battery production space. It accounts for over three-quarters of all lithium-ion battery production, and for over half of all cobalt processing and refining capacity.

Moreover, in 2021, 70% of global supply was mined in the Democratic Republic of Congo, followed by Russia – and as we know, both these countries have high geopolitical and ESG risks. So how are EV battery producers and car manufacturers managing supply challenges?

EV Supply and War

Other countries are also attempting to up their supply chains within the EV space. According to Benchmark Minerals Intelligence, Europe has plans to reach a total capacity of 789.2 GWh (Gigawatt hours) by 2030. That would be enough to support the assembly of nearly 15 million pure electric vehicles.

In the US, the newly-minted Inflation Reduction Act provides subsidies for EVs and plug-in hybrids, provided that a minimum percentage of critical minerals like lithium come from the US or its free trade partners.

If achieved, both measures will help ease the supply chain issues, but the risks of using raw material from conflict countries like the DRC remain, as Sustainalytics recently reported.

It is estimated that 15-30% of the DRC’s global cobalt supply comes from small-scale and artisanal miners, where labour rights are lacking, a lack of equipment persists, and some mines are dug illegally. In 2019, 43 miners died in a collapse of a cobalt mine owned by Glencore in the Kolwezi area, and, in 2014, UNICEF estimated around 40,000 children worked in cobalt mines in the DRC. This number is reportedly starting to decline.

Mineral waste from mines can pollute rivers and freshwater sources and have a direct health impact on people, animals and crops. And the processing of cobalt generates tailings, which can have adverse impacts on the environment if not treated and stored properly.

There are also risks related to the scarcity of key raw materials overall, and mineral explorations are underway in other regions. Recently, it was rumoured that some billionaires, including Jeff Bezos, Michael Bloomberg and Bill Gates, are funding the search for critical minerals, including cobalt and nickel, in Greenland as ice vanishes.

Handling the Supply Challenges

According to data from EV and electric market research firm SNE Research, the top five sellers of Electric car lithium-ion batteries in the first quarter of 2021 were Contemporary Amperex Technology, or CATL (300750), LG Energy Solution (373220), Panasonic (6752), BYD (002594) and Samsung (005930).

Their efforts to manage the supply challenges posed by reliance on cobalt range from developing cobalt-free batteries, such as lithium-iron-phosphate or LFP (Panasonic, Samsung), to acquiring stakes in a cobalt mine (CATL) or setting up joint ventures that help secure a stable supply of raw material (LG).

The use of blockchain has also been tested by the likes of Stellantis (STLA), Volkswagen (VOW) and Volvo (VOLV) to track the entire supply chain. Tesla (TSLA), which already tracks cobalt from mine to end-use, announced earlier this year that about half of the vehicles produced use cobalt-free batteries.

But reducing reliance on cobalt and high-risk regions is a long-term game, as is EV manufacturers’ efforts to make the supply chain more sustainable.

In the short term, the industry cannot ignore the threats of tensions in Asia and the conflict in Ukraine, as well as ESG risks lurking throughout supply chains. In the short term, this could undermine sales at a time where demand is growing. 

TAGS

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn
Font-Size

About Author

Sara Silano

Sara Silano  is Editorial Manager for Morningstar Italy

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures

The Morningstar Star Rating for Stocks is assigned based on an analyst's estimate of a stocks fair value. It is projection/opinion and not a statement of fact. Morningstar assigns star ratings based on an analyst’s estimate of a stock's fair value. Four components drive the Star Rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s fair value, (3) our uncertainty around that fair value estimate and (4) the current market price. This process culminates in a single-point star rating that is updated daily. A 5-star represents a belief that the stock is a good value at its current price; a 1-star stock isn't. If our base-case assumptions are true the market price will converge on our fair value estimate over time, generally within three years. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Morningstar Star Rating for Stocks, please visit here

Quantitative Fair Value Estimate represents Morningstar’s estimate of the per share dollar amount that a company’s equity is worth today. The Quantitative Fair Value Estimate is based on a statistical model derived from the Fair Value Estimate Morningstar’s equity analysts assign to companies which includes a financial forecast of the company. The Quantitative Fair Value Estimate is calculated daily. It is a projection/opinion and not a statement of fact. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Quantiative Fair Value Estimate, please visit here

The Morningstar Medalist Rating is the summary expression of Morningstar’s forward-looking analysis of investment strategies as offered via specific vehicles using a rating scale of Gold, Silver, Bronze, Neutral, and Negative. The Medalist Ratings indicate which investments Morningstar believes are likely to outperform a relevant index or peer group average on a risk-adjusted basis over time. Investment products are evaluated on three key pillars (People, Parent, and Process) which, when coupled with a fee assessment, forms the basis for Morningstar’s conviction in those products’ investment merits and determines the Medalist Rating they’re assigned. Pillar ratings take the form of Low, Below Average, Average, Above Average, and High. Pillars may be evaluated via an analyst’s qualitative assessment (either directly to a vehicle the analyst covers or indirectly when the pillar ratings of a covered vehicle are mapped to a related uncovered vehicle) or using algorithmic techniques. Vehicles are sorted by their expected performance into rating groups defined by their Morningstar Category and their active or passive status. When analysts directly cover a vehicle, they assign the three pillar ratings based on their qualitative assessment, subject to the oversight of the Analyst Rating Committee, and monitor and reevaluate them at least every 14 months. When the vehicles are covered either indirectly by analysts or by algorithm, the ratings are assigned monthly. For more detailed information about these ratings, including their methodology, please go to here

The Morningstar Medalist Ratings are not statements of fact, nor are they credit or risk ratings. The Morningstar Medalist Rating (i) should not be used as the sole basis in evaluating an investment product, (ii) involves unknown risks and uncertainties which may cause expectations not to occur or to differ significantly from what was expected, (iii) are not guaranteed to be based on complete or accurate assumptions or models when determined algorithmically, (iv) involve the risk that the return target will not be met due to such things as unforeseen changes in changes in management, technology, economic development, interest rate development, operating and/or material costs, competitive pressure, supervisory law, exchange rate, tax rates, exchange rate changes, and/or changes in political and social conditions, and (v) should not be considered an offer or solicitation to buy or sell the investment product. A change in the fundamental factors underlying the Morningstar Medalist Rating can mean that the rating is subsequently no longer accurate.

For information on the historical Morningstar Medalist Rating for any managed investment Morningstar covers, please contact your local Morningstar office.

For more detailed information about conflicts of interest, including EU MAR disclosures, please see the “Morningstar Medalist Rating Analyst Conflict of Interest & Other Disclosures for EMEA”here

Select Your Site Edition To make sure the site is relevant to you, we need to know if you’re an individual investor or a financial professional.