The road to electric will be bumpy but we’re getting better at dealing with disruption

Supply chain disruption has become the new normal. From milkshakes to microchips, 2021 has brought daily warnings about new shortages to hit our shelves. In the UK, a recent logistical headache was the disruption in fuel supplies. Whether the lack of drivers was caused by Covid or Brexit, the sight of motorists converging on British forecourts focused minds on our fossil fuel dependency but also begged the question: is it time to speed up our switch to electric?

The move to electric vehicles (EVs) has been gathering pace for a while now. Earlier in 2021, GM said it would stop selling petrol and diesel-powered models by 2035. Audi has pledged to halt such production by 2033. Regulation is another driver, with the expansion of London’s Ultra-Low Emission Zone (ULEZ) driving a 30% increase in demand for EVs and COP 26 heralding a more concerted drive against carbon emissions.

Such commitments are welcome but overlook the fact that each EV battery requires materials that have yet to be mined. Amounts vary according to battery type and vehicle model, but a single lithium-ion battery pack could contain around 8kg of lithium, 35kg of nickel, 20 kg of manganese and 14kg of cobalt.

Lithium itself is not scarce, with current reserves estimated to be 21 million tonnes, enough to carry the conversion of EVs through to 2050. The challenge lies more with scaling up production to meet demand - projected to increase sevenfold by 2030 - and environmental concerns such as the copious amounts of either water or energy needed, depending on the extraction source.

Cobalt is more problematic. Two third of global supply is mined in the Democratic Republic of Congo, where concerns have been cited over child labour and workers’ health. Nickel is one of the most technically challenging metals to process and refine and, although abundant, manganese can negatively impact ecosystems and human health.

Predictions of a wholesale move to EVs in the coming decade should therefore be tempered by the realities of battery production. Although production capacities for lithium-ion cells are being ramped up in the US, Europe and Asia, industry experts are still predicting a bottleneck which will be the next big test for the automobile sector after the current semiconductor shortage. The Duisburg-based Center for Automotive Research (CAR) predicts that, whilst the semiconductor shortage will cut a total of 8.1 million cars from global production between 2021 and 2023, 18.7 million rechargeable electric cars will be lost because of battery cell shortages by the end of the decade.

What can be done to mitigate this challenge? Reshoring is one response.

In Europe, Mercedes-Benz recently teamed up with Stellantis and TotalEnergies to invest a third each in Automotive Cells Company, the Bordeaux-based EV battery producer. In the US, Ford and South Korean manufacturer SK Innovation recently announced plans to spend over $11 billion building EV battery factories in Tennessee and Kentucky. Shortening supply chains is a priority for Joe Biden, with one of his first acts as President to sign an Executive Order requiring a supply chain review, focusing on semiconductors and EV batteries. Meanwhile, the CHIPs for America Act aims to incentivize semiconductor production in the US. ?Another focus is the development of more circular economies. Batteries can still have up to 70% of their capacity when they stop being good enough to power EVs, making them ideal to be repackaged and repurposed.

The reality is that reshoring will take time to implement and, where lithium-ore batteries are concerned, the cost of recycling can often outweigh the value of minerals recovered. Fortunately, manufacturers are increasingly acclimatizing themselves to the ‘known unknown’ of supply chain disruption and putting in place strategies to mitigate the next Black Swan before it happens.

Focusing on Just In Case inventory management is one preferred solution, despite the pitfalls of trapped capital and a slow cash conversion cycle. An increasingly popular alternative is the use of specialist companies which foster slicker inventory management (and free up liquidity) by purchasing and holding title to goods until they are needed by the manufacturer and selling them on a Just in Time basis. This increases Cash From Operating Activities on balance sheets, but without the risk of being unable to meet demand when the next disruption occurs.

The move to electric will clearly not be immune from supply chain disruption. The good news is that we are learning to expect disruption and adapting accordingly.?

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