The road ahead for EVs

It’s hard to keep a handle on economic trends in the region without coming across an article on the state of the electric vehicle (EVs) market. There’s seemingly always a new story on the decline in sales growth seen in 2024 across the United States and Europe, or the latest milestone for China as it emerges as the industry’s undisputed leader for both production and demand.

The stories are as captivating as they are common. Today, China stands atop of almost the entire EV supply chain, driven principally by insatiable domestic Chinese demand , which recorded an approximatley 30 per cent rise in July.

Feeding that demand presents a huge opportunity for other markets in the Asia-Pacific region, from those exporting the required resources, to those manufacturing key EV components such as batteries. How that downstream opportunity develops will be watched closely by economies looking to leverage China’s hard-earned strength.

And that strength is no accident, ANZ’s Head of International Technology and Automotive, Alfred Bae, tells ANZ Institutional Insights. It’s a product of a deliberate campaign by Chinese authorities to electrify its transportation industry, and meticulously develop a sector that’s become the envy of the world.

“It's largely driven by the strong government incentives and policies,” Bae says. “China's been investing into the space a lot longer than many of the other countries. And they've been investing not just in the EV manufacturing, but the entire value chain.”

ANZ Research data show China produces 60 per cent of EVs in the global market, and 80 per cent o­­f the lithium-ion batteries that power a large part of that fleet. There are reportedly more than 200 manufacturers currently based in China.

The sector is heavily subject to what ANZ’s Head of Geopolitical Risk, Cameron Mitchell, calls an “UNTIDI” future; one of economic statecraft, export controls and supply-chain resilience measures, all built in an era where the advanced economies compete for economic security.

EV dominance provides China an opportunity to bolster its changing manufacturing base, as well as reduce demand for imports. Perhaps slow on the uptake, the West is responding; the US hit Chinese-produced EVs with a 100 per cent tariff in May; Europe has since followed with its own duties.

Stella Saris Chow, ANZ's Head of Sustainable Finance, International, has observed China’s emerging EV strength across Asia. Speaking to Insights, she tells of visiting cities across south-east Asia like Jakarta, “where you see [Chinese EV group] BYD showrooms and advertisements everywhere”.

The south-east Asian EV market is fertile ground for growth, with EY suggesting it could grow to between $US80 billion and $US100 billion by 2035.

“What will be interesting there is how quickly the electric-vehicle infrastructure can be built out, and by who, to accommodate the increase in supply and demand,” Saris Chow says.

Head start

In the area of infrastructure, China has a huge head start, according to Bae – with charging stations “widely available both in homes and in commercial buildings and shopping malls”, he says. Regions like Australia are less developed.

“What we’re seeing is there’s differing speeds in different markets,” Bae says. “Australia is probably a bit behind, to be honest.”

Behind, perhaps, but not absent: Australians buy a reported 100,000 new-energy vehicles a year. From a negligible presence five years ago, now two out of every five Chinese cars sold in Australia are electric – largely, Bae says, because “they’re very affordable, and have become more and more affordable in the last few years”.

Bae expects Chinese EV makers to continue to build “a very significant presence” in the international market over time.

Others point to reservations around Chinese EV dominance, and what that means for trade and supply chains in the modern technology space more broadly.

Mitchell says businesses “need to be attuned” to the implications – and potential risks – of these developments.

“Mexico and Turkey have put or are considering putting some restrictions around Chinese imports in place,” he said. “Turkey has since lifted these, but it’s a live issue globally.”

Bae concedes “Europe and the US might be challenging markets to penetrate”.

“But the whole geographic south of the world, I do feel, is going to be led by the Chinese auto players,” he says.

Rock on

If China is to continue to dominate the market, it’s going to need the resources to make a lot of cars – rare earths, lithium, cobalt, and nickel to name just a few. For Australia, which produced 40 per cent of global lithium in 2023, that’s where the opportunity is.

“As of now, I would say that’s the biggest opportunity for Australian companies and investors,” Bae says. But in the future, that could change, he thinks – if there is a will, and means, to move up the value chain.

Australia’s proposed Future Made in Australia legislation ticks the ‘will’ box. Refining critical minerals into battery-grade materials is a key part of the EV production process, and not one Australia has a noticeable foothold in (nor does anyone except China, which sees 70 per cent to 80 per cent of material processing and refining occur within its borders, according to Bae).

There’s a line of thinking that leaves money on the table, with one estimate suggesting Australia pockets just 0.5 per cent of all the value that flows through the lithium supply chain.

The Future plan includes $A7 billion tax incentives for processing critical minerals at an estimated cost of $A7 billion over the decade and would spend $A1.2 billion on strategic projects in the sector.

“If Australia could do mining and the first value-add – refining, ready for export – I think that would be the biggest bang for its buck,” Bae says. “Otherwise, it has to go through China and then come back out.

“If they could export directly to Japan, Korea, the US, Europe – that’s probably the biggest [opportunity].”

Another upstream opportunity exists in energy storage, according to Bae.

“Australia is obviously investing a lot into renewable energy,” he says. “And they’re buying a lot of these battery ESS’ – energy storage systems.”

‘A lot’ is almost an understatement. Data from the Clean Energy Council shows Australia racked up its fourth-straight quarter of $A1 billion plus in investment in large-scale energy storage products.

“From an import perspective, that’s probably another opportunity, or point of interest for the Australian business community,” Bae says.

Spark up

While Australia ponders refinement, other economies across Asia are finding their own niche in the China-dominated supply chain.

China’s aforementioned dominance of the EV battery market has seen it lift its export value from the subsector to a reported $US34 billion by 2023, from just $US8.6 billion in 2021.

Still, regions like Japan and South Korea are taking the market leader on, investing in their own battery manufacturing capability, according to Saris Chow – “but also investments are being made in Europe and the US”.

Battery production and technological innovation has surged to a point supply is pushing against demand, leading to significant price declines. In the US alone, some estimates suggest prices have dropped 90 per cent between 2008 and 2023, even amid forecasts of demand worth $US55 billion annually by 2030.

According to the International Energy Agency (IEA), in some cases China’s battery manufacturing capacity surpassed global EV cell demand in 2023 by up to nine times. This, and questions raised about the profitability of the Chinese battery manufacturers, can be fuel for doubts around the ability of producers from other countries to compete in such an environment.

“China’s global EV dominance means it needs export markets as well as its domestic market,” Mitchell says. “But if it pushes too hard and too quickly it risks alienating many of the export markets its relying on.

“Some of these export markets are looking to develop their own EV sectors: it’s going to be a tough balancing act.”

Wai Mun Lum, ANZ’s Head of Resources, Project & Export Finance, says taking steps to ensure greater diversity in the global trade supply chains was critical for the sector.

And it’s not about manoeuvring around any one market or group of markets, he says – it’s just “good business sense”.

“As we saw during the global pandemic, with global trade and supply chains grinding to a halt, when you are too dependent on a particular region or country, it makes sense to diversify,” he says.

The days of structuring supply chains to ensure lowest-possible unit costs are over, Lum says, replaced by an era of managing potential external shocks and heightened geopolitical risks.

“There needs to be some cost worn to ensure trade and supply chains are more diverse,” he says.

As a bank, ANZ has been an active participant in the EV battery space, as part of its broad and diverse presence across markets. The bank has financed numerous battery-related operations, including in some cases with sustainable financing solutions.

In 2023, ANZ led a $US940 million green-labelled term-loan facility for Hyundai Mobis Americas, helping finance the supply of parts for EV production in the US. A year before that, the bank helped Chinese group Geely Auto secure a $US400 million EV gigafactory in France, and supported vehicle leasing group FleetPartners with a $A400 million asset-backed securitisation, including a $A75 million green tranche.

The EV market is one that “lends itself clearly to sustainable financing”, Saris Chow says, and its expansion is critical for the world’s ambitions to lower carbon emissions.

“If you think about how we can decarbonise transportation, the electrification of cars is the most straightforward and most commercially available,” she says. “Clean transportation is going to make up a large part of decarbonisation efforts of companies and countries.”

Demand for sustainable finance in the EV battery space, while notable, is a product of demand for sustainable finance in general, Saris Chow says.

“Many banks have sustainability targets,” she says. “There's a lot of liquidity looking to support assets that are low emission, compared to high-emitting industries.”

Big shift

The IEA says reaching net-zero carbon emissions by 2050 will require electric vehicles to make up 65 per cent of the global fleet by 2030. Several experts Insights spoke to find that to be ambitious, at best.

“In 2023, [EVs made up] somewhere around 15 per cent of total new vehicle sales,” Bae says. “For us to get to 65 per cent, it means there needs to be quite a dramatic change and growth each year. Based on the current trajectory, this target seems optimistic.”

ANZ Research’s Soni Kumari recently told the 5 in 5 with ANZ podcast EV penetration was likely to reach “more than 40 per cent by 2030”, with sales growing annually “by 17 to 18 per cent” through that time.

With lithium and ion batteries to largely follow that path, ANZ Research sees “lithium demand rising annually by a similar rate of 17 to 18 per cent through 2030,” according to Kumari.

In US and Europe, part of that growth has, and will continue to, come at the expense of traditional vehicles, according to Bae. In China, demand has been “driven by increase in vehicle ownership per person and some people have just gone straight to EVs”.

Geopolitical realities will continue to play a role in shaping supply chains in our region, Bae says.

For Mitchell, the opportunity should not distract from the need to “remain mindful of growing security concerns regarding foreign-made EVs and associated technology”, he says.

For his part Bae suspects geopolitical machinations won’t stop “Chinese EV manufacturers expanding into places like Australia, Asia-Pacific, India, Europe, Africa and Middle East”.

“Even the US in the longer term,” he says. “I don't think they can keep China fully out.”

That’s why if you look hard, you’ll keep seeing “a lot of articles around Chinese EVs actively targeting export markets, particularly into places like Europe, Central Asia and South America”, Bae says.

And probably even if you’re not looking for them at all.