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Credit FAQ: Panelists Debate Risks And Opportunities Along The EV Value Chain

Electric vehicle markets are growing as fast as they are changing. This is creating opportunities for companies along the supply chain. It also brings uncertainty and challenges.

At a recent live event, S&P Global Ratings, with S&P Global Mobility and S&P Global Commodity Insights discussed trends along the entire value chain--from mined raw materials to auto sales.

The stakes are high. The automakers that moved most quickly into electrification are dealing with margin dilution and higher leverage. Those that move too slow, however, could see weakening market position over the next three to five years. The balance of risks is similar for the upstream (materials) and midstream battery makers. Increasing vertical integration along the value chain adds to the unknowns and opportunities.

A replay of our Asia-based webcast is available here. In this article, we address questions put to us at the interactive panels, with more than 460 attendees. We also include some Q&As from similar roundtables held recently in Hong Kong and Europe.

Frequently Asked Questions

How self-sufficient is Asia-Pacific in terms of battery materials? What is driving the push for increased vertical integration?

Some 60%-70% of mined nickel and refined lithium are produced in Asia-Pacific. Commodity-rich countries such as Australia and Indonesia will likely seek or continue to capture more of the benefits from the boom in demand for these electric vehicle (EV) minerals and metals.

Miners are extending downstream into refinery, to diversify revenue sources and reduce earnings volatility. This is a strategy that could weigh on leverage if not well executed. At the same time, battery and EV producers are venturing upstream to mining and refining, to ensure stable supply of raw materials and gain more visibility on costs.

Joint ventures allow both the upstream and downstream entities to align their interests while sharing capital investment and technical expertise. Still, it's not clear at this stage whether such arrangements would lower supply costs versus the market averages, especially during periods of shortages.

Please elaborate on the major types of batteries currently being used and their market shares. How will battery technology evolve over the next few years and how would this affect incumbent players?

This is an area that, like everything in EV, is evolving. As it develops, the implications reverberate along the value chains.

Chart 1


Current dynamics:  Globally, batteries with high nickel content dominate-- NMC, NCA, and NMCA (see chart 1 for full names) had a 65% market share of EV batteries in 2022 by installation. Their dominance in the market has led to supply battles for some of the underlying raw materials.

The shift:   LFP batteries are fast gaining traction; their global market share jumped to 34% in 2022 from 26% in 2021. This is partly driven by cost-competitiveness, because they don't use nickel and cobalt. However, energy density is lower in these batteries. As material costs moderate, we believe high-energy density batteries will regain traction. The market share of LFP batteries globally will remain limited to about one-third over the next few years.

Our view on nickel-rich batteries vs. LFP batteries:  We expect high-nickel batteries to maintain their market dominance over the next few years. Their high energy density should support satisfactory EV driving range and attract sustainable adoption by global auto makers.

At the same time, LFP batteries will be competitive, as more global original equipment manufacturers (OEMs) use them for their entry-level car models; such OEMs include e.g., Tesla Inc., Volkswagen AG, and Ford Motor Co. The market share of LFP batteries globally will remain steady at about one-third over the next few years.

Solid state batteries are likely to emerge in 2024, though initially only for niche applications. If the technology can scale up, these batteries can become cost-competitive and have superior energy density and efficiency.

Battery players have to invest heavily on battery technology innovation to maintain their market competitiveness. China's Contemporary Amperex Technology Co. Ltd. (CATL) has been rolling out different battery technology to cater for the need of auto OEMs from the premium to low-end market.

One example is sodium-ion batteries; CATL is ramping up this type of battery, motivated by the cost benefits. Sodium is widely available and cheaper than lithium.

LG Energy Solution Ltd. (LG EnSol) is also undertaking R&D in lithium sulfur batteries and solid-state batteries as a next generation battery technology.

What's the capacity utilization rate of battery-cell producers? Are we seeing an overcapacity issue?

Capacity utilization is satisfactory for leading battery producers, given rising EV penetration and accelerating EV initiatives by automakers. However, some second-tier battery makers in China may have overcapacity, in our view.

We anticipate the global EV penetration rate will increase to 17%-22% by 2025 from 13% in 2022. Diversified customer bases and leading battery technology should keep order flows sufficient for the major battery producers.

By our estimates, the capacity utilization of major battery producers like CATL will remain at 80%-90% over the next two to three years. For Korea's LG EnSol, the rate will stay at 70%-80% over the period. These are satisfactory rates, in our assessment.

In addition, major battery producers are also expanding business scopes into energy storage. This segment should continue to see high growth over the next few years with governments and companies striving for long-term carbon neutral targets. According to Korean energy-data firm SNE Research, the global energy storage market expanded by 75% to 122 gigawatt hours in 2022 after growing 159% in 2021. This will likely help major battery producers mitigate potential over-capacity issue over the next few years.

That said, some second-tier battery producers in China will face overcapacity issues in light of intensifying market competition amid slowing growth in the domestic EV market. Some of them aggressively expanded, have a narrower customer reach and weaker technology. This could exacerbate their capacity issues over the next few years.

The EV battery supply chain is largely based in Asia. In the U.S., the Inflation Reduction Act addresses this dependency, with incentives to localize the supply chain. Europe may also roll out a version of the "IRA". How might government policies shape the battery industry in the next few years?

Asia's share of the global supply chain will fall. But it will still lead because its underlying market demand will remain the largest.

In the U.S., Korean battery suppliers in particular are making expansion plans to be eligible for benefits under the IRA.

  • LG EnSol, SK On (unrated), and Samsung SDI (unrated) have announced various joint-venture plans and sizable investments over the next two to three years to add capacity there.
  • LG EnSol will set up joint venture with General Motors Co., Stellantis N.V., Hyundai Motor Co., and Honda Motor Co. Ltd.
  • SK On will add capacity jointly with Ford and Hyundai, on top of additional capacity expansions in their own stand-alone capacity as well.
  • Production grant made available to battery makers producing in the U.S. will likely help the Korean battery makers' profitability as well as cash flow.

Meanwhile, the EU's proposed Critical Raw Materials Act (CRMA) will also add to diversification in the global supply chains of electric vehicles. The CRMA focuses on strategic raw material supply as well as on recycling and sustainability--15% of EU's annual consumption must be recycled by 2030.

We think Chinese companies like CATL will gradually expand their production exposure in Europe to localize their supply chain in the region to support EV initiatives of European OEMs. That said, the CRMA in Europe may pose some challenges in sourcing materials locally by 2030. The whole supply chain in Europe is evolving and industry players are trying to overcome the challenges over the next few years at least.

How much costlier are EVs than ICE vehicles--and when might we see parity?

By our ballpark estimates, the retail price of EVs is 20%-50% more than that for internal combustion engine (ICE) vehicles. In terms of production costs, a battery electric vehicle (BEV) (fully electric model) could be 50% or more expensive than an ICE, depending on the battery cost.

The battery is the most critical component of EVs--it accounts for 30%-50% of the total production cost. Electric motor and power control system each account for about 10%-15%.

Given the small volume (lack of economies of scale) and still-high battery cost, we don't anticipate cost parity between EV and ICE before the second part of the decade. Over the longer term, the cost for EVs will trend down on likely improving supply and technology advancements.

How do EV margins look and what's the scope for improvement?

They are generally low and have narrowed in 2022 due to price hikes in batteries. In China, the gross margin for some BEVs is about 5%, versus ballpark ICE margins of 15%-25%. Many producers are still struggling to break even at the EBITDA level, especially amid the current price war among domestic automakers.

Tesla's EBITDA margins were 20%-25% in 2020-2022, considerably higher than EV peers'. The company benefits from economies of scale and a high level of vertical integration. Yet, margins narrowed in the first quarter this year after price cuts and will likely hover around 18% for the full year.

Improvements depend on sales volume and battery prices--which in turn hinge on the ability of raw-material producers to economically meet supply. But this is an area of uncertainty, given the volatility and limited visibility over raw material prices.

What is the biggest downside risk to the auto sector for the next 12-18 months? What could go wrong?

Demand is the biggest immediate overhang. In China, we believe consumer sentiment is still cautious on the purchase of big-ticket items such as auto. Light vehicle sales in the first four months fell by 1% by volume, year on year.

Weaker demand and competitive pressures will hurt pricing. After supporting revenues amid stagnant volumes in the last two years, pricing is likely to weaken.

In Europe and the U.S., sales in the first quarter exceeded our expectations due to the ease of supply-side constraints (e.g., chips shortages) and release of pent-up demand. However, this momentum could falter in the second half as high selling prices and rate hikes undermine affordability.

Participants at our webinar agreed that demand is an overhang. Those participating in our live poll cited demand as the biggest concern for the auto sector (see chart 1). Most think that the supply-chain issues are fading as a problem. Nonetheless, we view visibility in supply chains as weak--which adds to risks and uncertainty.

Chart 2


Japanese auto OEMs are trailing in the EV race. Why is this and what are the credit implications?

Japanese carmakers are focused on the success of their hybrid vehicle models. They have been improving their hybrid models while also reducing costs for production, rather than prioritizing EV. This strategy has had some short-term benefits, because the Japanese OEMs aren't facing the material margin dilution risk or leverage pressure, relative to global peers that have invested more in BEV. Over the medium term, however, this strategy could hurt them. We think they may face a weakening market position in key markets--China, the U.S., and Europe.

Having said that, with rising EV adoption, all the major Japanese OEMs are intensifying their efforts to catch up on BEV. Toyota Motor Corp., for example, plans to introduce 10 new BEV models by 2026 with annual BEV sales of 1.5 million units. Honda and Nissan Motor Co. Ltd. also made similar EV development plans.

Will Chinese OEMs succeed in building a durable market position in Europe's EV market?

We anticipate that at some point Europe will at least consider limiting the access to incentive schemes for EVs not produced in the region. This is considering that Europe's annual production has already come down substantially since the pandemic, to 16 million light vehicles in 2022 from approximately 20 million in 2019.

The success of the Chinese in Europe depends on their capacity to set up services around the pure car sales, which likely requires local partnerships. The current political environment is not favorable to this development at the time we write. However, further down the road we cannot exclude agreements that include Chinese partners along the lines of Geely's involvement in Volvo Cars, in Renault and in Mercedes Benz. The turning point could be the localization of Chinese light vehicle production in Europe (BYD is seeking a location).

Will weakening economic conditions derail the momentum in EV penetration?

That's possible. Especially in markets such as Europe where penetration is mainly driven by environmental regulation, i.e., by "push" rather than "pull" factors. Europe's EV share dipped slightly year to March compared with 2022. In comparison, we see better momentum in China and in the U.S.

What are the key rating considerations for OEMs as they transition from ICE to EV products?

The EV transition could weigh on both the business strength and financial position of auto OEMs. This would test the ability of OEMs to:

  • roll out competitive EV models and secure market share amid intensifying competition;
  • ramp up volume, reduce costs and protect margins;
  • contain leverage, given the heavy R&D and capex requirements;
  • set up a smooth supply chain that would protect from potential bottlenecks.

Rising EV sales will intensify margin burdens for auto OEMs, given that EVs typically command lower margins than ICEs. This was especially so in 2022, when a jump in raw material costs hiked battery costs by 15%-30% year on year, depending on battery technology.

In our view, margin fluctuation amid electrification isn't necessarily a credit negative. We focus on an issuer's ability to maintain EBITDA margins in line with our established ranges over the next two to three years, depending on the rating level. For most issuers, that range is 6%-10%.

Some OEMs that are progressing rapidly in EV are experiencing margin and leverage pressure. So indeed, there are potential "fallen angels" (an issuer no longer rated as investment grade). Examples include Zhejiang Geely Holding Group Co. Ltd. and Geely Automobile Holdings Ltd. Some other OEMs were better able to protect margin such as Mercedes-Benz Group AG, BMW AG, Hyundai, and Kia Corp.

Rated companies cited in this report
Company Issuer credit rating

Geely Automobile Holdings Ltd.


Zhejiang Geely Holding Group Co. Ltd.


Toyota Motor Corp.


Honda Motor Co. Ltd.


Nissan Motor Co. Ltd.


Hyundai Motor Co.


Kia Corp.


Contemporary Amperex Technology Co. Ltd.


LG Energy Solution Ltd.


Volkswagen AG


Stellantis N.V.


Renault S.A.


Volvo Car AB


Mercedes-Benz Group AG




Tesla Inc.


General Motors Co.


Ford Motor Co.

Source: S&P Global Ratings

Writer: Cathy Holcombe

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Claire Yuan, Hong Kong + 852 2533 3542;
Vittoria Ferraris, Milan + 390272111207;
Stephen Chan, Hong Kong + 852 2532 8088;
Katsuyuki Nakai, Tokyo + 81 3 4550 8748;
JunHong Park, Hong Kong + 852 2533 3538;
Ker liang Chan, Singapore (65) 6216-1068;
Secondary Contacts:Hiroki Shibata, Tokyo + 81 3 4550 8437;
Danny Huang, Hong Kong + 852 2532 8078;
Jeremy Kim, Hong Kong +852 2532 8096;
Neel Gopalakrishnan, Singapore + 65-6239-6385;
Minh Hoang, Singapore + 65 6216 1130;

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