Since 2010, the average price of a lithium-ion (Li-ion) EV battery pack has fallen from $1,200 per kilowatt-hour (kWh) to just $132/kWh in 2021. Inside each EV battery pack are multiple interconnected modules made up of tens to hundreds of rechargeable Li-ion cells. Contact online >>
Since 2010, the average price of a lithium-ion (Li-ion) EV battery pack has fallen from $1,200 per kilowatt-hour (kWh) to just $132/kWh in 2021. Inside each EV battery pack are multiple interconnected modules made up of tens to hundreds of rechargeable Li-ion cells.
Lithium-ion batteries (LiBs) are pivotal in the shift towards electric mobility, having seen an 85 % reduction in production costs over the past decade. However, achieving even more significant cost reductions is vital to making battery electric vehicles (BEVs) widespread and competitive with internal combustion engine vehicles (ICEVs).
2023 modeled cost of a 300-mile EV battery pack: $118/kWhRated ($139/kWhUseable); Cell – $100/kWhRated ($118/kWhUseable) The current cost estimate of $118 per kilowatt-hour of rated energy ($139/kWhUseable), is derived using the peer reviewed and publicly available BatPaC battery cost modeling software developed at Argonne National Laboratory.
Batteries are key for electrification –EV battery pack cost ca. 130 USD/kWh, depending on technology/design, location, and material prices [Jul 2021 figures] Cost breakdown of pack –Prismatic NCM 811 1) [USD/kWh]
The speed of battery electric vehicle (BEV) uptake—while still not categorically breakneck—is enough to render it one of the fastest-growing segments in the automotive industry.1Kersten Heineke, Philipp Kampshoff, and Timo Möller, "Spotlight on mobility trends," McKinsey, March 12, 2024. Our projections show more than 200 new battery cell factories will be built by 2030 to keep up with rising demand. Overall, the market for cell components—comprising cathodes and anodes, separators, electrolytes, and cell packaging—is expected to grow by 19 percent per annum until 2030, reaching more than $250 billion.
This rapid growth opens a window of opportunity for cell component suppliers, start-ups, and new entrants, particularly in Europe and North America. Across both regions, industry and governments alike are strongly inclined to nearshore—or bring supply closer to home—in an effort to derisk supply chains and secure control over intellectual property. Despite this opportunity, however, current localized production would need to increase significantly to ensure supply meets demand by 2030.
This article is a collaborative effort by Jakob Fleischmann, Eugen Hildebrandt, Konstantin Huneke, Raphael Rettig, and Patrick Scott, representing views from McKinsey''s Automotive & Assembly Practice and McKinsey''s Battery Accelerator Team.
Suppliers in the battery component sector thus face challenges regarding commercial market entry, the necessity for substantial funding, and a rapidly evolving technological landscape. Moreover, local suppliers face a highly competitive market dominated by incumbent suppliers, mostly in Asia. And environmental and regulatory factors pose risks that could disrupt production, increase costs, and create negative perceptions of the sector.
Cell component companies that seize the opportunity to meet the demand for local supply will place bets strategically from the start, build a backbone for success, and efficiently deliver on capacity additions.
Today, Asia leads the cell component market in annual production, measured in metric kilotons. The region produces 96 and 95 percent of cathode and anode active materials, respectively, and 90 and 95 percent of electrolyte and separator material, respectively (see sidebar, "An overview of the battery industry in Asia"). By contrast, Europe and North America have modest presences in the sector.
The battery industry has deep roots in Asia, particularly in China, Japan, and South Korea. In 1991, Sony introduced the first commercial lithium-ion battery in Japan. Japan and South Korea furthered technological development, laying the groundwork for rapid growth of the battery industry in Asia. In turn, China made substantial investments in the battery industry, catapulting it to global leadership. Today, China accounts for a dominant share of lithium-ion battery production.
According to the typical cost breakdown of a conventional lithium-ion battery cell system, cathode is the largest category, at approximately 40 percent (Exhibit 1). In most cases, the active material in cathodes is a transition metal (such as nickel, cobalt, manganese, or aluminum), oxide (NMC),2Lithium nickel manganese cobalt oxide. or lithium iron phosphate (LFP). Cathodes also contain lithium ions, which are then stored during charge in the graphite anode material.
Decarbonizing battery component production could be a competitive advantage in appealing to OEM buyers and is necessary to meet sustainability goals and regulations. Anode and cathode production represents approximately 33 percent of total life cycle CO2 emissions.
Together, four battery cell components—cathodes and anodes, separators, electrolytes, and cell packaging—are the main drivers for cell performance, particularly as it relates to energy density, cycle life, charging rate, and safety. Europe accounts for only 3 percent of cathode material production and 2 percent of anode production, while North America produces less than 1 percent of cathode active material and 5 percent of anode material. Just 7 percent of electrolyte production and 4 percent of separator production is housed in both regions combined. This considerable gap between demand for cell components and local supply signals growth opportunities in the battery component market.
The global revenue pool of the core cell components is expected to continue growing by around 17 percent a year through 2030 (Exhibit 2). Future technological developments (new anode materials and solid-state electrolytes) will only increase the importance of battery components.
In the battery manufacturing value chain, EBITDA margins vary by stage (Exhibit 3). Raw materials make up the largest category (20 to 40 percent), followed by cell components (10 to 30 percent), cell production (approximately 5 to 10 percent), battery packing and integration (5 to 10 percent), and recycling (5 to 15 percent). The relatively higher margins for cell components can be attributed to their differentiation potential—advanced or unique components can command higher prices—as well as their small share in the overall cost of an EV. These dynamics can enable higher margins for cell component manufacturers without significantly affecting the final price for consumers.
By 2030, Europe and North America are each expected to house approximately 20 percent of global battery cell production. In contrast, both regions combined are forecast to hold anywhere from 5 to 10 percent of global cell component capacity, lagging further behind incumbents in Asia—specifically in separator and electrolyte components (Exhibit 4). As a result of this supply shortage, the regions will likely need to import locally produced core cell components.
As more gigafactories are built outside of Asia, the focus of the global market is expected to become regional.3For more, see "Unlocking the growth opportunity in battery manufacturing equipment," McKinsey, May 3, 2022. This shift is driven by new legislation that provides incentives for the localization of battery cell and component production—including subsidies that are part of the US Inflation Reduction Act (IRA) and the newly established EU Green Deal Industrial Plan (GDIP)—as well as the desire for local partnerships and codevelopment between cell component suppliers and cell producers.
The increased need for supply to Europe and North America has triggered some Asia-based incumbents to expand their production footprints in these regions (Exhibit 5). Since 2021, cathode and electrolyte manufacturing are leading this trend, with ten to 20 new footprint announcements. These components are particularly well suited to local sourcing given their sensitivity to moisture and contamination.
Going forward, this dynamic is expected to accelerate, with four leading supplier archetypes likely to shape the European and North American markets: start-ups, upstream companies, downstream companies, and established companies from other industries (Exhibit 6).
Established cell component manufacturers will likely venture into new territories across regions and products, building on preexisting local partnerships to manage regional complexities, such as construction permitting. An electrolyte manufacturer in China, for instance, recently partnered with a chemical supplier in Europe, leveraging an existing facility to produce its electrolytes. Beyond regional moves, automotive OEMs and cell manufacturers are also expected to continue trending toward vertical integration, from raw materials to recycling.
Start-ups, meanwhile, will continue to be pivotal in shaping the components landscape and industrializing cutting-edge technologies. Trailblazers have already reached the scale-up stage and are actively deploying advanced anode technologies with OEMs.
Notable challenges in the battery cell component industry in Europe and North America include overcoming market entry hurdles, securing substantial funding to set up, ensuring capital excellence and strategic talent acquisition, adapting to new legislation promoting cell component localization, and staying ahead of imminent technological advancements.
These insights were developed by the McKinsey Center for Future Mobility (MCFM). Since 2011, MCFM has worked with stakeholders across the mobility ecosystem by providing independent and integrated evidence about possible future-mobility scenarios. With our unique, bottom-up modeling approach, our insights enable an end-to-end analytics journey through the future of mobility—from consumer needs to a modal mix across urban and rural areas, sales, value pools, and life cycle sustainability. Contact us if you are interested in getting full access to our market insights via the McKinsey Mobility Insights Portal.
Aspiring entrants to the battery component market face several formidable barriers to entry, the most notable of which are the lengthy timelines required for battery components to be tested, validated, and approved before securing high-volume orders. A strategic, phased approach may involve first validating the new entrant''s product performance and reliability with prospective offtakers. Once the product has gained traction with potential customers, the real test begins: moving from pilot to factory scale. Companies can invest in building a factory up front, even before securing high-volume orders, knowing that the facility itself will undergo a qualification period that often lasts a year.
Entrants will also need to contend with lock-in effects and their impact on product properties. Component changes can significantly affect the product performance and production process, resulting in risks to quality and reliability when changing suppliers.
At the same time, incumbents continue to scale across regions. Beyond proving that they can offer a compelling and reliable product, companies will likely need to compete with aggressive commercial packages from incumbents. In our experience, many new companies haven''t optimized the bill of material or are not yet certain in their ability to produce at low cost in new facilities. In these cases, innovative commercial approaches can help players persevere.
Profitable growth will require battery materials and component suppliers—whether they are disruptors or established companies—to allocate capital for new processing facilities prudently while navigating the challenges of uncertain battery chemistries.
Localizing the battery supply chain in Europe and North America will likely require substantial funding. According to our analysis, the components supply chain for cathode and anode active materials, electrolytes, and separators is expected to be worth more than $35 billion annually in North America, but it will require investments of approximately $25 billion to scale. Potential funding sources include regulators, automotive OEMs, cell manufacturers, and private investors.
In the United States, the Department of Energy has earmarked up to $3.5 billion for battery manufacturing, which includes funding for new, retrofitted, and expanded facilities for various components of battery-grade materials and manufacturing processes.4"Biden-Harris administration announces $3.5 billion to strengthen domestic battery manufacturing," US Department of Energy, November 15, 2023. This funding is part of a larger $6 billion package aimed at accelerating decarbonization projects in energy-intensive industries.5"Biden-Harris administration announces $6 billion to drastically reduce industrial emissions and create healthier communities," US Department of Energy, March 8, 2023.
At the same time, the European Commission has established a dedicated instrument under the Innovation Fund to support the battery value chain, allocating up to €3 billion.6"Commission invests €3 billion in innovative clean tech projects to deliver on REPowerEU and accelerate Europe's energy independence from Russian fossil fuels," European Commission, November 3, 2022. This funding is targeted at enhancing the middle of the battery value chain, particularly cell production, and could stimulate investments in other parts of the value chain.
Increasing the talent base will be a crucial element of growth—but labor shortages for critical trades in the United States could increase risks around time and cost. In fact, cost overruns on the average project can approach $1.2 billion—79 percent of the initial budget—and delays can run from six months to two years.7Steffen Fuchs, Homayoun Hatami, Tip Huizenga, and Christoph Schmitz, "Capital investment is about to surge: Are your operations ready?," McKinsey, April 7, 2022. To scale accordingly, manufacturers can adopt robust sourcing strategies when hiring and effective optimization practices to manage processes.
According to McKinsey''s Global Energy Perspective 2023, EVs are three to four times more energy efficient than internal-combustion-engine vehicles and will therefore play a critical role in lowering emissions.8Global Energy Perspective 2023, McKinsey, October 18, 2023. However, battery production is not free of emissions and is subject to government regulations that vary by jurisdiction. For example, suppliers of cathode active materials in the United States will need to closely manage their nickel emissions to comply with air quality regulations. And global manufacturers of cathode active materials will need to adapt designs to be compliant with local regulations if they wish to produce in North America.
These insights were developed by McKinsey''s Battery Accelerator Team, which helps companies across the battery value chain address the key challenges in the scale-up of the global battery industry (including shortages of raw materials, cell manufacturing equipment performance, and skilled labor) as well as address sustainability concerns (including energy efficiency and recycling and circularity initiatives). Our team consists of more than 200 experts across Asia–Pacific, Europe, and North America, including senior experts from materials and components sourcing, cell R&D, gigafactory construction and industrialization, and other relevant topics. Contact us to learn more about our capabilities and impact across the battery value chain, from raw materials to recycling.
The IRA in the United States and the GDIP in the European Union are expected to enhance local investment in the battery value chain. At the same time, they reflect those regions'' environmental regulations, which are more rigorous than those in Asia. In this regulatory environment, leveraging renewable energy sources offers a significant advantage and has already been adopted by many European suppliers.
Battery chemistries are expected to evolve considerably leading up to 2030, which could require North American and European battery component players to invest in targeted technology and research. In a competitive market with limited resources, these investments could have immediate cash and profitability effects as well as long-term viability risks if they fail to scale.
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