Global demand in electric cars is expected to hit new highs in 2018, as China, India, and Norway take the lead with new government initiatives. Amid the fanfare, the risks of the electric vehicle revolution are too often overlooked: reputational issues in the closely-linked extractive sector, the scarcity of essential raw materials, underestimated environmental impact, and infrastructure challenges.
2017 was a bad year for petrol and diesel cars. A number of countries have already enacted a ban, or are expected to phase out environmentally harmful vehicles. Investment in clean automotive technology has been rising rapidly and will continue to do so.
Almost 90% of that growth will originate in non-OECD countries. India plans to sell only electric cars by 2030 and in China, as much as 20% of the projected 35 million annual vehicle sales should be made up of alternative fuel cars in 2025. Comparatively, world-leading economies, including Australia, Germany, Japan or Mexico, lag behind.
The Electric Vehicle Boom: From Zero to Sixty
The Chinese government promises to invest $5 billion in new car-charging points allowing for more than 5 million alternative fuel cars to hit the roads by 2020. In comparison to this, the regulation efforts by the European Union appear small in scale accounting for a total investment up to €800 million into new car-charging points until 2030. In contrast, single member states, such as Scotland, England, and France, have set forth ambitious plans to completely phase out petrol and diesel cars before 2035 and 2040, respectively.
Norway has the highest per capita number of all-electric cars in the world and 50% of all new road legal cars are either electric or hybrid. Norway has a plug-in concentration of almost 22 electric vehicles per 1,000 people (July 2016), a record number of more than 7,300 nationwide charging points (January 2017) and a 32% overall electric car market share. New electric vehicle sales hit an unprecedented record in December 2017, at 52% of all cars being sold.
Private sector-driven growth is currently the key factor in pushing the overall alternative fuel car market. Daimler and Volkswagen announced they would scale up expenditure in new clean technologies: Volkswagen alone pledged an $84 billion investment. British inventor, James Dyson, invested up to €3 billion in building a new electric car model. Market leader Tesla aims to produce 500,000 electric vehicles a year. Volvo wants to only sell electric or hybrid vehicles from 2019 onwards. And General Motors has set out to launch 20 electric car models by 2023. All in all, nearly every major automotive manufacturer has made a substantial corporate strategy shift making electric vehicles the core of its future business.
This electromobility revolution is universally hailed as a positive development in the history of technology. However, it’s worth keeping in mind some of the attendant risks: the environmental footprint of electric cars, global competition for scarce natural resources, and the growing power of certain countries and industry-leading companies to dictate the rules of the game.
How the Extractive and Commodity Trading Industry Operates: New Challenges Ahead
The extractive and commodity trading industry cherish secrecy and behind-closed-doors practices. However, the general public has taken more notice of the industry, its business model as well as global network in recent years – also due to the work of NGOs such as Global Witness and leaks stemming from both the Panama and Paradise Papers. Surprisingly, in spite of their tremendous market power and annual turnover, companies of the industry are still widely unknown.
Pushing ahead the agenda of phasing out petrol and diesel cars will also mean doing more business with companies that often have a dubious reputation in terms of upholding environmental and human and labor rights standards. Public pressure and market-related standardisation, as well as regulation, have appreciably increased over time, also thanks to the Extractive Industries Transparency Initiative (EITI), the Initiative for Responsible Mining Assurance (IRMA) and individual corporate sustainability and governance efforts by the companies themselves, but as the Panama and Paradise Papers revelations have shown, multiple industry-leading companies still pursue questionable business practices including making secret offshore deals and fostering excessive corruption.
EITI has had a huge impact since its launch in 2002. However, some of the most important countries related to natural resource extraction such as Australia, Brazil, and the United States, are not members of the governance initiative – in contrast to market giants of the extractive and commodity trading industry that explicitly endorse it, including BHP Billiton, Glencore, Trafigura, and Vale. Other key players such as Gunvor Group, Mercuria and Vitol Group are not part of EITI. Also, IRMA’s sphere of influence as another voluntary standard scheme is still limited.
Therefore, governments and automotive companies seeking new alliances in their pursuit of natural resources run a higher risk of exposing themselves to greater reputational and, thus, financial damages themselves when doing business with companies that still often lack business transparency, use corruption to their own ends and have repeatedly violated human and labor rights as well environmental standards in the past. This puts additional pressure on automotive manufacturers, in particular, to ensure a sustainable supply chain from start to finish – which can be difficult to prove as raw materials extraction and supply is not controlled by them and often centralized in a few hands. More importantly, without diverse sourcing options, the possibility of supply restriction becomes more likely.
The Scarcity of Relevant Natural Resources: How Real Is It?
The most important factor that will make the transition from traditional to alternative fuel cars a success is down to the availability of natural resources that are essential for building electric cars. However, the global market growth in electric vehicles is expected to exacerbate the race for scarce natural resources at the expense of natural reserves, environmental standards, and human rights.
Shortages in the minerals supply chain pose a key risk that could put a brake on the technology boom earlier than thought, leaving multiple countries with a strong traditional automotive industry, such as Germany, exposed to a competitive disadvantage by potentially losing many jobs during a protracted supply crisis. This would especially be the case if the global automotive industry’s shift away from diesel and petrol cars is less diversified and therefore irreversible. A new global economic recession, as well as, environmental disasters are also realistic factors that would have a direct impact on the overall growth in demand for minerals, metals and rare earth.
Tesla has experienced unexpected supply shortages caused by multiple business partners many times, which has forced the company to postpone the launch of some of its latest car models. Supply dependencies can, therefore, generate direct and severe financial losses that automotive manufacturers have to be prepared for.
Multiple countries with the world’s largest mineral resources and rare earth deposits are non-democratic, hybrid regimes with authoritarian elements including the Democratic Republic of Congo, China and, Bolivia. Due to their near-monopoly status in certain mineral, metal, and rare earth segments, these countries can solely control supply and, thus, impact upon the market price. Companies of the extractive and commodity trading industry often take advantage of these market structures and seek alliances with governments to foster their own business. If supply is restricted, this will directly affect import-dependent countries such as Germany, the UK or France. How problematic things can become has been exemplified by China’s rare earth policy or Indonesia’s nickel export restrictions, leading to soaring commodity prices over the past few years.
Taking a closer look at the market concentration of production relevant natural resources, it becomes clear that only a few players (countries with critical deposits and private and state mining companies alike) dominate the respective market segments. In terms of cobalt, the Democratic Republic of Congo accounts for 65% of the global supply, in terms of graphite China accounts for 65% and in terms of the nickel Indonesia accounts for more than 50%. Manganese, another critical metal, is mined predominantly in 6 countries (South Africa is by far the largest supplier followed by China, Australia, Gabon, Brazil, and India) accounting for a nearly 90% market share.
With regard to lithium-only four countries (Argentina, Australia, Chile, and China) combined generate nearly 80% of the global supply. Other key players in the lithium game are China and Zimbabwe. Compounding the problem, on the extractive side, lithium production is still in the hands of a few big multinational corporations, mainly from Argentina, Australia, Canada, Chile, China and the United States. New players are joining the market as demand rises, which in principle may lead to enhanced competition. But this brings its own risks, insofar as the smaller mining companies are less known and may take advantage of business opportunities where overall regulation is poor.
All in all, bottlenecks in supply pose a realistic and lasting danger as global demand in multiple minerals, metals, and rare earth segments are increasing at a higher rate vis-a-vis mineral extraction output. More importantly, the availability of sufficient quantities of some of these minerals and metals for future market demands are highly disputed.
Governments and the global automotive industry need to tap various mineral, metal and rare earth supply sources to enable a sustainable supply chain and reduce dependency on corrupt regimes and companies with a bad reputation, but the awareness of this need is growing slowly if at all, at least at the political level – as set out in the Raw Materials Initiative of the European Union, for instance.
Electric Vehicles Are Not as Green as You Might Think
First, many electric car components have little or no end-of-life recycling value. This is especially true for the lithium-ion batteries. Second, only a small percentage of power grids providing electricity to charge one’s car is “green” in terms of incorporating mostly a mix of renewable energies. Third, natural resources such as nickel and cobalt generate high levels of air, soil and water pollution when being mined and smelted.
This means that alternative fuel cars create pollution and carbon emissions in other ways by shifting them to those countries where the production relevant minerals, metals and rare earth are extracted. This local mineral extraction is mostly only made possible through high levels of traditional energy consumption (e.g. coal, etc.) and the use of toxic chemicals.
Against this backdrop, customers expect an electric car to be environmentally friendly throughout the whole production lifecycle by also incorporating ethically sourced natural resources. How difficult it is to achieve this target and what a failure to do so could mean in terms of business and sales performance as well as brand value and reputation, Tesla and other car manufacturers already know.
As media and civil society attention and scrutiny have massively increased in recent years with regard to the global extractive and commodity trading industry as well as (potential) electric car buyers have become more engaged through social media and are now better equipped to publicly “shame” a company than ever before, the stakes for automotive manufacturers have been raised significantly.
Outlook: Lack of Infrastructure Investment Is an Obstacle
Much needs to be done to kick off the electromobility revolution. In terms of infrastructure, governments run the risk of falling behind market production leaving automotive manufacturers in the cold. According to Morgan Stanley, an overall global $2.7 trillion infrastructure investment is needed in the near future to make electric cars a lasting success over the next two decades.
The areas of required investment are not only down to local (speedloader) car-charging points, but also include power grid expansion and subsidies to guarantee nationwide green energy, grid stability and lower market prices for new car purchases.
Manufacturers also have to significantly improve battery performances and chemistry to increase electric car ranges, massively enhance the batteries’ reuse and recycling as well as make new technologies more attractive for end users – despite high productions costs.
Presently, not a single country meets the much-needed capital expenditure to keep pace with its aggressive electromobility targets – not even Norway, the global market leader. Any automotive company with ambitious targets will be at risk without the necessary infrastructure at its disposal in the likely event that the gap in investment will not be resolved.