January 20 – The auto sector could be the blueprint for the energy transition. In recent years, car companies have been hugely disrupted by a combination of regulation, innovation and changing consumer appetite. The sector currently contributes a massive amount to the world’s total emissions (8%), and this needs to drop significantly over the next three decades. To do this, auto companies must move away from fossil-fuel based engines, and fast.

While there has been significant innovation in the sector, many companies face a huge challenge in achieving net zero, and the race is on for the large original equipment manufacturers (OEMs) to transition to electric cars. This shift would contribute significant savings to the industry’s carbon footprint, with battery electric vehicles (BEVs) shown to have 66% lower lifecycle GHG emissions than traditional internal combustion engines (ICEs).

All 29 companies included in our recently published report on the sector appear to have recognised this need, and have announced targets for low- or zero-emission vehicles (ZEV) in the last two years. However, the quality and ambition of these targets varies considerably.

What is clear from our research is that some of the companies with the greatest level of ambition are currently behind in terms of ZEV sales. Stellantis, for example, has yet to develop ZEVs, yet the company has an ambition to have all passenger car sales fully electric in Europe by 2030. Similarly, Ford has ambitious plans to achieve 50% of global sales from BEVs by 2030, rising to 100% by 2040 – a huge step up from the 3% achieved in 2021. Even the leading incumbent companies, such as Volkswagen and General Motors, currently have less than 10% of total sales from BEVs. Ambitions are currently not being realised in the actual operations, product offering and sales of many of these businesses, and it is clear that many have a long way to go to electrify their fleets.

Key to meeting ambitious targets will be securing access to batteries, which are at the heart of the electric vehicle. But battery materials are constrained and the supply chain is highly concentrated, with car companies scrambling to find partnerships so they can deliver new electric models. Companies that have already disrupted the auto industry with pure-play electric models, such as Tesla and the Chinese company BYD, have a significant competitive advantage as they have existing supply chain partnerships with battery materials providers, and – in the case of BYD – even produce these materials themselves.

Evaporation pools for the extraction of lithium for batteries at the Salar de Uyuni, Bolivia March 26, 2022. REUTERS/Claudia Morales

Alongside BYD, the other Chinese firms we looked at dominate the supply chain for battery materials and manufacturing, with emerging companies such as GAC Group, Changan Automobile and SAIC Motor all well-positioned to grow ZEV sales based on their supply chain resilience.

Traditional carmakers are addressing these challenges by tying up supplies further up the chain and forming partnerships with mining companies. This may indeed be one model to secure supply of the critical metals for lithium-ion batteries. But with battery technologies evolving fast, looking at alternative technologies could prove equally fruitful. Sodium-based batteries, for example, could provide a solution given sodium is 1,000 times more abundant than lithium.

Chinese battery suppliers such as CATL, HiNa and many others are exploring this option, with industrial-scale projects being put into place. However, innovation in other battery chemistries could also offer auto companies an opportunity to develop safer, cheaper, more energy-dense battery technologies that offer scope for faster charging.

As well as a challenging supply chain backdrop, car companies continue to face tightening regulation. This is particularly evident in the U.S., where companies have been slow to reduce emissions, and more stringent regulation is coming into effect. To meet U.S. fleet emissions targets for 2026, we found that companies with exposure to the U.S. market will need to reduce emissions from passenger vehicles by nearly 9% annually on average between 2020 and 2026. This is a massive step up from the 0.9% annual reduction achieved between 2014 and 2020.

A general view of Hybrit’s pilot plant producing fossil-free steel in Lulea, Sweden, for SSAB, which is being sourced by Volvo. Vattenfall/Asa Backlin/Handout via REUTERS

While the tightening regulatory landscape should offer opportunities for Chinese auto companies, which are well-positioned to scale their current EV models, other regulations, including the Inflation Reduction Act, may act as a barrier to imports from countries, including China, which are not among the 20 with which the U.S. has a free trade agreement.

Against this complex backdrop, a number of new business models are likely to emerge both within the sector and in the associated value chain. Equally, partnership models will need to be developed with the mining and chemical companies upon which the auto sector relies.

Indeed, how the car companies deploy EVs will have knock-on impacts in other sectors. To see the full benefits of electrification of cars, the power needs to come from clean fuels such as renewables. Meanwhile, looking across the full lifecycle emissions of a “zero-carbon” car will put the spotlight on the materials used across the value chain. This includes highly carbon-intensive steel. Offset agreements struck by Volvo with the Swedish steel company SSAB for fossil-free steel illustrates the potential for the auto industry to act as a catalyst to drive a shift to greener steel production.

There may also be an advantage for incumbent companies to split their EV businesses off from their internal combustion engine offerings. This is already happening among utilities, which separate their fossil fuel power generation from new renewable assets, and we are starting to see shifts among auto companies, too. For example, Renault has announced plans to list its Electric Unit Ampere in the first half of 2023 – likely in recognition that the EV and ICE businesses are different and will require different structures to leverage capital and partnerships.

Decarbonisation of the auto sector will continue to see ongoing disruption and there will of course be winners and losers. Among traditional carmakers, we found that Japanese companies, which were early adopters of hybrid technology but have been slow to roll out fully electric models, are currently trailing their counterparts. Lapping them are Chinese firms, which appear best-positioned to keep their pole position, both at home and internationally.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Sustainable Business Review, a part of Reuters Professional, is owned by Thomson Reuters and operates independently of Reuters News.


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