Supply Chain Challenges to Curtail Electric Vehicle Production over the Next Decade

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By Alexander McQueen | 3Q 2022 | IN-6625

As demand for Electric Vehicles (EVs) continues to increase, the supply of components necessary to manufacture these vehicles is gradually declining. Shortages of semiconductor chips and graphite will impact the production of EVs, with disruption potentially stretching throughout the next decade.

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Increasing Demand for EVs


Consumers around the globe are buying Electric Vehicles (EVs) at a record pace, despite increasing prices and long delivery times. According to the Global EV Outlook, sales of EVs doubled in 2021 from the previous year to a new record of 6.6 million. In the United States, second quarter sales reached 196,788, growing 66.4% Year-over-Year (YoY).

However, persistent supply chain disruptions and shortages of various necessary components, as we looked at in a post earlier this year, are pushing the market toward a tipping point where soaring EV demand will outpace supply. Chip shortages continue to plague EV manufacturers, as well as the declining supply of graphite, a primary component in EV production. The Benchmark Mineral Intelligence warns that these shortages will only grow throughout the next decade and will create problems in the transition away from polluting Internal Combustion Engine (ICE) vehicles.

Component Scarcity Looming for Manufacturers


Chip shortages have heavily impacted Tesla’s production with Chief Executive Officer (CEO) Elon Musk citing this as a main reason that Tesla would not be releasing any new vehicles in 2022. Shortages of semiconductors is a more serious issue for EV manufacturers, as they need at least twice the number of chips as ICE vehicles. According to the International Trade Commission, the average Hybrid Electric Vehicle (HEV) requires 3,500 semiconductors. Consequently, Tesla has been forced to rewrite its software to make the most of the limited supply. In some cases, it has redeveloped its software so that one chip can serve dual functions in an attempt to reduce overall demand.

While chip supply has been increasing after severe scarcity throughout the last couple of years, EV automakers, such as Rivian, have reported that they struggle to compete with established Original Equipment Manufacturers (OEMs) for semiconductors. Despite attracting high-profile clients like Amazon and raising US$11 billion in Venture Capital (VC), they have been unable to scale production. As of May this year, only 5,000 of the 90,000 Rivian trucks ordered by customers since September 2021 have been manufactured. EV startups like Rivian are typically last in line to receive components from suppliers.

The demand for other battery-grade materials used in EV production has reached record levels within the last year and continues to increase. For example, the supply of graphite, a primary component used to manufacture the anodes in a lithium-ion battery, is expected to reach a deficit of more than 20,000 tons this year. The Benchmark Mineral Intelligence expects that this shortage will only increase over the next 10 years. Graphite mines are situated in only a few places around the world, such as China, which produced 79% of the world’s graphite last year. China is also responsible for the downstream processing to make graphite usable in EV batteries. This makes global EV manufacturers reliant on limited sources and vulnerable to supply shocks. The cost of high-grade graphite has also increased from US$530 to US$825 per ton in June 2022.

Need for End-to-End Supply Chain Resilience


EV manufacturers around the world will need to be tactical in their production strategies and sourcing going forward, as the constant supply of critical materials is not guaranteed. Smaller automakers should look to diversify their sourcing options, while larger organizations may seek to take supply into their own hands by investing in lithium refining and battery production. Tesla also secured a deal last year with Australian mine operator, Syrah Resources, to purchase graphite from a site in Mozambique, with the goal of reducing its reliance on China. Whenever possible, companies should also look to integrate more functionality into fewer chips.

Still, the limited supply of components will create difficulties for EV manufacturers trying to keep up with demand. If supply cannot meet growing demand, the shortages will continue to create bottlenecks in production, restricting the transition to EVs. The solution is not a quick fix and will likely require billions of dollars in investment to boost the supply of necessary components.