In my last article on electric vehicles (EVs) and climate change, I outlined the relationship between EVs and climate change. Yet, there is another important aspect of the production of EVs that needs to be considered - its relationship with geopolitics. Admittedly, this is an extremely complicated topic, so to do it justice, I will pick two particular points of geopolitical tension to analyze.
There are many reasons why EVs are considered geopolitically significant - three particularly stand out. Firstly, countries with advanced EV sectors and markets are considered leaders in the fight against climate change, oil dependence, and the move towards sustainable transportation. The second refers to the materials that are used to make some integral parts of EVs, both in terms of iron in EV batteries, as well as rare earth material in motors. I will consider these two aspects in closer detail. There are two important points to raise: dominance and de-risking.
Fight for leadership
The two biggest players in the geopolitical game for dominance of the EV market are the U.S. and China. One could say that the tension in the EV sector between the two countries is just an extension of the already existing deterioration of good trade relations and the heightening of competition.
On dominance:
Ever since China rose to the occasion of economic development and geopolitical status and became the second-largest economy in the world, competition with the U.S. has diffused in all sectors possible. One of these sectors is the fight for energy transition. At the heart of this aspect of the competition, is China’s status as a developing or developed country. As China developed industrially much later than the West, it has pushed for Western countries “to pay their debts,” and developing countries (which China claims it is), to be given more flexibility when paying their share. All this has led to China perceiving “the energy transition as an opportunity to lead in technologies and products not currently dominated by the West”.
The energy transition, and therefore EVs have been at the center of this new Cold War-style competition between superpowers. With China’s tradition of low manufacturing and labor costs, and government subsidies, (although it has recently departed from this), China’s EVs are considerably cheaper, fueling this competition further. So, the first aspect of the geopolitics of EVs is the struggle over who will dominate the global market of the product.
Materials
On de-risking:
It is important to note, that because of its geopolitical and environmental significance, the EV market is heavily influenced by government policies. Like the semiconductor industry, whilst each country has its individual players (companies) that produce EVs, governments massively influence the EV market, and therefore policies guided by the competition outlined above change the dynamics of both domestic and global markets.
The most contested aspect of the EV geopolitical discourse is the supply chain and materials used for batteries and motors.
As explained in my last article, most EV batteries are made of lithium. Lithium is a metal that is found in countries primarily in South America like Argentina, Chile and Bolivia. However, this metal needs to be processed in order to be used for batteries, and the country that dominates this process is China. It is estimated that “China produces 60 per cent of the world’s lithium products and 75 per cent of all lithium-ion batteries.” Moreover, many EV models, particularly earlier ones, used rare earth magnets for motors and systems like heating. Today, a large number of major EV companies have reduced or altogether eliminated their use of rare earth materials. So whilst this was an important aspect of the geopolitical debate, as China once again has the largest reserves of rare earths, and should therefore be mentioned, this article will focus on the issue of batteries, which is the most prominent at the moment.
On batteries, as mentioned, China dominates the market. In fact, the world’s largest manufacturer of EV batteries is a Chinese company called Contemporary Amperex Technology Co Limited (CATL). CATL has been growing steadily and recently recorded very strong earnings for 2023. One would think that this is a great trend for the entire global EV industry, but there is one key concept that stops this from being true, and that is de-risking. De-risking is a widely discussed trend in which major global powers (and more specifically financial institutions) are seeking to limit business with clients that could pose (geopolitical) ‘risk.’ This has taken the form of ‘decoupling,’ particularly from China, in an effort to establish self-reliance in manufacturing and production. Given China’s dominance in one of the most integral aspects of EV production (batteries), companies all over the world are seeking to move away from their reliance on China. Two Japanese car manufacturing giants have successfully joined forces in an attempt to “try to catch up with Chinese competitors.”
Another way in which geopolitics are shaping the EV industry and vice versa in the light of decoupling, is the US-enacted regulations preventing EV drivers from being eligible for tax benefits if key parts of their vehicles are made in China. This prompted China to file a complaint in the WTO for “discriminatory requirements for electric vehicle subsidies.” It will be interesting to see how this will unfold. For now, this acts as a prominent example for how an environmentally critical sector for the energy transition like electric vehicles is structured by geopolitical tensions, strategies and government policies.