To say 2021 was a busy year would be an understatement. So, it is timely that I return to writing, not to reflect on the past year, but rather to contemplate the trends of the new year.
We live in a unique epoch. The tide to electrify everything has turned. Government policies aimed to eliminate emissions are global and increasingly biting. Electrification of vehicles is a real economic tsunami. Classic global vehicle manufacturers are no longer paying lip service. They are launching new EV models by record numbers; models that end users are willing to buy from manufacturers other than Tesla. Commercial vehicle manufacturers including buses and trucks are ramping up their transition to electrification. Global Tier-1 suppliers are rushing to catch up after sleeping at the wheel and ignoring electrification in the past decade. So it feels like a slam dunk. What is there to predict for 2022?
Behind this transformation lie a number of geopolitical, economic and technological macro forces that will shape this transition, and determine the winners (and consequently the losers).
The geopolitical divorce between the USA and China, and to some lesser extent between western economies and China, accelerates. China’s policies for economic and technologic independence are well publicized. The United States has also made it clear that it will remain energy independent, with more policies to raise the export barriers on several technologies. Therein lies the conflict. With electricity, there is no physical energy traversing oceans the way oil tankers did. Instead, it is the components, systems and technologies critical to renewable energy and its storage that become the new battlefront. The United States and Europe are both investing in building new battery factories for the future. The supply chain of raw materials critical to batteries is investing in increased resilience from Chinese-controlled mines in Africa.
In the face of geopolitical tensions, the economic wheels of electrification are accelerating. Battery prices are falling even with rising raw material prices. Investors continue to pour billions into battery and EV startups and SPACs, even when many of these companies aren’t ready yet to be publicly traded entities. Investments in charging infrastructure are rising. Local municipalities, states and the US federal government are heavily investing in grid and charging infrastructure.
Auto companies have committed to a vast expansion in their EV offerings by 2025. Several global Tier-1 suppliers have outlined to Wall Street their transformation strategies. Increasingly affordable EV models are making their way to showrooms. The expected tidal wave of electrified pick-up trucks will extend the appeal of EVs to vast geographies in the United States that favor larger vehicles.
Against the backdrop of government policies, economic growth and easy access to capital, the tech sector continues to witness an influx of new ideas, willing entrepreneurs and talent escaping dying industries. But these technological advances are shaped by their immediate geographical and economic environment. Witness as an example the emphasis in China on LFP-based batteries, while the United States and Europe invest in next-generation solid-state batteries (SSB). The race to scale SSB into manufacturing is real. Companies with new anode or cathode material technologies aim to deliver where traditional lithium-ion batteries fall short. There will be continued support for such endeavors in battery materials though the market will soon demand proof that these companies can deliver what they promised – failure to do so will be very costly. Remember what happened to A123 only a decade ago!
Electrification is not only about EVs and battery materials. Software becomes king. Tesla has already demonstrated how a vehicle is defined by its software content. Auto manufacturers and global Tier-1 suppliers are rethinking their core competencies towards software. As we, at Qnovo, have learned over the past numerous years, software is ultimately what defines the performance and safety of a battery.
Along with software is a concurrent race to collect vast amounts of data on vehicles, their batteries, their usage and their functionality. China already has its own data-collection systems. The private sector in the US and Europe is already applying lessons learned from other IT disciplines to batteries and EVs.
For governments and businesses, this decade is one of transformation. To meet a target date of 2030 to reach a variety of emissions and policy goals, the auto industry will need a tempo of product releases, akin to the maturity that the industry achieved in past decades. It means these companies will need to secure key technologies they are still missing (including software), secure their battery supply chain, secure their EV manufacturing sites, and address the rising labor problems that will accompany this transition (there are far fewer components in an EV relative to an ICE).
And it all needs to happen by 2025 or thereabout. US, European, Korean and Japanese auto manufacturers and their suppliers that meet or beat this date will likely be winners. For them, their sun will be rising from the West where their markets will be based. For the rest, their sun will set in the East where China’s indigenous industries will dominate.