Paving the road to electric mobility

Across Europe, we’re seeing the construction of more and more gigafactories to supply batteries for electric vehicles (EVs). This is a trend fuelled – or charged – by two factors. The first is the need to build the infrastructure that the transition to electric mobility demands. After all, behind every new EV coming onto the road is a battery that needs to be produced. And the second is to localise production, not only to create more sustainable supply chains but also to protect against geopolitical instability.

Confidence in an EV future

Despite the recent slowdown in EV sales, the direction of travel towards electric mobility is clear.

Like with any transition, there will be bumps in the road, and while it’s unrealistic to expect a linear upwards trajectory, three underlying drivers point to further growth: from a commercial perspective, many car manufacturers (OEMs) have already committed to making their future car platforms electric; from a legislative perspective, there are hard targets in Europe to phase out internal combustion engines and meet the goals of the Paris Climate Agreement; and from a technological perspective, there is a lack of alternatives to decarbonising road transport. Plus, EV prices are already dropping, especially when compared to five or ten years ago, which means the barrier to entry is becoming increasingly lower for consumers.

It’s in this confidence of an EV future that OEMs are buying into new European gigafactories. ING’s recent financing deals for the likes of Northvolt and Automotive Cell Company (ACC) had a clear common denominator: the commitment from OEMs (Volkswagen, BMW and Volvo Cars, and Stellantis and Mercedes Benz respectively) to buy the products coming off these production lines. It’s ultimately in their best interests to future-proof parts of their business and ensure they have local battery suppliers that are both spatially and culturally closer to them.

And it’s also this kind of guarantee that helps to get these projects off the ground, as it provides assurance of having a committed buyer once production starts. But however necessary OEMs’ involvement is, it’s not sufficient on its own. You also need a credible player to construct and operate an advanced production facility, with the ability to execute requests on time and on budget. Supply of materials is key too, as is ongoing R&D to keep the technology evergreen.

New ways of working

The ‘just-in-time’ model has historically been popular in the automotive space, in which OEMs had a looser relationship with their suppliers that was largely price-driven. This is a logical structure for a mature industry and a mature product like internal combustion engines. Now we see something different happening. OEMs are buying strategic shares further up the value chain, such as in lithium refineries or mines, so that they can lock in access to battery materials. That’s why we see companies like Northvolt undergoing rapid expansion on an unprecedented scale.

It's this rapid growth that forced ING to take an innovative approach to financing Northvolt. The deal was structured on a non-recourse basis since these kinds of emerging players don’t have a long balance sheet to point to. This meant scrutinising in detail the project’s viability on its own merits, as well as its potential to generate cash.

There’s also a novelty to the use of materials. The recyclability of batteries is very high, meaning it’ll eventually be possible to have a self-sustaining, circular model. This is not only environmentally beneficial, but also makes business sense by lowering the cost of production. It’s a good example of how sustainability doesn’t have to come at the expense of profitability.

EU and government backing

The involvement of sovereign and multilateral institutions in transactions is critical, though their influence goes beyond grants or subsidies. Export credit agencies, for example, are one of the biggest catalysts to bringing in commercial money. These are institutions tied directly or indirectly to national governments to support countries’ strategic objectives. They provide insurance so if things were to go wrong, financiers/lenders can recoup a substantial portion of their investment. This kind of financial safety net encourages commercial parties to back new energy transition projects.

Funding also comes from schemes such as Invest EU through the European Investment Bank and Important Projects of Common European Interest (IPCEI). These help to limit the number of investors in projects, allowing the companies running them to focus on the operational tasks at hand, rather than managing a multitude of shareholders.

Over time, this support can be dialled down and the market can take over, as the business case becomes strong and mature enough to attract investment on its own. In the end, financing sustainable projects must be sustainable in itself: it has to make commercial sense, as goodwill can only take you so far.  

What’s next?

The EV battery value chain will likely evolve in two directions. The first is geographical: there are factories in the pipeline in the US, so this will be another key focus area. The second has to do with the materials stream: we will soon see more projects dedicated to producing cathode active material and lithium hydroxide etc. Taken together, these two trends signal that we’re likely to continue seeing higher activity across the battery value chain.

Society is transitioning to a low-carbon economy. So are our clients, and so is ING. We finance a lot of sustainable activities, but we still finance more that’s not. See how we’re progressing on ing.com/climate. 

As car manufacturers (OEMs) look more critically to the materials and products that go into their cars, ING is ideally positioned to offer support. As well as possessing a holistic view of the entire value chain, our experts from our Sustainable Value Chains team bring deep sector knowledge and an understanding of the idiosyncratic risks of these kinds of ventures. We can connect the dots between the different links in the chain, and we benefit from a global presence with local expertise.