The most critical raw materials

EVs are based on two major components: drivetrain and battery. Although there are various alternative batteries such as nickel-metal hydride (NiMH), lead-acid and vanadium redox flow batteries and alternative technologies like fuel cells (Cano et al., Reference Cano, Banham, Ye, Hintennach, Lu, Fowler and Chen2018), lithium-ion batteries (LIB) have become the dominant technology (Nykvist and Nilsson, Reference Nykvist and Nilsson2015). Most LIBs are either lithium nickel manganese cobalt oxide (NMC), lithium nickel cobalt aluminium oxide (NCA) or lithium manganese dioxide (LMD) batteries. Depending on the chemistry and battery type, amounts of the CRMs that are required vary. In general, cobalt, lithium, graphite, nickel and manganese are employed. In recent years, nickel-metal hydride (NiMH) batteries have been used in hybrid electric vehicles (HEVs), which contain REEs (Pollet et al., Reference Pollet, Staffell and Shang2012).

Critical raw materials also play a crucial role in the drivetrain. Electric vehicles are usually powered by permanent magnet (PM)-based synchronous drives that require neodymium-iron-boron (NdFeB) magnets, which contain REEs. Although there are various alternatives to RE-based electric drives, for example, asynchronous drives, electric drives that rely on NdFeB magnets have high performance and are especially energy efficient. Consequently, market share of PM drives accounts for an estimated 90% of all battery electric vehicle models on the market (Roskill, 2018). Among the EVs that use PM drives are many top selling cars from practically all major car manufacturers in the EV market, such as the BMW i3, BYD e6, Citroen C-Zero, Chevrolet Volt, Honda Insight, Hyundai Kona Electric, Mitsubishi i-MiEV, Nissan Leaf and Toyota Prius (Boldea et al., Reference Boldea, Tutelea, Parsa and Dorrell2014; Erdmann et al., Reference Erdmann, Bette, Merino and Velte2015; Widmer et al., Reference Widmer, Martin and Kimiabeigi2015; Hyundai, 2018; Evans, Reference Evans2019). Their superior performance also led to a shift by Tesla, the world's biggest electric car company, to NdFeB magnet-based drives for its high performance models (Desai, Reference Desai2018). NdFeB permanent magnet-based drive technology is also used in HEVs, as space and weight are particularly critical factors in the hybrid systems. NdFeB magnets contain the REEs neodymium, dysprosium and terbium. Although current sales numbers are relatively small, with 2 million EVs sold worldwide in 2018, it is expected that global passenger EV sales will reach 28 million in 2030 and 56 million in 2040 (BloombergNEF, 2019). CRMs for EVs may therefore become a much bigger issue in the upcoming decades.

An overview of the raw material basis of EVs and the respective market structure of the production of rare earths, cobalt, lithium, graphite, nickel and manganese is provided in Table 1. It becomes is clear that China has become the most important producer of raw materials for EVs. The country not only has a strong position in the production and processing of REEs and graphite, but also controls the processing of cobalt and lithium, of which it has only small domestic mine production (USGS, 2019c,d).

Table 1. Production structure of the CRMs relevant for e-mobility (DERA, Reference Al Barazi, Näher, Vetter, Schütte, Liedtke, Baier and Franken2017a, 2019; Adamas Intelligence as quoted in Law, Reference Law2019; USGS, 2019a).

The strong market position of China brings with it high supply risks for consumers elsewhere as they depend on a stable supply from China. The resulting criticality of the specific raw materials required for EVs is analysed by criticality assessments. The methodology of criticality assessments varies among the various studies, with the major pillar being the analysis of supply risks (BGS, 2015). Most studies also consider the economic importance or vulnerability to supply disruptions as a second dimension (Graedel and Reck, Reference Graedel and Reck2016). The two-dimensional approach is applied with individual specifics by the European Commission (2014, 2017), by the USGS (Fortier et al., Reference Fortier, Nassar, Lederer, Brainard, Gambogi and McCullough2018) pursuant to the Executive Order (EO) No. 13817, “A Federal Strategy to Ensure Secure and Reliable Supplies of Critical Minerals” (The White House, 2017) and for the evaluation of raw material criticality for low carbon energy production in Japan (Miyamoto et al., Reference Miyamoto, Kosai and Hashimoto2019). Frequently, a third dimension is taken into account to include the environmental impact of a raw material from cradle-to-gate (Graedel et al., Reference Graedel, Barr, Chandler, Chase, Choi, Christoffersen, Friedlander, Henly, Jun, Nassar, Schechner, Warren, Yang and Zhu2012, Reference Graedel, Harper, Nassar, Nuss and Reck2015a). Criticality assessments can be region, technology or industry specific, and focus on different organisational levels: thus, one needs to distinguish between potential short-term disruptions and long-term supply risks (Graedel et al., Reference Graedel, Barr, Chandler, Chase, Choi, Christoffersen, Friedlander, Henly, Jun, Nassar, Schechner, Warren, Yang and Zhu2012). Furthermore, criticality of raw materials can change over time as new mines are brought into production, substitutes are used and recycling routes are established (Alonso et al., Reference Alonso, Sherman, Wallington, Everson, Field, Roth and Kirchain2012). Accordingly, there cannot be a uniform list of CRMs as Poulton et al. (Reference Poulton, Jagers, Linde, Van Zyl, Danielson and Matti2013) state.

In recent years, numerous criticality assessments have been conducted to analyse dependencies and bottlenecks along the supply chain, supply risks and potential supply disruptions. In order to identify the most critical raw materials that are required for EVs, results of recent criticality assessments are screened in a meta-analysis. The criticality assessments taken into account include studies from all major economies, the US, Japan, the EU, and its member states with the strongest economies, Germany and the former EU member state, the UK. Results highlight the most critical raw materials.

The raw materials assessed as critical in the supply chain according to these 11 criticality studies between 2013 and 2019 are shown in Fig. 2. Whereas nickel is not considered to be critical in the scientific literature due to its diversified production structure, five of the CRMs that are crucial for EVs were assessed as critical with varying frequency by the different studies: Manganese and lithium were identified as critical by only two and three studies, respectively. Graphite, cobalt and REEs were among the most critical raw materials in recent years. REEs especially were assessed as critical in supply by all the studies, can consequently be regarded as the most critical raw materials and are therefore used as a case study in this paper.

Fig. 2. The most critical raw materials according to 11 recent criticality assessments in Europe, the US and Japan between 2013 and 2019 (Own analysis of Silberglitt et al., Reference Silberglitt, Bartis, Chow, An and Brady2013; DERA, 2014, 2017b; European Commission, 2014, 2017; BGS, 2015; Hatayama and Tahara, Reference Hatayama and Tahara2015; JOGMEC, 2015 as quoted in Miyamoto et al., Reference Miyamoto, Kosai and Hashimoto2019; Blagoeva et al., Reference Blagoeva, Aves Dias, Marmier and Pavel2016; Fortier et al., Reference Fortier, Nassar, Lederer, Brainard, Gambogi and McCullough2018; Miyamoto et al., Reference Miyamoto, Kosai and Hashimoto2019). The red colour indicates those CRMs that are particularly important for EVs.

Rare earths as a case study

Rare earths are a group of 17 chemical elements that comprise the lanthanides plus scandium and yttrium. They have been considered as some of the most critical raw materials that are required for the future of mobility (Alonso et al., Reference Alonso, Sherman, Wallington, Everson, Field, Roth and Kirchain2012). REE usage in automotive applications includes that in permanent magnets, which contain neodymium, praseodymium, dysprosium and sometimes terbium; NiMH batteries, which require lanthanum, cerium and neodymium; and LEDs, which require europium and yttrium. The quantity of REEs vary in different vehicle types. In HEVs, there are usually: ~870–581 g lanthanum; 1226–821 g cerium; 189–135 g praseodymium; 649–555 g neodymium; and 149–71 g dysprosium (Xu et al., Reference Xu, Yano and Sakai2016). As the electric drivetrain in a battery electric vehicle (BEV) delivers higher performance than in a HEV, the magnet weight and the overall amount of REEs deployed are usually more than twice as high (Pavel et al., Reference Pavel, Thiel, Degreif, Blagoeva, Buchert, Schüler and Tzimas2017). In contrast, ICE (of a comparable size) require only negligible amounts of REEs (Xu et al., Reference Xu, Yano and Sakai2016). The need for REEs will consequently increase dramatically as demand grows for BEVs and HEVs. Their production is highly concentrated in China.

China's rise in the RE market over recent decades is illustrated in Fig. 3. The US had been the biggest producer of rare earths, accounting for about half of global mine production until the mid-1980s, when China entered the market. The state-capitalistic system followed a systematic plan in order to reach a dominant market position (Mancheri, Reference Mancheri2012; Morrison and Tang, Reference Morrison and Tang2012; Biedermann, Reference Biedermann2014) that the former leader of the People's Republic, Deng Xiaoping, described as follows: “The Middle East has its oil, China has its Rare Earths” (freely quoted in Bradsher, Reference Bradsher2009). Within years, the country reached a large market share and became the market leader in terms of production amount in the 1990s, and further strengthened its market position until it had achieved a de facto monopoly in the 2000s. In 2010, China had reached a market share of around 97%. No relevant competitor was left (Fig. 3).

Fig. 3. Global production of rare earths (based on data by USGS, 2019b; in rare earth oxide equivalent content).

Parallel to the rise of its RE mining industry, China established industries that were based on REEs, for example, phosphors for energy efficient lighting and, above all, a competitive permanent magnet industry that today accounts for 90% of global NdFeB magnet production (Adamas Intelligence, 2019; Du and Graedel, Reference Du and Graedel2013). China has also become competitive in the electric drive technology and is home to some of the biggest manufacturers of EVs worldwide (FT, 2018; Campbell and Tian, Reference Campbell and Tian2019). The country now dominates virtually every step along the value chain, leading to concerns about the danger of abuse of market power (Mancheri, Reference Mancheri2012).

Having become the dominant player in the RE market, China tightened its export restrictions on REEs in order to attract foreign investments and to strengthen its domestic industry (Tse, Reference Tse2011; Morrison and Tang, Reference Morrison and Tang2012). The market situation for consumers got worse in the years 2010 and 2011: Geo-political tensions between China and Japan escalated when a Chinese fisherman was arrested in a disputed territory over which both countries make claims. China blocked the supply of REEs to Japan for several weeks in retaliation (Bradsher, Reference Bradsher2010). Supply disruptions and price increases of several hundred percent were the consequences, causing insecurity in the global market. Consumers of REEs worldwide, in addition to bearing the high costs, were concerned that their supply could become endangered as well and were unsure, whether they could maintain production (Schmid, Reference Schmid2019a, Reference Schmid2020).

The automotive industry, a major user of REEs, was hit particularly hard. Daimler (2011) publicly stressed that the company was exposed to supply risks with regard to REEs due to the high market concentration and the resulting supply dependency. Its direct rival, BMW, confessed that the company suffered under the increased REE prices (Becker, Reference Becker2018). The German automotive supplier Continental stated that the additional costs due to the RE crisis totalled €30 million in 2011 (Continental, 2011). Many companies in the automotive industry experienced similar problems (Osram, 2011; Moody's, 2016). Companies were exposed to supply risks mostly regardless of their position in the supply chain and whereas those companies upstream, in the early stages of the supply chain, close to the raw material production, were the first to be affected, price surcharges were often passed on to customers downstream (Hensel, Reference Hensel2011).

The RE crisis in the years 2010 and 2011 illustrated the danger to consumers worldwide of being solely dependent on CRMs from a single supplier. At the same time, to reduce the dependence on China, supply restrictions and price risks have provoked new strategies worldwide, most notably seen in companies seeking access to raw material production, recycling and substitution (Schmid, Reference Schmid2020). Securing direct access to REE mine production outside of China is among the most effective strategies for a stable supply as it ensures the entire raw material need without losses in the quality of the raw material. However, establishing a parallel supply chain outside of China has proven to be challenging (Golev et al., Reference Golev, Scott, Erskine, Ali and Ballantyne2014; Schmid, Reference Schmid2019b). The same issue also applies to setting up an industrial recycling route. Recycling of REEs is typically accompanied by a loss of quality of the recyclate (Rademaker et al., Reference Rademaker, Kleijn and Yang2013; Elwert et al., Reference Elwert, Goldmann, Roemer and Schwarz2016; Yang et al., Reference Yang, Walton, Sheridan, Güth, Gauß, Gutfleisch, Buchert, Steenari, Van Gerven and Binnemans2017). Price competitiveness of secondary raw material is also a major challenge in recycling of REEs and of many CRMs (Binnemans et al., Reference Binnemans, Jones, Blanpain, Van Gerven, Yang, Walton and Buchert2013; Ayres, Reference Ayres2019). Losses in the performance of the final product is also a problem that derives from substitution (Widmer et al., Reference Widmer, Martin and Kimiabeigi2015; Pavel et al., Reference Pavel, Thiel, Degreif, Blagoeva, Buchert, Schüler and Tzimas2017).

Companies that seek direct access to mine production aim for a diversified supply structure and a reduced dependence on the supply from China. Potential RE projects at different stages can be found worldwide, for example, in Australia, Canada and Malawi (Chen, Reference Chen2011; Hensel, Reference Hensel2011; Schmid, Reference Schmid2019b). Two major projects outside of China, the Mountain Pass mine in the US and Lynas’ Mount Weld in Australia, already produce significant amounts of REEs (Golev et al., Reference Golev, Scott, Erskine, Ali and Ballantyne2014; Schmid, Reference Schmid2019b). Different levels of involvement in RE projects can be distinguished, with memoranda of understanding and non-binding offtake agreements being the lowest threshold measures and investing in RE mine projects and setting up joint ventures representing high-involvement strategies. A larger extent of involvement in RE projects comes together with higher financial investments and increasing risks. However, almost a decade after the RE crisis, no parallel supply chain has been established and the European auto industry is reluctant to engage in RE projects worldwide (Schmid, Reference Schmid2019b).

The corporate perspective needs to be analysed to understand the challenges and opportunities that the European automotive industry perceives when reacting strategically to REE criticality and securing their supply.

Company awareness and preparedness

Insights into the corporate perspective on REE supply risks reveal a fundamental lack of awareness within the companies at the time of the RE crisis in 2010/2011. Affected companies were hit hard, mostly without prior notice and with little understanding of the actual situation and the effects on their company. The majority of corporate executives that were interviewed stressed that they personally had no or little idea where REEs came from, how they were produced and what the market structure looked like. In a few cases when individuals had already been aware of the supply dependence on China, there was little interest within the firm as REEs and CRMs, in general, were considered to be a niche topic or not relevant at all. This attitude was endemic in most companies at all stages of the supply chain and the lack of awareness could be found in most companies regardless of their size. Large OEMs and major automotive suppliers had little idea of what was in their products or how REEs and REE-based components were produced. Typical answers of corporate experts include: “I've got to admit, that the share of raw material wasn't considered sufficiently.” (O17) Due to the lack of awareness of REE criticality, most companies were not prepared for the situation in 2010/2011. Executives describe that they first had to collect the required information about REEs, their production in China, market structures and particularly the actual REE content in the companies’ products. Typically, the amount of REEs deployed in the final products and the physical properties of certain components were not known. One corporate executive expresses this lack of knowledge pointedly: “No one really knew what was in the magnet.” (X19)

Due to the lack of awareness, most (downstream) companies were not prepared for the price and supply risks and only four companies explicitly stated that they had taken proactive measures in advance. Typical answers therefore sound like this: “[We were] not at all prepared for this.” (J17)

As the RE crisis hit the affected companies hard, executives themselves, typically, had to gather technical specifications and market information: thus, a timely reaction was difficult to reach. This lack of awareness of criticality and knowledge about REEs and their applications has changed fundamentally since the RE crisis. The experiences in 2010/2011 and in the years after seem to have made an impression – not necessarily as much on the companies’ processes and strategies as personally on most corporate executives that were responsible for the implementation of mitigation strategies. Some executives describe sleepless nights that they had due to the price and supply risks endured by their companies. The extent of the increased awareness differs in the various companies in which interviews were conducted, but an overall change of mentality can be observed: “A special kind of serenity has found its way into the company regarding the topic of rare earth.” (W18)

Although it is sometimes difficult to keep the topic on the agenda as the automotive industry currently faces many other challenges, for example, car sharing, autonomous driving and digitalisation, according to most executives, today “people are aware” (Y19) of the dependence on REEs from China and the market dominance of the Chinese industry along the value chain.

The resulting supply risks associated with REEs are closely seen in the light of China's state capitalism that is able to plan strategically for the long run. Due to China's strong political influence on the REE market and companies’ decisions, the market ratio of profit maximisation does not necessarily apply, according to the interviewed executives. It is argued that Chinese companies along the REE value chain do not have to be profitable, at least in the short term, as long as there is a certain strategic interest in the company or technology perceived by China's policymakers, which are assumed to support these companies. Competition with Chinese companies is further hampered by the cost advantage of China's REE production which ultimately hinders the development of RE projects outside of China. This argument of corporate executives occurs frequently and is also related to the lower environmental standards in China, which are also discussed in the scientific literature (Ali, Reference Ali2014; Packey and Kingsnorth, Reference Packey and Kingsnorth2016). Figure 4 illustrates the codes that are associated by the interviewed executives with the dependency on China and the potential consequences for the European automotive industry. China's dominant position in the REE market is closely connected to its state capitalism in which market economy ratio does not apply and which – at least partially – explains the cost advantage of China's REE production, according to the interviewed corporate executives. The low costs and long-term strategy of the Chinese REE industry is assumed to hinder the development of RE projects outside of China and is seen as a principal reason for the lack of alternatives. In many interviews, corporate executives say that China's RE policy follows a strategic plan to achieve leadership in certain industries. This situation is characterised by one expert as follows: “The Chinese are eating their way into the supply chain from behind.” (B19) Dependency on China is therefore not only seen with regard to REE production, but along the entire value chain to separation and further processing, for example, products like NdFeB magnets. Dominance by China is also associated with the threatened decline of technological competence in Europe and with a concern, that companies in the western world will ultimately lose their competitive edge to Chinese companies.

Fig. 4. Association graph of codes related to the dependency on China.

Insights into firm's strategies to secure their supply

Knowing how to react to the dependency on China is, however, difficult for most companies. Interviewed executives in more than three quarters of the companies stress the high cost pressure in the automotive industry. The fact that the price matters is emphasised numerous times during the interviews and the price of RE and RE-based components seem to be of highest priority. Figure 5 illustrates the strongest associations with the ‘price matters’.

Fig. 5. Association graph of price sensitivity.

According to corporate executives, there are cost advantages to Chinese REE production and there are no comparable and attractive projects outside of China. Any measures to reduce the dependency on China are only assumed to be possible when they are cost competitive, ultimately, with Chinese production. This fundamental requirement narrows the perceived scope for action and limits the possibilities for the companies to engage in RE projects outside China. REEs from elsewhere should cost “not one cent more than [from] China” (G19) is one of the strictest and most straightforward statements that, however, underlines a fundamental challenge expressed by most interviewed executives. Their own reactions to the supply risks and dependencies on China are restricted by this maxim and only limited activities are found within the European industry. In contrast, Japan has been very active in getting involved in RE projects worldwide since the RE crisis and has become the largest competitor to Chinese production through strategic investments in the RE producer Lynas, which has both a RE mine in Australia and a processing plant in Malaysia (Schmid, Reference Schmid2019b). Japan's activities are therefore often considered to be basically the only corrective measures to China's market dominance. The fact that the Australian RE producer Lynas has been in trouble multiple times in recent years due to economic and ecological reasons (Jamaludin and Lahiri-Dutt, Reference Jamaludin and Lahiri-Dutt2017), has, consequently, concerned some executives.

Ultimately, price competitiveness seems to dominate the discussion about mitigating supply risks of REEs among many companies, as their customers seem to be unwilling to accept price premiums for REEs from outside of China. Corporate executives also emphasise the feeling that the companies’ customers typically tend to have little understanding of the specific REE market situation. There seems to be a lack of strategic interest further down the supply chain and frequently little willingness to consider REE supply as a strategic topic rather than a merely commercial aspect in a negotiation with the Tier 1 supplier. Surcharges for REE supply from outside of China are mostly not accepted and there is often only little interest in pursuing a long-term oriented strategy, which eventually restricts the ability of the company to act. Among the typical answers that highlight this situation are: “[We] started our discussions with the strategists and then the purchase took over” (X19). “To get an appointment [with the OEM] sometimes takes several months” (A16).

One OEM company executive directly confirms the feeling of many Tier 1 and Tier 2 suppliers that there is little interest in the OEMs to engage in the early stages of the supply chain: “The supplier himself is the one responsible for its risk” (W18). However, most interviewees from both suppliers and OEMs agree that it would be important to establish RE mine projects and to have alternative supply chains outside of China, for example, to use a botanical metaphor: “[We need to] nurse small plants outside of China” (B19). They stress the overall awareness of the topic in their companies and emphasise that alternative RE production and an integrated supply chain outside of China would be important and should be a measure used to reduce the dependency on China. Although most of the interviewed executives acknowledge the need for RE mining projects outside of China and explicitly express their wish for alternative supply chains, only few had taken serious action or have even considered becoming engaged in the early stages of the supply chain, for example, through investments or offtake agreements. The reasons are quite diverse and include the fact that some companies consider themselves too small, that reaction time is too long when trying to establish new projects, that there are overcapacities in China, which threaten the development of parallel supply chains, that there is a lack of real alternatives to Chinese RE production, that overall success of such a strategy is unlikely and that REE prices have gone down in recent years, which makes new projects relatively unattractive. Figure 6 illustrates these associations with alternative access to REEs.

Fig. 6. Association graph of involvement in RE projects outside of China.

Some executives express their hope for future cooperation in order to jointly develop a RE mine project and stress that for big companies, the required investments are relatively small and could be shared: “What is 4 billion for a mine, with all the consumers?” (B19)

However, there are serious doubts among corporate executives that there will be such an initiative and that companies in the automotive industry will actually start to become involved in RE projects and to engage in the early stages of the supply chain. Even if some players are willing to invest or to participate in a joint action to engage in RE projects outside of China and to establish a parallel value chain, they don't seem to know how to implement that strategy. Although there is wide-spread awareness of the supply risks and of the importance of a long-term strategy, there is also a perceived lack of ability and to some degree, a lack of willingness to engage in RE production among the European automotive industries.