"Do or do not, there is no try"
Master Yoda's blunt message to Luke Skywalker in the Empire Strikes Back could easily describe the situation the European automotive industry is in right now. Either we do this – or we don't. Billions of euros have been invested into a localised value chain with European manufacturing of batteries and battery materials aimed to support a transition to electric vehicles. Car makers have been backing the development with targets of going all electric, some already in 2030.
However now, in the Strategic Dialogue that the EU Commission initiated in January 2025, car makers demand a relaxation of the requirements to increase the sales of EVs.
The industry is asking for a phase-in approach through which the sales of electric cars are adjusted to mirror a slower demand and thereby secure jobs and profitability in the industry.
In 2024 the sales of EVs in the EU fell with almost 5% leaving the BEV share at 13.6%. This highlighted the challenges car makers face when the share of BEVs in 2025 for most companies will need to be between 20% and 25% to not cause fines from the EU. That indeed look like a big leap.
Furthermore, ACEA, the automotive industry lobbying organisation, suggests that all electric drivetrains including hybrids should benefit from incentives either on EU or member state level. Suddenly the road towards full electrification does not seem to be as fast as previously expected.
Brace for impact
For EU the dialogue is challenging especially as several car makers and sub suppliers in the industry have announced redundancies although the profitability in the sector is far from alarming especially for the OEMs. Still, only the fact that the commission has initiated the strategic dialogue indicates it feels the pressure.
The question is then, what would a relaxation of EU's CO2 requirements mean?
Without doubt it would mean a slower growth of EV sales. It would leave the growth to be driven solely by demand and competition for future market shares. A demand that to some extent is supply-driven through model line up and delivery times. It would probably mean a continued take-up of hybrid sales. The segment which include cars with batteries of a few hundred Watt hours (MHEV) to around 1-2 kWh (HEV) grew by 21% last year on an almost flat light vehicle market. In January 2025 the segment grew YoY another 18.9% to dominate the EU market with 34.9%.
In the short term this would benefit most car makers that either offer mild, full or plug-in hybrids which all have better margins than EVs.
But long term? At CES we believe a relaxation will effectively kill the dreams of European battery value chain. And among several other consequences it will prove disastrous for a more ambitions battery recycling industry.
In fact we believe that the consequences of the falling sales of EVs in Europe last year have not been talked about enough. During 2024 the large Korean battery cell manufacturers in Poland and Hungary have been running under half of their capacity. For the first time ever all three battery giants posted losses in the last quarter of 2024. This led to similar situations for the battery material companies of which several have suffered from losses and falling revenues. The whole battery supply chain was basically left behind in 2024 when European consumers didn’t open their wallets to buy the EVs on offer.
For cell and battery material producers the whole situation only adds to the disadvantages any production facility has in Europe compared to the ones in South Korea or China. Higher labour and energy costs are the most important differences but limited access to trained staff and slow permitting procedures have also proven to be critical. Recent analysis from CES has showed that basically all efforts to localise the battery supply chain to Europe will make the end product more expensive which is exactly what consumers don’t want. If now a further slow demand is added to this we believe there is a significant risk that even announced investments in precursor, cathode and cell manufacturing in Europe will be suspended or completely withdrawn.
What's most pressing is that this happens at the same time the BEV market in China and the rest of the world last year is growing. In China the market for BEV and PHEV last year grew at a rate of 39% taking the EV share of all car sales to 48%. This growth leads to more experience, higher productivity and essentially better products. Take for instance BYD's decision to offer autonomous driving capability as a standard feature in 21 vehicles, including in its $9,000 electric Seagull. The risk that not only batteries but also full electric vehicles will be both cheaper and better in China than all kinds of cars in Europe is soon almost a fact.
And even if we belive that 2025 will be a growth year for EVs in Europe, no matter what the outcomes of the Strategic Dialogue is, there is nothing in the current regulation that incentiveses legacy car makers to go from the required levels in 2025 until the big jump in 2030 where as much as 50% of cars need to be electric. In our view it is that target that rather is at stake than the target in 2025. In no case we believe the trajectory between 2025 and 2030 will be a straight line.
This will have an impact on investors' and lenders' confidence in the whole sector where a European battery industry seems to be more and more squeezed between low domestic growth and fast growing competition overseas.
How recycling is affected
For the battery recycling industry this is essential. Slower growth in the battery industry affects both feedstock generation and downstream market opportunities. The challenges are already big, not least caused by too fast expansion in pre-processing with too many players in the market. The cost structure in Europe makes production of battery materials from scrap and end-of-life batteries more expensive than in other markets. A slower demand of EVs, and the lack of investments it will cause, will most probably kill most remaining ambitious initiatives and leave the market to be developed outside of Europe. For companies with alternative investment options many have already come to this conclusion.
At the same time the recycling market is growing. While end-of-life batteries don’t come in tsunamis the volumes will increase year by year. So will unfortunately also recalls, not least proven by Samsung’s latest recall of 180,000 EV battery packs which without doubt will cause complete replacements with subsequent recycling in several cases. Here the recycling industry will be an important part of the ecosystem and a key partner for the car and battery makers.
The question though is how much battery scrap there will be in the near future and if there ever will be any buyers of recycled materials in Europe. To answer that question recyclers and investors in recycling companies should put themselves in their customers’ shoes and evaluate if they would approve investments of hundreds of million euros in a market where the regional end-customers want to slow down. This at a time when especially the Chinese market is growing faster and where producers would, if there wasn’t for tariffs, happily sell both more batteries and EVs to the European market with significantly higher margins than the European counterparts.
So if the European car industry is serious in the efforts to create a fully localised supply chain in Europe a slow-down is probably not the best way. On the other hand, the prerequisites for that were difficult already before the industry wanted the requirements to be relaxed.
A new battery landscape – sober since 2025
European car makers might never be real Jedis, and maybe that is simply more realistic. In fact in ACEA’s document on an Industrial Value Chain the importance of a localised value chain in Europe is not raised more than in a wish to “launch a discussion about what can be done to ensure that the EU become competitive in battery manufacturing”. After all the automotive industry is as so many other industries dependant on global supply chains, global suppliers and global customers and will always seek to buy components and localise production where it is most favourable to do so.
As analysts our answer to the problem that arises around recycling is to produce even more granular data and use to understand what actually is happening. It is essential to identify the signals in the noise when the industry speaks with one voice while it allows its individual members to execute its own strategies. That is how we can help our customers to find the markets where there is a sustainable demand for reuse and recycling services and to identify the partners who can deal with these flows for those who need it.
One extremely important factor in the next 5-10 years will be timing. To secure the effective use of working capital it's essential to understand when capacity is really needed and when it's not. This will be an important theme in the volume update we are doing on CES Online in March.
For a deeper understanding of the toughening conditions for the European battery recycling industry our CES Online analysis is available for CES Online subscribers and can be purchased separately by non-subscribers.
