Battery demand is booming, as electric vehicles replace conventional diesel and petrol models, e-bikes become a fashion item, and other sectors, including construction and agriculture, electrify. The global market for battery manufacturing is forecast to reach €450 billion euros by 2035, according to an Oliver Wyman analysis. This is 10 times its value in 2020.
Amid this growth, the industry is in flux. Until now, it has been mainly based in Asia — the top 10 battery cell manufacturers worldwide are all from China, South Korea, or Japan. But large European manufacturers of vehicles and consumer products are electrifying their products, creating demand for a Europe-based battery industry.
According to a recent Transport & Environment (T&E) study, 100% of European demand for lithium-ion batteries will be produced in Europe by 2027, following an increase of several hundred GWh in production capacity there. In parallel to European efforts, the USA are pushing large scale industrialization via the Bipartisan Infrastructure Law to expand domestic manufacturing of batteries for electric vehicles (EVs). The industry will receive a combined $2.8 billion to build and expand commercial-scale facilities to cater to the local auto sector.
The battery industry is also complex and fragmented, with multiple players involved at each step of the value chain. These include miners and processers of raw materials, component producers and battery manufacturers, and end users and recyclers.
These shifts present major opportunities for investors, especially private equity firms, that are looking to drive the industry expand and make it more efficient. Mergers and Acquisitions (M&A) activity has already increased in the sector: More than 120 transactions took place globally from 2017 to 2022, and the overall deal value of disclosed transactions was more than $18 billion. At the same time, some players have struggled due to financing and ramp-up issues at scale, and Britishvolt was placed in administration in January 2023.
Note: Exchange rate USD to Euro 0.9; Battery market based on cell price forecast plus 30% battery pack costs (on-top)
The subsectors of the battery value chain in asset intensity, maturity, and funding needs, making them attractive to different kinds of investors.
Opportunities and plays for investors in the battery industry
1. Battery cell manufacturing
Battery cell manufacturing has been the most sought-after subsector in recent years and is dominated by large-cap companies. But they face challenges from the rising prices and limited availability of raw materials, as well as the cost of energy. There are wide differences in performance among manufacturers, indicating the potential for operational improvement. Investors with an appetite to improve companies on an operational level might find a play here.
In particular, operational excellence is paramount for process stability and the control of consistency and yield. This could come from digital — internet of things — tools and will require expertise in process design, automation, and quality control. We think reasonable targets are a scrap rate of 3% (much lower than many plants achieve at the moment) and output of over 20 GWh a year for a single production line, at least in mass-market applications.
Moreover, several European battery manufacturers already exist – some of them outside the high-volume automotive business. This suggests that there is also an opportunity for growth capital to help these companies improve their operating practices and to expand the footprint of European battery manufacturing.
2. Equipment manufacturers
Battery manufacturing involves numerous processes, such as the various stages of electrode manufacturing, followed by cell assembly, finishing, and formation and testing. These steps represent major challenges in the scaling up of gigafactories planned for Europe. Large Asian companies still dominate equipment-making for these process steps, but few can provide a full service for gigafactories in Europe and North America.
As battery manufacturers expand their capacity in Europe, they might welcome comprehensive offers that consolidate different types of equipment. That’s an opportunity for established European equipment manufacturers — some of whom are well connected in the European and US industrial environment and can benefit from synergies with other sectors — as well as for new entrants.
Many equipment businesses are still in the build-up phase, and clear European industry leaders have not yet evolved in each equipment field. That means a buy-and-build approach to the segment might be effective, making equipment manufacturers one of the most interesting areas for private-equity investors.
3. Other essential links in the value chain
Components and materials: The manufacturers of components such as electrodes, separators, and electrolytes are currently mostly Asian, and European targets are still limited. That also holds true for producers of materials, which mostly consist of large, established, specialized chemicals companies. Consequently, there is a limited availability of target companies in these spaces.
Recycling: Dismantling and scrapping old batteries on an industrial scale, in order to put valuable raw materials back into the system, is worth the considerable effort it takes: Market prices of battery materials, such as metals, will remain high. Most projects in battery recycling are currently driven by large industrial players, such as vehicle manufacturers, energy firms, and companies with experience in recycling other materials. This industry is still at an early stage but is expected to become larger in scale over the next five to seven years. The enterprises involved are therefore likely more appropriate for venture-capital investors, at least for the time being.
Approaches to investment
As a new industry ecosystem is built, here are three key ways for private-equity firms to play a role.
Develop a European champion
Europe and the US need more suppliers at all stages in the battery value chain, and established equipment makers are well connected within the continent’s industrial production system. To evolve into a new European and US battery manufacturing industry, they need growth capital.
Buy and build
Many smaller makers of equipment — for everything from electrode manufacturing to cell assembly and testing — are still in the build-up phase. Consolidating different equipment products could be an attractive offering to make to battery manufacturers.
Contribute to operational excellence
Process stability and the ability to control for consistency and yield are still major challenges. Professionalizing European battery makers will require investment, time, know-how and effort, but ultimately allow for sustainable and attractive margins.