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Do electric cars have a higher chance of catching fire? Probably not. But when it does, battery fires last longer, resulting in a more damaged car and delayed discovery of the cause. Beneath these ashes lie the real cost of electrification.
A number of fires and recalls have drawn renewed attention to the dangers of batteries. GM has recalled 142,000 cars and Hyundai 82,000, both over the risk of the batteries catching fire in unusual circumstances.
Unlike components in traditional gasoline cars, automakers around the world source all of their electric car batteries from a handful of Asian companies. Only four of them – LG, Samsung SDI, Panasonic and CATL – deliver high-end batteries. They are all running at almost full capacity.
Replacing existing batteries therefore displaces the production of new batteries, increasing the prospect of shortages as automakers try to increase production. Recalls are also very expensive and call battery manufacturers’ business models into question. Increased costs may then have to be passed on to the automobile manufacturers and their customers.
Part of the surge in recalls is natural given the record number of electric cars on the streets, with global sales nearly doubling in July. Governments and automakers have set ambitious goals to go fully electric. Volvo, Jaguar and Cadillac are just a few of the automakers planning to phase out gasoline-powered cars by 2030. Beijing wants one-fifth of all new cars sold by 2025 will be new-energy vehicles, selling new fossil-fueled cars from 2035 onwards.
Achieving these goals is based on two assumptions: Battery manufacturers can build capacity to meet this demand while prices remain low.
So far the trend is encouraging. The prices of batteries – the most expensive component of an electric car – are falling. The price gap between electric and gasoline cars has narrowed, with parity only three years away, says UBS. According to the consulting firm Benchmark Mineral Intelligence, battery cell prices have fallen nearly 90 percent over the past decade to around $ 110 per kilowatt hour last year.
But while these have decreased, the cost of battery recalls is increasing. A short circuit or defect within the battery cells can be explosive because the chemicals in lithium-ion batteries are highly flammable. But so is gasoline. According to the National Fire Protection Association, there were approximately 174,000 vehicle fires in the United States in 2015 when electric cars made up less than 0.3 percent of the cars on the roads.
The difference is the price to fix the problem. Almost all gasoline vehicle recalls involve defective components such as airbags, floor mats and ignition switches that can be replaced at low cost. Ford Motor’s recall of 3 million vehicles due to airbag problems in January cost $ 610 million, an average of $ 200 per car.
When electric cars are recalled, the average costs are inevitably higher because the battery pack accounts for around 40 percent of the total car price. GM’s Chevy Bolt’s most recent recall cost $ 1.8 billion to an average of $ 12,700 per car. Hyundai’s total cost for this recall was estimated at $ 900 million – about $ 11,000 per car.
This, in turn, burdens the battery manufacturers – who already work with wafer-thin margins – disproportionately financially. For LG Chem, which supplies batteries to Tesla, Porsche and BMW, among others, the operating margin of its electric car battery unit is only 1.4 percent in the second quarter. For the past two full years these have been negative. The counterpart of the Tesla supplier Panasonic posted a loss every year, but one since production in Tesla’s battery “Gigafactory” started four years ago.
Crucially, rising costs make the challenge worse. The average price for lithium carbonate, one of the two main compounds in batteries, has more than doubled since the beginning of this year, reaching $ 16,500 per ton in August. Increasing production capacity is costly – LG, for example, will spend $ 12 billion by the end of 2025 to build the facilities it needs to meet demand. Then transport prices from Asia to Europe, which according to the Drewry World Container Index have risen ten-fold since May last year, add pressure and costs in the supply chain.
Taken together, these factors have what it takes to cause a supply crisis and draw parallels to the months leading up to the current chip shortage. Not only will this likely increase costs, but it will also make it more difficult for auto companies to meet the goals for starting the electric car revolution.