RAW MATERIALS
The mining of raw materials is an increasingly important aspect of the lifecycle of an EV battery, with key components of a battery including minerals such as lithium, cobalt, manganese and nickel. There are growing concerns over potential shortages of these key resources and how industry participants can ensure adequate supply, along with concerns surrounding the immaturity of pricing mechanisms for some of these minerals in the context of high demand.
The raw materials also need processing, for example lithium ores require converting to lithium carbonate or lithium hydroxide. Significant further supply will be required for the developing battery industry and careful decisions need to be made as to the siting of processing facilities, having regard to proximity to the raw materials, to availability of abundant green energy, to the distance to gigafactories and to car plants.
As with the wider challenges faced by OEMs in electrifying their industry whilst minimising their environmental footprint, there is an inevitable tension between creating new mines and mining existing deposits more intensively and environmental concerns and wider ESG issues, particularly in relation to the use of child labour in cobalt mining in the DRC. A combination of ESG disclosures and green financing requirements and the forthcoming new EU Batteries Directive will mean that in their race to secure supply, increasingly industry participants will need to adhere to strict standards to ensure they can measure the environmental and ethical footprint of the full battery supply chain (including CO2 emissions from both mining and transportation) and track provenance.
Whilst demand for raw materials will increase massively over the next 5+ years, longer-term innovations in battery chemistry (see R&D) and scale reuse and recycling (see Reuse & Recycling) will be key to tempering that demand.
READ MORE
RAW MATERIALS
R&D
MANUFACTURING & ASSEMBLY
SALES & DISTRIBUTION
REUSE & RECYCLING
Whether you are an OEM, an existing component supplier, a prospective new market entrant or a direct or indirect investor, legal and regulatory issues should undoubtedly be at the forefront of your mind as you consider the opportunities and challenges in this fast-developing landscape. Herbert Smith Freehills can advise you across the whole EV battery lifecycle - please click on the different sections of the battery to the left to find out more about some of the key areas in which we can provide support.
R&D
Significant investment is being made in EV battery research and development. This includes new chemistry (for example, lithium iron phosphate (LFP); solid-state and sodium-ion); new materials (for example, black phosphorus and graphite (or graphene polymers) or silicon nanoparticles); new design configurations (for example, unified prismatic) and the integration of, or combination with, new technologies (for example, super-capacitors) with a view to lowering costs, to achieving higher energy density, facilitating faster recharging, delivering higher levels of safety (particularly as regards to the risk of fire) and to making the batteries lighter. In addition to direct EV battery R&D, there is also significant investment in the associated charging electronics, battery management software and green technologies to allow EVs to be charged effectively from inherently variable energy sources (such as solar and wind).
Understanding the incentives and financial support that is available for R&D, as well as government grants to support the adoption of EVs and chargers, including pursuant to the EU Action Plan on Batteries, is important. IP is essential to safeguarding investment in R&D, in relation both to protecting your own innovations and to ensuring that you have a clear path to market (freedom to operate) through the existing complex patent landscape that is emerging in the area of EV technology.
As the battery market continues to ramp-up, both in terms of scale of production and technological advancements, battery makers will increasingly face stiff competition for skilled workers which may impact the pace of the EV transition.
READ MORE
MANUFACTURING & ASSEMBLY
1. Batteries Europe, Strategic Research Agenda for Batteries 2020
2. Batteries Europe, Strategic Research Agenda for Batteries 2020
READ MORE
SALES & DISTRIBUTION
At present, OEMs are fighting to lock-in long-term battery supplies and, in a number of cases, are now joining forces with the battery manufacturers to help develop the gigafactories themselves in return for guaranteed supply (for example, both VW and Volvo with Northvolt and Stellantis (and now Mercedes-Benz) in ACC). This developing market in EV batteries could lead to heightened issues regarding competition law, particularly any anti-competitive behaviour.
In addition to ensuring the usual level of contractual protection and appropriate dispute resolution forum, EV battery stakeholders will also need to ensure that their product and asset value is secured and protected, not least through safeguarding their IP to protect their R&D investments.
The transportation of batteries is generally regulated (and is also a further material source of C02 emissions in the supply chain) and moving batteries across national borders or between trade areas impacts trade law and customs tariffs. Understanding the dynamics of these rules is an important element of any business case.
At the same time, increased complexity in supply chains and new innovation inevitably leads to questions about where liability for the product sits and the allocation of liability, particularly at the end sales stage and in relation to responsibility for product safety compliance, including issues such as fire safety and early degradation.
READ MORE
REUSE & RECYCLING
It is impossible to contemplate a significant role in the EV battery industry of the 2020's without proper consideration of what to do with the batteries at the end of their vehicle life. There are regulatory (the EU Batteries Directive and proposed new EU Batteries Regulation), moral (ESG) and economic (cost and scarcity of raw materials) reasons why this is the case.
The battery reuse and recycling industry is still nascent as the technologies develop, the batteries themselves develop and, perhaps most importantly, there remains an insufficient supply of used batteries to create economies of scale. That will all change.
There are good arguments to think that reuse (primarily as stationary batteries, as battery energy storage systems or as primary balancing power to the local electricity grid) is, at least initially, the best way forward as there is, at present, so much useful life in the battery at the end of its vehicle life (which can be monitored as battery management systems are incorporated, giving real time data as to the performance and health of the cells). However, whether used EV batteries are really a good way of storing electricity remains to be seen. There are significant safety concerns which need to be taken into account. Also, batteries may in future be able to utilise more of their capacity in the vehicle (or a replacement vehicle) with the result that they become less suitable for this secondary or tertiary role. However, if batteries can be made significantly cheaper, the economics of recycling will be less appealing as compared with (initial) reuse.
At present, only 12% of aluminium, 22% of cobalt, 8% of manganese and 16% of nickel used within the EU is recycled. All are key components to EV batteries and recovery of the metals is expensive, inefficient and highly energy intensive. However, improvements in the manufacture of batteries (making them easier to disassemble and recycle); the ease of identification of their contents (via battery passports that digitally record the integrity of the supply chain within the battery); recycling techniques (including the use of pyrometallurgy and hydrometallurgy) and the availability of increasing volumes which will allow economies of scale to be achieved will all boost recycling efforts significantly over the coming decade. Whilst recycling will never be 100% efficient, nor is virgin mining or extraction, so a number of industry participants (with governmental support) are now looking at ways in which to design a structure for the industry which will allow for a "closed loop" where the battery components can be efficiently and sustainably recycled and put straight back into the gigafactory, delivering major economic advantages in addition to the clear sustainability credentials.
READ MORE
In 2020, only 27 GWh of lithium-ion EV battery cells were manufactured in Europe. The European Battery Alliance estimates that the output of battery cells required by 2028 in Europe will be over 400 GWh, with global demand growing to roughly 2,000 GWh by 2030 (if not sooner). Given this anticipated demand and notwithstanding the increasing pipeline of planned European gigafactories by the likes of ACC, Northvolt, CATL, Tesla and Envision AESC, the need for scale growth in cell manufacturing facilities is self-evident.
In order to facilitate the EV transition, governments have introduced initiatives (including the important European Battery Innovation IPCEI designation) and subsidies to support local battery cell production. These regional and governmental initiatives and subsidies will likely need to increase as the pace of electrification accelerates.
On the flip-side, more onerous regulation of the battery industry is coming, in particular via the EU's new proposed Batteries Directive, which covers, amongst other things, limits on uses of hazardous materials, CO2 limits, performance and labelling requirements.
Anyone who has been watching the challenges of developing the Tesla gigafactory in Brandenburg, Germany will recognise that the planning approvals, construction and wider-permitting of battery plants requires deft project skills, alongside heavy initial capital outlays. Co-location with a secure, and ideally cheap, supply of green energy is also a growing pre-requisite.
FUTURE INDUSTRY DIRECTION
FUTURE INDUSTRY DIRECTION
• Any significant move towards hydrogen or other alternative fuel cells as the primary energy source for EVs (particularly cars) would have very significant consequences for the EV battery market (notwithstanding that FCEVs may still utilise a small (peak power) battery),
READ MORE
With the latest governmental policy moves, OEM announcements and statistics as to the speed of transition to BEVs, it would be easy to conclude that the growth of the EV battery market in line with the core assumed scenario is an inevitability. Here we pose some alternative scenarios that may play out and influence the future direction of the industry:
• Over time, will we see policy and ESG pressures to move towards smaller, lighter, less powerful batteries to better use the world's precious natural resources and/or in order to better deliver affordable private mobility to the mass market?
• Any significant move towards hydrogen or other alternative fuel cells as the primary energy source for EVs (particularly cars) would have very significant consequences for the EV battery market (notwithstanding that FCEVs may still utilise a small (peak power) battery)
• The OEMs are starting to take significant ownership and control over the development and production of their batteries to seek to ensure security of supply, quality and to reduce costs; but longer-term is there greater merit in viewing the battery as a long-term asset with a longer life-cycle than the vehicle itself which could then remain under separate (possibly asset-backed financed) ownership, with that owner also assuming responsibility for maintenance, repair/swapping and reuse & recycling?
• We foresee a tension developing between the growing desire of major industrialised nations to have the manufacture of battery cells sited within a short distance of their domestic automotive vehicle production and what is the most logical solution for the structure of the supply chain from both an economic and sustainability angle. Reducing battery transportation costs and their CO2 emissions is rightly an important driver in near-shoring the EV battery industry. However, the minerals still need to be mined, processed and transported. Hard economic and sustainability questions remain to be answered as to whether the areas of Europe that are well-established for vehicle production are the best places to site new gigafactories for the long-term (including in terms of availability of renewable energy sources, proximity to major urban areas and in terms of the availability of labour and labour costs). The same considerations apply to the raw material processing and to the recycling plants that should ideally be co-located with the gigafactories, which amplifies the scale of this tension.
• The OEMs are starting to take significant ownership and control over the development and production of their batteries to seek to ensure security of supply, quality and to reduce costs; but longer-term is there greater merit in viewing the battery as a long-term asset with a longer life-cycle than the vehicle itself which could then remain under separate (possibly asset-backed financed) ownership, with that owner also assuming responsibility for maintenance, repair/swapping and reuse & recycling?
• We foresee a tension developing between the growing desire of major industrialised nations to have the manufacture of battery cells sited within a short distance of their domestic automotive vehicle production and what is the most logical solution for the structure of the supply chain from both an economic and sustainability angle. Reducing battery transportation costs and their CO2 emissions is rightly an important driver in near-shoring the EV battery industry. (However, the minerals still need to be mined, processed and transported. Hard economic and sustainability questions remain to be answered as to whether the areas of Europe that are well-established for vehicle production are the best places to site new gigafactories for the long-term (including in terms of availability of renewable energy sources, proximity to major urban areas and in terms of the availability of labour and labour costs). The same considerations apply to the raw material processing and to the recycling plants that should ideally be co-located with the gigafactories, which amplifies the scale of this tension.
MINING
• As the global demand for EV batteries has increased, the focus of the mining industry has shifted towards core battery materials such as lithium, graphite, manganese, nickel and cobalt and demand for such commodities has risen at unprecedented levels.
• OEMs and those in the battery supply chain are keen to lock in supplies of such "critical minerals" and stakeholders, including governments, shareholders, employees, lenders and customers, are increasingly demanding resilience in the battery materials supply chain, coupled with compliance with core ESG principles (see the ESG segment). These two factors are currently key to shaping investment and M&A in the battery materials sector.
Sourcing & creating a resilient supply chain
• A significant issue for the EV battery supply chain is the concentration of these critical minerals: according to BloombergNEF 68% of the world's cobalt comes from the Democratic Republic of Congo (DRC); between the "lithium triangle" (Chile, Bolivia and Argentina) and Australia they produce the vast majority of the world's lithium; and China is responsible for 80% of global refining capacity for these minerals, as well as 60% of the world's graphite production.
• With vastly increasing demands on supply, many in the industry foresee a supply shortage of certain key commodities, including due to the investment needed to make such commodities battery-grade. One example of this is nickel, where significant investment is needed to produce higher-grade nickel required for battery production.
• We have recently seen a push to increase investment in battery minerals from outside of these areas of concentrated supply and to increase strategic autonomy over production including, for example, by encouraging domestic production of lithium (e.g. Cornish Lithium in the UK; lithium (and cobalt) in Finland near the GigaVaasa area and the Bergby lithium project in Sweden). Whilst these are all on a small scale at present, we expect to see further desire to reduce reliance on overseas suppliers for critical battery materials for economic, environmental and geo-political reasons.
• Moreover, in relation to some minerals, notably cobalt, it is likely that many OEMs and others in the battery supply chain will be willing to pay a premium for cobalt originating from outside the DRC due to ESG concerns (see the ESG segment), or seek to eliminate cobalt from their batteries altogether.
Response of mining companies
• Mining companies are responding to the above issues by seeking to rebalance and expand portfolios (through exploration or M&A) to include critical minerals. However, it is difficult for mining companies to predict long-term demand and understand where their capital investment should be focussed. This is particularly acute given the current uncertainty around which battery materials will be most in demand (as a result in rapid technological advancements in batteries –e.g. the potential of removing the liquid electrolyte and/or cobalt and nickel from the cells) and the long lead times and significant capital investments required to develop new mines.
• Mining companies are also increasingly partnering with OEMs and others in the battery supply chain in order to secure capital for the long term investments required to supply these critical commodities in a way that meets stakeholders' ESG expectations. For the OEMs and battery manufacturers, such investments should deliver a more certain supply and allow the OEMs and battery manufacturers both to impose their ESG standards and to provide more visibility into / control over their own supply chain.
For more information on our Mining practice please see here and for our automotive industry specific experience please see here.
READ MORE
ENERGY
• While batteries are in many ways seen as the key to more sustainable energy usage, the carbon intensity of batteries (i.e. the emissions caused in their production process) is likely to become an important consideration. The proposed new EU Batteries Regulation includes the concept of carbon passports for new batteries (see the Proposed EU Battery Regulation segment). Therefore, battery producers will be incentivised to source their energy from green / renewable sources to seek to deliver low carbon intensity (planned gigafactories by Northvolt and Britishvolt both involve the supply of 100% renewable energy).
• Currently, EV batteries are considered to need replacement in the vehicle after they lose around 20% of their capacity. However, this means that these batteries have significant secondary use potential post their end of vehicle life. The significant remaining capacity can be used for stationary storage applications (BESS) or in other mobile power units, but this comes with its own challenges of ensuring that retrofitted and recycled batteries perform reliably and safely. Such a problem can be alleviated by designing batteries with second-life applications already in mind.
• The creation of a circular supply chain for EV batteries would allow battery and EV manufacturers to not only reduce their environmental footprint but also to reduce their recycling costs, when recycling and second-life obligations become mandatory, as already envisaged under the proposed EU Batteries Regulation. Various industry participants are already looking at this, with VW for example considering offering used-vehicle leases on its EVs, with the intention that via the second (or even third) leases this would keep EVs in customers' hands for around 8 years and then allow VW to recycle the battery packs into secondary uses.
• Nissan's 4R Energy Corp's venture with Sumitomo Corporation to reuse battery packs from the Nissan Leaf for stationary distributed and utility-scale storage systems is just one of many examples of implementing a design geared towards second-life and addressing potential recycling costs.
• Second-life batteries can be utilised as backup storage for grid-scale installations. Storing electrical energy at MW scale can help to reduce the variation in power output from intermittent generators and smooth peaks and troughs in demand. The second-life batteries are therefore well suited for exploitation by providers of balancing services (Enhanced Frequency Response).
• The concept of grid support from first-life EV batteries (i.e. batteries installed within their vehicles which primarily function as an EV battery) has also been contemplated. When charging, EVs are connected to the grid and could, in theory, cumulatively act as grid support storage. However, this would bring a number of challenges, such as the impact of this extra use on the battery's lifespan.
• The design and implementation of the regulatory regime in various jurisdictions is ongoing. At EU level, in February 2021 the European Parliament called for the creation of competitive and resilient value chains for battery production, reuse and recycling. It stressed that the new EU regulatory framework for batteries should tackle the full lifecycle environmental impacts, with dedicated provisions on batteries relating to mobility and energy storage.
For more information on our Energy practice please see here and for our automotive industry specific experience please see here.
READ MORE
PROJECTS
• The choice of location of gigafactories varies as there are a number of factors at play: the OEMs have a number of existing (active and mothballed) sites which, amongst other things, are generally proximate to skilled labour (for example, ACC will site two of its planned gigafactories at Douvrin (the long-term home of PSA's ICE plants) and at Opel's Kaiserslautern plant).
• On the other hand, there is much to be said for proximity to abundant cheap green energy (both for the gigafactory, but also any co-located recycling) and, potentially, to the battery minerals and ore processing facilities (for example Northvolt's Skelleftea site or the GigaVaasa area of Finland). The manufacture of batteries is highly energy intensive and there is an increasing regulatory focus on the carbon intensity of production. Gigafactories with access to a plentiful supply of low carbon generation will therefore be at a distinct advantage. Assuming a key goal for a non-OEM connected producer is securing long-term supply contracts, then their proximity to one or more car manufacturing plants will also be an important factor in reducing carbon emissions and cost from distribution.
• Many proposed sites may benefit from competing government (local, national and regional) incentives and access to EBA/EIB and other dedicated financing and, more generally, the benefits of locating within the EU (v neighbouring EU countries) should be considered (see the Incentives / Trade segment).
• Once the site has been chosen, planning, land-use and other consents for construction then take the fore, alongside acquisition of the land and access rights, if not pre-owned. The tender and construction phase (including ongoing compliance with building regulations and other permits) then begins. Capital cost, use of technology and supply chain capability may have implications for the overall procurement strategy, as well as risk allocation, and collaboration and interface management may be required. ESG ambitions for the construction and operation of the factory will need to be embedded into procurement processes from an early stage.
• Constructing gigafactories requires high levels of capital investment with a single facility costing billions. Significant private investment has come from the automotive industry itself, but as an investment target these projects appeal to a much wider pool of capital with investment also coming from energy and commodity companies and funds that back green technology.
• If project financing is being deployed (or payments of incentives or grants are phased) then, as usual, the key project milestones will need to be factored around this. In this regard, the securing of long-term supply contracts for the finished batteries on "bankable" terms in relation to duration, pricing, etc. and critical battery minerals will likely be key. Particularly in the current environment, consideration should also be given to looking to secure long-term power supply, versus relying on grid spot market pricing.
• As indicated, many gigafactories may also build adjacent recycling plants (which, in project terms, can follow after the gigafactory) and some are also looking to co-locate with mineral processing plants (for example, battery grade lithium hydroxide or coated separator composites) to feed the factory. The co-ordination of the interaction between these phases of the wider project and the contractual (and financing) framework for them will be key.
For more information on our Projects practice please see here and for our automotive industry specific experience please see here.
READ MORE
ESG
• Supply chains will have to be carefully considered from an ESG perspective, including the full mining value chain of the critical minerals used for batteries (see the Mining segment), to ensure that relevant resources are sourced from responsible producers and that battery manufacturers (and OEMs) do not expose themselves to reputational and legal risks within their supply chain.
• The responsible sourcing of cobalt is one of the most acute examples of ESG factors shaping the market. A significant proportion of global cobalt reserves are located in the DRC whose human rights practices and labour standards (both child labour and human slavery) have come under intense scrutiny.
• Another example is lithium mining in the "lithium triangle" (Chile, Bolivia and Argentina) where lithium is extracted from salt flats by pumping significant amounts of water under the surface of a salt flat and then allowing it to evaporate. Indigenous communities are concerned about the water-intensive methods of lithium extraction in the area and argue that these regions could become uninhabitable due to how much freshwater is expended during this process. Nickel mining in Indonesia faces similar scrutiny due to the impacts of the deep-sea disposal of (substantial) waste following the extraction process.
• Responsible sourcing is likely to require supply chain due diligence exercises in relation to ESG matters and the use of third-party certification for suppliers within the entire battery value chain. To this end, many OEMs and others in the battery materials supply chain have voluntarily joined the Responsible Minerals Initiative in a bid to support responsible mineral production and sourcing globally. We expect to see certain elements of diligence and reporting become mandated through regulation – for example, the proposed EU Battery Regulation (see the Proposed EU Battery Regulation segment) contains an obligation for certain battery producers to establish supply chain due diligence policies with respect to cobalt; natural graphite; lithium and nickel. The ESG risk categories to be diligenced include: air; water; soil; biodiversity; human health; occupational health and safety; labour rights, including child labour; human rights and community life.
• The reliance on critical minerals for the production of batteries means that battery manufacturers and their supply chain may also be captured under the EU Conflict Minerals Regulation and related obligations; while currently only covering tantalum, tungsten and gold, the Regulation is expected to be expanded in scope to also cover cobalt in the near future.
• Strong focus on carbon emissions throughout the global economy may also have an impact on the prices of products necessary for the production process as companies within the entire value chain try to decarbonise to meet net-zero targets. In particular, the proposed expansion of the EU ETS to maritime transport may have an impact on the price of bulk cargoes, affecting both raw materials and processed compounds.
For more information on our ESG practice please see here and for our automotive industry specific experience please see here.
READ MORE
IP
Intellectual Property is a key strategic issue in the evolution of EV battery technology. There are several aspects to consider, including:
• ensuring that any innovation collaborations with third parties secure the IP and data rights and permissions needed for successful development and subsequent commercialisation of the technology;
• navigating the already complex patent landscape in this area in order to ensure that there is a clear path to market for the technology and ensuring that the investment is not undermined by the existence of third party IP rights or failure to seek third party licences;
• the extent to which standardisation will play a role in IP issues around EV batteries is as yet unclear;
• the likely importance of trade secrets in protecting key knowledge around new technologies in a fast moving and innovative field, and the associated difficulty in policing and enforcing such rights in comparison to other registered IP rights;
• considering carefully the risks around the loss of key employees to competitors and the ability to ring-fence know-how in this context; and
• conducting operational resilience assessments and putting cyber and data security protections in place to protect systems and operations from attack or mis-use.
For more information on our IP practice please see here and for our automotive industry specific experience please see here.
READ MORE
INCENTIVES / TRADE
Incentives & Funding
• In the EU, there are two major sources of public funding for battery projects: (i) subsidies granted by EU Member States which, in principle, need to be approved under EU State aid rules; and (ii) funding granted under one of the several initiatives supported by the EU.
• Under EU State aid rules, the EU Commission has approved two major Important Projects of Common European Interest ('IPCEI') in the area of batteries:
• There are multiple funding initiatives at EU level arising from the European Battery Alliance ('EBA') such as the Business Investment Platform ('BIP'), or the research initiative Horizon Europe. The latter will make €95.5bn available for the development of a more sustainable economy by financing projects in the field of batteries for the period 2021 – 2027.
• The EU Recovery and Resilience Facility ('RRF'), is an EU-level fund which will make €672.5bn available in loans and grants to support reforms and investments undertaken by EU Member States in the context of the recovery from the COVID-19 pandemic. The RFF is closely aligned with the Commission's priorities, namely ensuring a sustainable and inclusive recovery that promotes the green and digital transitions. Therefore, investments in the battery value chain are eligible for support under the RRF.
• In the UK, the government has stipulated a 10 point plan for a green industrial revolution which includes £1bn to support the electrification of UK vehicles and their supply chains, including scale battery production. This has been supplemented by further funding to support the EV transition announced with the UK Government's Net Zero Strategy: Build Back Greener in October 2021.
Trade
• The EU is a customs union and therefore all tariff and import formalities need to be accomplished only once in order to allow the product to circulate freely in the whole of the EU.
• Trade in batteries is influenced by the preferential tariffs on batteries, their components and also vehicles resulting from trade agreements (including the EU-UK trade and Cooperation Agreement, 'TCA'). These provide for reduced tariffs on many goods conditional on satisfying detailed "rules of origin". In the case of vehicles, for example, the EU normally requires that no more than 40% of the value of a vehicle may be comprised of non-originating materials (sometimes expressed as a 60% value added requirement). As a result, many EVs traded between the EU and the UK would not have qualified for preferential treatment and would therefore have borne the full third country customs tariff. In order to seek to avoid this and to allow further time for battery production to be developed in the EU and the UK, more generous limits on non-originating materials (of up to 70% in batteries until 2023, falling to 50% from 2024) were included in the TCA for both batteries and EVs until 2026.
For more information on our Trade practice please see here and for our automotive industry specific experience please see here.
READ MORE
PROPOSED EU BATTERIES REGULATION
• In December 2020, the EU Commission unveiled the proposal for a new Batteries Regulation (to replace the current Batteries Directive and amend Regulation 2019/1020). The main objective is to modernise the European regulatory approach to batteries by ensuring that all batteries placed in the EU market are sustainable and safe throughout their entire lifecycle.
• The new regime under the proposed Batteries Regulation, which is expected to start to apply from 1 January 2022, will cover the full lifecycle of batteries, including production, use, and the end-of-life stage, while the existing EU regulatory framework for batteries only covers the end-of-life stage.
• The Regulation envisages reporting requirements on the carbon intensity of batteries, which over time would develop into a maximum permissible carbon intensity for new batteries. To ensure compliance with such obligations, measures would need to be implemented to track the relevant emissions from the battery production process and enable market participants to make the necessary disclosures in the future.
• The Regulation also envisages a whole lifecycle approach to batteries, which will require the reuse and or recycling of batteries at their end of lives (see the Energy segment). These obligations will rest upon the manufacturer of the battery or, if imported into the EU, the importer.
• Specifically, the new regime will introduce the following changes: (i) a new set of carbon footprint rules for EV batteries; (ii) new requirements on recycled materials such as a declaration of content by 2027; (iii) a new battery management system storing the information and data needed to determine the state of health and expected lifetime of batteries; (iv) new supply chain due diligence policies for raw materials; and (v) more detailed Extended Producer Responsibility ('EPR') obligations.
Please see here for the HSF briefing note on the proposed EU Batteries Regulation.
READ MORE
EMPLOYMENT
Recruiting, retaining, motivating and keeping safe your employees is critical in any industry, but we look below at some of the key employment law and HR issues to consider in connection with the EV battery supply chain:
Employee health & safety issues
• Mining, the handling and processing of ores and chemicals and the manufacture, transportation and recycling of battery cells all involve enhanced health & safety risks. The Covid-19 pandemic has also brought this issue into even sharper relief and companies need to have in place updated policies and procedures to protect their workforces and comply with local legislation which may well evolve in this area (e.g. the potential introduction of sanitary pass requirements), environmental norms which are adapting e.g. on aeration and protection of the place of work etc.
Protecting and incentivising key talent
• With a new industry set to grow so fast, competition is already fierce for key employees, particularly in the R&D field and for experienced senior management from both the Automotive and IT industries and companies need to ensure they have in place robust contractual arrangements (such as non-competition provisions, clauses to protect trade secrets and secure title to IPR for the company, confidentiality clauses etc.) and incentive arrangements to attract and retain top talent. For further commentary on the protection of trade secrets, please see the latest article in our "Views on an evolving automotive industry" series – Using trade secrets to protect innovation and the IP Segment.
Retaining constructive relations with the employee representatives (trade unions & works councils etc.)
• This is of heightened focus with large (often unionised) factory based workforces that may be required to adapt quickly to new ways of working or new shift patterns (potentially moving from a single shift operation to a 24/7 double shift pattern to ramp up supply during busy periods) and generally results from ensuring the company is compliant with its legal obligations (to avoid giving the employee representatives leverage) and maintains constructive relationships generally in its interactions with the employee representatives.
• But, in addition to their traditional representative bodies, employees are increasingly active themselves, directly, on social media platforms. This increases the ability of individuals or a group of employees to raise grievances in a public forum which is less easy for the company to manage and which of course could give rise to reputational risks.
• Employers therefore need to be alive to this risk, ensure employees have the proper forums to raise grievances internally (and that these are promptly dealt with) e.g. clear grievance procedures, whistleblowing hotlines, discussion groups etc. The EU Whistleblowing Directive is also due to be implemented from December 2021-December 2023 (depending on the size of the workforce) and will give risk to additional obligations in Europe.
"Right-sizing" and restructuring workforces
• Whilst many gigafactories will be greenfield start-ups, a number of the OEM majors (such as Renault and Stellantis) are looking to restructure their existing manufacturing facilities and workforces to transition from the ICE supply chain to the EV supply chain. Restructuring exercises are expensive and time-consuming for management and give rise to potentially significant legal, social and reputational risks (such as damages claims from the dismissed employees, the risk of vetoes to projects in certain jurisdictions, potential industrial action, damage to industrial relations, negative impact on reputation etc.), however there are of course material social and economic advantages in being able to retain and reskill existing workers.
• Many jurisdictions also impose a legal obligation to ensure the workforce is properly adapted for future needs, requiring the employer to anticipate training and future skills requirements and to proactively take measures to ensure that the future workforce is probably adapted to the company's needs to minimise the risk of future redundancies.
Working time issues
• These are regularly a source of potential risk and cost for employers. The key risk areas relate to:
For more information on our Employment practice please see here and for our automotive industry specific experience please see here.
READ MORE
PRODUCT LIABILITY
Key product liability issues for consideration and resolution include:
• How should liability be allocated between battery manufacturers and the OEMs (and others in the supply chain) for defects in batteries that lead to safety issues (e.g. a sudden loss of driving performance or a fire)? This is an area where both statutory regimes and market practice are likely to develop rapidly
• Both battery manufacturers and OEMs will have to develop effective policies for identifying defects and recalling batteries and BEVs where necessary to ensure consumer safety
• Over time, the regulatory regime governing the chemical content, performance and safety characteristics of EV batteries is likely to become ever more complex and stringent, including via the EU Batteries Regulation (see the Proposed EU Battery Regulation segment). Battery manufacturers and OEMs will need to take steps to ensure compliance and quality throughout their supply chains
• Manufacturers will need to consider how to 'future proof' their batteries to ensure compliance with developing regulations (such as the EU Batteries Regulation) and compatibility with new charging technology
• Manufacturers and importers currently have a legal duty to collect / take back EV batteries and to ensure they are not incinerated or dumped in landfill. The rules governing the disposal of batteries will continue to be a major focus for governments and regulators. Manufacturers, importers (and potentially others in the supply chain) will have to continue to adapt to ensure ongoing compliance;
• There may be scope for businesses in the supply chain (including manufacturers of EV batteries, OEMs and others) as well as the insurance industry to work with governments and regulators to shape the rules on safety and other areas of compliance that will develop during the coming years.
For more information on our Disputes practice please see here, information on our Product Liability practice please see here and for our automotive industry specific experience please see here.
READ MORE
M&A & FINANCINGS
• Collaborations and acquisitions are expected to be prevalent throughout the EV battery supply chain as industry participants acknowledge either that their existing expertise or financial resources are not sufficient to support their desired investment or the pace and scale of change, with Western industry participants, in particular, often looking to their Asian counterparts who are significantly ahead in the EV battery market.
• Pooling resources through tie-ups or securing know-how through start-up acquisitions can mitigate market risks, maximise individual entity strengths and capacity, expand management and technological expertise and facilitate securing substantial third party financing. Joint ventures such as those between Toyota and Panasonic, Ford and SK Innovation, as well as Stellantis, TotalEnergies and Mercedes-Benz in ACC, and upstream supply tie-ups like the Johnson Matthey battery minerals strategic partnership are, therefore, likely to continue to be commonplace as the industry evolves and industry participants try to adapt in response.
• Such collaborations and acquisitions are not, however, simple. Deal terms are often difficult to establish particularly for early stage investments in technology-focussed EV battery start-ups. New technology always brings new challenges, with principals and lawyers tasked with foreshadowing potential hurdles and appropriately accommodating these in documentation. Even following completion, extensive transitional arrangements may be needed to support the business in its formative years. The usual challenge of cross-border collaborations and acquisitions will also be present, whether related to due diligence, compliance, culture or integration, as well as increasingly national protectionism through scrutiny of foreign direct investments.
• Competition law also has to be navigated both in respect of market share-based approvals associated with tie-ups or acquisitions and in ensuring participants are not perceived to be inhibiting consumer choice in an anti-competitive manner, thus risking fines, potential damages claims and serious reputational damage.
• As with any nascent industry, as it develops beyond needing to rely on parent and venture capital or private equity capital, companies will increasingly look to the debt and equity capital markets to raise finance for their projects, including though SPAC mergers and follow-on fundings, such as the one between Kensington Capital Acquisition Corp. and QuantumScape.
• Unusually-designed acquisition and leveraged financings are also anticipated to be common in the market to fund desired corporate transactions with pressures on borrowers and lenders to achieve the necessary return on their investment likely to continue to escalate.
• Such collaborations, acquisitions and funding structures always require early-stage definitive advice, but the rapid convergence of early-stage start-ups, with major listed companies and with traditional and non-traditional finance providers and public markets means that a deep understanding of public and private corporate, financing and tax structures across a number of markets is essential in order to be able to assess the best options and avoid the pitfalls and obstacles.
For more information on our M&A practice please see here, information on our Finance practice please see here and for our automotive industry specific experience please see here.
READ MORE
○ The EU Commission approved in December 2019 an IPCEI involving seven EU Member States which will provide up to €3.2bn (with the expectation of a further €5bn in private investment), to support research and innovation in all segments of the battery value chain. The completion of the overall project is planned for 2031; and
○ The EU Commission approved in January 2021 a second major battery IPCEI involving twelve EU Member States which will provide up to €2.9bn (with the expectation of a further €9bn in private investment), to support research and innovation in the entire battery value chain. The completion of the overall project is planned for 2028.
○ compliance with local law restrictions in relation to maximum working time hours, potential restrictions on shift conditions and Sunday working and minimum rest periods; and
○ ensuring working time does not become a factor increasing the risk of stress, burn-out or other health and safety related matters.
Mining
Energy
Projects
ESG
IP
Incentives / Trade
Proposed EU Batteries Regulation
Employment
Product Liability
M&A & Financings
VIEW NEXT
VIEW NEXT
VIEW NEXT
VIEW NEXT
VIEW NEXT
VIEW NEXT
VIEW NEXT
VIEW NEXT
VIEW NEXT
EXPLORE OUR
AUTOMOTIVE EXPERTISE
FIND OUT MORE
