Battery swapping is a technology that allows battery-powered vehicles to switch a depleted battery with a fully charged one in a matter of minutes. The benefits of using swap stations instead of traditional charging points include is that they offer faster charging times, eliminate wait time and enable consumers to avoid peak hours. The concept has taken off in Asia, particularly within China and Taiwan, as automakers and two-and-three wheeler (2/3 wheeler) companies seek to speed the pace at which consumers can replenish their battery charge.

Battery swap stations can take different forms depending on the operator. The most common in the passenger electric vehicle (EV) segment is Nio’s swap stations operating across China and Europe and Gogoro’s 2/3 wheeler stations in Taiwan. In Nio’s stations, car owners can drive their vehicles into the station, where there are 13 available batteries to reserve in advance. The battery from the underside of the car will then be remotely switched out and replaced with a fully charged alternative, all taking place in under 5 minutes. With Gogoro, by comparison, the station is manually operated by consumers due to the smaller size of the batteries. In this case, a charged battery can be lifted out of a station, where 30 charged batteries are available.

What demand do we expect from battery swapping?

Fastmarkets expects that battery swapping will require over 117 gigawatt hours (GwH) of batteries by 2033, with a notable upside risk for this number to increase due to the pace of uptake. In terms of markets, we expect that China will hold 69% of the market, with operators such as Nio, CATL, Aulton, GAC and a JV between Geely and Livan leading the development of swap stations in the market. Notably, CATL is investing in swap stations for passenger EVs, as well as heavy electric vehicles, with its QIJI Heavy-duty truck swap services, the first of its kind globally. Gogoro, with a forecasted 12,000 2/3 wheeler swap stations to be operational by year-end 2023, will lead the market in Taiwan. This is in addition to KYMCO, which can hold, in some cases, 50 batteries in one 2/3 wheeler swap station.

Will battery swapping replace charging infrastructure?

We expect that traditional battery charging points will remain the dominant choice for the EV market going forward, but that battery swapping will continue to rise in popularity over time. We expect this to happen predominantly in Asia. This is likely to happen in the electric 2/3 wheeler market, which is expanding rapidly. Our forecast below shows that we expect sales to reach over 48 million units by 2033.

China will make up 46% of that market and India 39%, representing over 22 million and 19 million units. This large fleet presents issues for traditional charging. It would require a large area of land to install sufficient charging points for such a high number of 2/3 wheelers, with the longer wait times also presenting scenarios where potentially hundreds of people could be waiting for their vehicle to recharge.

We expect slower uptake in Europe and North America for two reasons. Firstly, EV adoption remains more nascent in these markets compared to China, particularly in the 2/3 wheeler market, making

traditional charging points more attractive at this point. Secondly, the automakers that do offer swaps as a charging option are predominantly based in Asia. Until we see greater demand for these brands across Europe and North America, we won’t see a notable rise in swapping. That said, particularly in urban areas, swaps offer utility to densely populated cities looking to improve the efficiency of their charging infrastructure. We expect to see uptake of the stations in dense cities in Europe in the foreseeable future. As Nio builds their fleet of battery swap stations in Europe, we also expect that other companies will follow suit as confidence in the infrastructure builds.

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• Electric vehicle (EV) adoption will recover from its sluggish start in 2023
• Fastmarkets has lowered its EV sales forecast to reflect muted EV sales in China
• By contrast, Fastmarkets expects that the EV market in the US has hit a turning point, with a combination of the IRA and the EPA emission standards spurring mass adoption
• While EV adoption at the outset of this year in Europe has been sluggish, there are signs that the market remains resilient, despite a first-quarter dip.
• The energy storage sector (ESS) market is growing exponentially and in China and the US is outpacing that of EVs. The growth of this sector cannot be underestimated and has notable implications for battery materials and metals markets
• EV growth in other markets will rely on policymakers improving the financial incentives for consumers to purchase an EV. In this piece, we highlight Costa Rica as an example of how this can be done well

The noticeable drop in EV sales in China and Europe in January of this year was seen as a signal to many that 2023 would be a sluggish year for EV adoption. However, Fastmarkets believes that this is not the entire story. In this piece, we examine what we have seen so far in the EV and ESS markets in the first quarter of this year and discuss how that informs our demand forecasts for 2023 and beyond.

For more in-depth insights into the short- and long-term forecasts for the key battery materials, find out more about our NewGen forecasts here.

China ESS demand soars, while EV sales suffer

January was a slow month for EV sales, contracting 5.5% year on year. This was a result of the removal of OEM manufacturing subsidies, low consumer spending as a result of the downbeat macroeconomic outlook and a spike in Covid-19 cases. While January has always been a slow month for EV sales in China, this contraction in January is notable, as it is the first that the market has seen in the past three years. Sales in February and March have also been more sluggish (57.3% and 34.8% year on year) compared to the levels of uptake that we saw in 2022 where monthly sales growth averaged 106.9%.

Fastmarkets has noticed that OEMs and dealerships have higher levels of inventory because of this dampened demand; as seen in the graph below, 2023 sales are not keeping pace with production as demand is not reaching the levels that OEMs have seen previously.

As a result of these factors, the battery raw materials team at Fastmarkets is re-assessing its 2023 EV sales forecast for China. They now expect EV sales to reach 8.04 million units in 2023, down from 8.55 million previously. That said, Fastmarkets remain bullish on sales picking up in the latter half of the year due to the new emissions standards being implemented on July 1, 2023.

The standards enforce new limitations on the level of emissions that internal combustion engine (ICE) cars can emit, reducing levels by around a third. This has created a glut of ICE vehicles for OEMs to sell before the regulations come into place in July, with OEMs lowering model prices to clear this backlog. However, once these emissions standards are introduced, it is thought that the policy will encourage consumers to go electric by making ICE vehicles less attractive as an investment. We also expect that the ongoing EV price war, falling battery material prices and greater EV inventories, will cause an acceleration of the downward trajectory in EV prices in China, aiding EV affordability.

Elsewhere, the ESS market in China has experienced exponential growth in 2023. Market participants have said that provincial governments are investing extensively into the development of battery energy storage systems (BESS), particularly those co-located with renewable energy sources. This is a result of the government’s policy requiring BESS to be constructed alongside new renewable energy projects, in addition to a goal to attain 100 GW storage capacity by 2030. These policies have propelled investments into ESS and the ESS market could reach 30GWh this year. This means that the ESS market in China will grow more quickly year on year than EV sales, with 50% growth in 2023 (see graph below), compared to 25% for the EV market, highlighting just how rapid growth will be in this industry in the near term.

US EV sales have reached a turning point

Fastmarkets believes that EV sales have reached a turning point in the US and have entered the mass adoption phase. This was initiated last year, with the EV penetration rate reaching 6.6%, surpassing the 5% point typically seen as an indicator for the beginning of mass adoption. Data from quarters one to three shows that mass adoption is on track.

Figures from Argonne Library state that of the 1.13 million new light vehicles registered in February, over 105,241 were electric. That represents a 77.1% growth year on year and a new high of a 9.3% EV penetration rate. We also note that the new US EPA (Environmental Protection Agency) emission standards, requiring that 60% of OEM vehicle production is for electric vehicles, provide a major boost to EV demand over the longer term by increasing the pool of available vehicles for consumers and future investments into EV model designs. Consequently, Fastmarkets are bullish on sales for 2023 and beyond, with a forecast of 1.55 million EVs to be sold this year, rising to 10 million in 2033.

One sticking point for sales growth will be the announcement on April 18 by the US Treasury Department that only 10 electric and plug-in hybrid cars from four automakers (Tesla, General Motors, Ford, Volkswagen) qualify for the $7,500 US tax credit within the IRA. With the 2023 battery component and critical material requirements kicking in on April 18, we now see brands such as Hyundai, Nissan, BMW, Audi, Volvo and Rivian not qualifying for the credits. Of the top 10 EV models from last year, only three qualify, namely Tesla’s Model 3 and Y, and the Chevy Bolt (Ford’s highly popular Mustang Mach-E only qualifies for the partial, not full, credit).

While we expect that more vehicles will qualify once manufacturers have altered their supply chains in order to meet the requirements, for this year, we expect to see a shift in consumer preferences towards the models where credits are available. This is because the tax credit is hugely helpful in making EVs more affordable for consumers.

EV prices remain high in the market, sitting at $58,940 in March according to Kelley Blue Book, $11,000 above a new ICE vehicle, meaning that the loss of this credit will particularly hurt low-to-middle income consumers who rely on the credits to afford an EV.

In the ESS market, there has been explosive growth in the US, with 111% growth of battery storage capacity expected this year alone (see graph below). We are also expecting this figure could be surpassed given the introduction of ESS subsidies by the IRA this year, making standalone storage systems eligible for a 30% investment tax credit, alongside other incentives, that will remain until 2032. This level of demand highlights the need for the US to build out its domestic ESS battery manufacturing capacity, as many large-scale ESS operators currently rely on China for battery supplies.

Europe – a slow start to the year but a rebound expected

While EV adoption at the outset of this year in Europe has been sluggish, there are signs that the market remains resilient, despite a first-quarter dip. Sales from this first quarter in some of Europe’s leading markets were poor; sales contracted in January (as shown in graphs below) in Norway and Germany as a result of the former ending VAT exemptions for EVs and the latter ending subsidies for plug-in hybrids.

Another good example is the UK – the market seems to have lost the exponential growth in sales that it built up in 2019 and 2020, with sales across the three months just surpassing or matching sales figures from last year (see graph below).

The rebound in sales across these locations in March is an indication that the EV market remains resilient, all posting above 20% growth year on year. Data from the ACEA also highlights that EV demand across the broader European region remains upbeat, with sales of BEVs increasing by 22.9% in January. In particular, European sales are expected to be bolstered throughout the year by the entrance of more affordable Chinese EV models this year, from the likes of BYD, Nio, Xpeng and Great Wall.

Rest of world sales growth remains nascent

Fastmarkets predicts that Australia will reach the tipping point for mass adoption (5% EV penetration rate) this coming year, as price cuts to Tesla models will cause a surge in sales in the market. Elsewhere, excluding Korea, Canada, New Zealand, Israel and Singapore, growth will remain nascent. EV affordability will need to increase before major uptake in this region in the near term. One notable laggard is Japan, which is expected to only reach a 3% EV penetration rate this year (up from a low 1.4% last year). The EV industry has been slow to develop in Japan, largely as a result of automakers focusing on hydrogen and other fuel-cell vehicles. One segment in Japan that is predicted to do well is mini-EVs, which experienced a 48-fold increase in 2022 due to their affordability, costing a third of the price of a passenger EV and utility in urban areas.

One bright spot to note is Costa Rica, which achieved the highest EV penetration rate in the Americas region last year of 7.3%, with a rate of 10.6% in December 2022. Growth has continued this first quarter, with sales expanding by 187% in February. Although the volume levels are low, with 2,674 EVs sold in 2022, this market could act as a role model for other emerging markets and countries in the region. Costa Rica’s growth has been achieved by ambitious government policy, which offers an attractive breadth of financial and non-financial incentives, available until 2035. This level of policy commitment is rare to see outside of the major countries with EV sales and we need much more of these durable policies within emerging markets to ensure that EVs become more accessible and affordable to a wider array of consumers.

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Subsidy removal will result in increased EV prices

It is thought that the removal of this subsidy will cause a slowdown for three key reasons. The first is an increase in EV prices. A breadth of automakers in China, including BYD, GAC and Dongfeng, all announced price increases in November 2022 in advance of the end of subsidies. The OEMs have explained the increases as a necessity on the basis that the phaseout of subsidies will squeeze their tight profit margins, which are already being squeezed by rising costs of battery materials, supply chain disruptions and Covid-19 lockdowns.

BYD, the most popular EV manufacturer in China in 2022, has stated that it will be raising prices between 2,000 yuan (USD 290) and 6,000 yuan (USD 872) in 2023 across all models. The automaker’s decision to increase costs can be explained by the graph below, which illustrates the cost pressures that the OEM has been facing since 2020, with gross profit margin’s falling from 25.2% in 2020 to 16.3% in the first half of 2022 due to rising material costs. With the additional removal of the OEM subsidy in 2023, BYD, along with other automakers, has been forced to pass on some of these costs to consumers by increasing EV prices.

Given that BYD made up six of the top ten EV models in China in the January to November 2022 period (with the Song Plus model in first place), Fastmarkets believes that a price increase will impact a breadth of EV consumers in the market by making it less attractive to purchase an EV. As a result, we expect to see slower EV sales growth rates in the first half of this year.

Drop in EV sales expected as vehicle prices rise

It is also believed that the end of the OEM subsidy will dampen EV sales in the first half of 2023 because historically, a decline in subsidies in China has been followed by a decline in sales. This is best observed if we look back to the 2017-2019 period of passenger EV (PEV) sales (chart below). The labels highlight two previous reductions in the OEM subsidy by the government. One in May 2018, where the subsidy was cut for vehicles with a range lower than 140km, and another in June 2019, where subsidies were cut by 45-60% for vehicles with ranges lower than 250km. Following these cuts, we can see a drop in PEV sales, before sales readjust and return to upward growth again around 2-4 months later. This showcases a correlation between subsidy cuts and EV sales in the market, leading us to expect that this trend will play out in 2023 when the OEM subsidy ends.

That said, we should note that previously, OEM subsidies were higher and applied to a broader number of vehicles, meaning that the subsidy’s net contribution to EV prices was larger. For example, using Table 1, we can see that OEM subsidies in 2018 were provided to vehicles in five different vehicle ranges. However, in 2022, only two of those range categories qualified. We can also see that the size of the subsidy has been reduced over time, notably by 10%, 20% and 30% from 2020 to 2022. This has meant that the subsidy contributed to ~10% of the EV price in 2022, compared with ~35% in 2017.

Consequently, while we expect that the removal of the subsidy in 2023 will dampen EV sales, in line with historical trends, its removal will not have as severe an impact as in previous years when the subsidy made up a greater percentage of the EV price.

China EV sales growth on a downward trajectory

It’s also important to highlight that EV sales growth rates have already been on a downward trend since the end of 2021, with sales slowing in November 2022 due to the macroeconomic downturn and rising Covid-19 cases. Indeed, data from China’s Association of Automobile Manufacturers (CAAM) (highlighted in the chart below) shows that PHEV and BEV sales growth rates had noticeably slowed year-on-year. Indeed, PHEV sales in November 2022 did not reach a three-digit growth rate for the first time since April 2021, while BEV sales attained their lowest growth rate (67.4% year on year) since June 2020.

As a result of these three factors, Fastmarkets forecasts that there will be 8.7m passenger electric vehicles sold in China in 2023, representing growth of 43.8% year on year, a notable slowdown from 2022 where estimated growth was 72.2% year on year.

That said, despite the predicted slowdown in sales in the first half of 2023, it is predicted that EV sales will remain positive in the market throughout the remainder of the year. Many automakers have decided not to raise EV prices and to instead absorb the added costs created by the ending of the OEM subsidy.

This decision is thought to be due to an ongoing EV price war in China, instigated by Tesla in October 2022 when the automaker cut prices to its Models 3 and Y due to slowing EV demand. Tesla then went on to cut prices for a second time on January 6, 2023, resulting in a total reduction of Tesla’s vehicle prices by 13-24% (according to prices on Tesla China’s website) over the past three months, putting pressure on other automakers in China to follow suit. With manufacturers including SAIC, Nio, XPeng and Li Auto choosing to maintain their prices and absorb costs, there will continue to be a breadth of affordably priced EVs available in the market, limiting the downside risk presented by the end of the OEM subsidy.

Tax policies will support and strengthen EV sales

It is also expected that changes to the government’s vehicle tax policies for EVs and internal combustion engine (ICE) vehicles in 2023 will support EV sales this year. First, we note the decision made by the government in August 2022 to extend the EV tax incentive, allowing EVs to be exempt from the 5% vehicle purchase tax. As this is a continuation of an existing policy, it’s thought that this incentive will not have a noticeable impact on sales. However, the extension will give EV sales an edge over ICE sales due to the re-introduction of the 10% purchase tax for ICE vehicles in 2023. The tax was halved between June to December 2022 in order to stimulate the domestic auto industry, but will return to 10% in January 2023. We expect that the increase will further consolidate consumer interest in EVs by making it less attractive to purchase an ICE in 2023.

Fastmarkets also remains broadly positive on the EV market in 2023 due to the ever-growing EV penetration rates. Data from 2022 showcases that EV sales made up 25% of total vehicle sales in the January-November 2022 period, highlighting that EVs are firmly in the ‘mass adoption’ stage. This is also showcased by the growth of the commercial electric vehicle (CEV) segment, which grew 85% year on year in the January-November 2022 period, with light electric trucks, electric buses and trucks becoming increasingly popular for fleet operators with short-haul networks. Moreover, EV penetration rates in the CEV segment are expected to expand in 2023 as new electric van, pickup and truck models with longer ranges are added to OEM lineups, which is expected to attract a greater breadth of customers.

The road ahead for EVs

The EV revolution will take shape globally – there is simply too much critical need driving it forward. But battery makers and automakers will need to navigate the complexity and volatility of both supply and price across the battery materials market, making access to price, news, forecasts, and analytics vital to compete and win in the EV revolution.

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