Chinese cell manufacturing ran at an average capacity utilisation of around 40% last year. Wolfgang Bernhart's view on where that goes next is that it might get worse.
Too much capacity has been added. That is the plain reading, and it is the reason the Chinese government has proposed a new regulation urging companies to spend at least 3% on R&D, improve efficiency, and stop adding capacity without real orders from customers.
The same pattern sits one step upstream. Announced capacity in cathode materials, for LFP and for ternary alike, is significantly higher than what the market needs, and the capacity already installed is above it too. Prices have fallen accordingly. Graphite has been built out heavily, in Bernhart's view probably too heavily, with significant price reductions and a couple of companies already out of the market.
What the upstream position is built on
The other half of the picture is what Chinese companies own further back.
More than 90% of the investment in the Indonesian nickel industry comes from China. On lithium, Chinese firms are active in the traditional sources in South America and Australia that European and US companies are also looking at, and they have moved into African resources: Bernhart names Ganfeng and BYD among the companies doing it.
That position is what the regulatory argument in the West is a response to, and it is why the question that matters is not how much capacity comes out but where the output goes.
Tariffs move the price, not the cost
Bernhart reads the Inflation Reduction Act and the measures around it as having two objectives. One is to increase local value add. The other is to get Chinese companies out.
The second one, he thinks, is working. A Chinese company that does not have significant shareholdings from companies outside China, or that has connections to the Chinese state, will find it really hard to do business in the US. Add the tariffs and the amount of investment required to stay in the market rises again.
Where he does not think it works is upstream. There is a certain amount of lithium the US can mine domestically, or source from free trade countries and countries with a critical minerals agreement. Graphite is the counter-example. A 25% import tariff leads to increasing prices for American customers of electric vehicles and for the utilities buying stationary energy storage, and 25% is by far not enough to compensate for the higher cost of producing graphite in the US rather than in China.
The 100% tariff on Chinese electric vehicles works the same way in his account. It means American customers pay more.
His reference point for what that costs them is what the money buys in China. He has been in vehicles where the same interior, the same equipment and the same options would cost roughly three times as much in Europe. At 100%, very few Chinese vehicles will be imported, and pressure on Mexico not to incentivise Chinese EV production there closes the obvious way round. Since cost is a very important topic for the customers most likely to buy an electric car, he expects lower adoption, and more pressure on Chinese companies to send those vehicles to other markets. Europe is the biggest of them. India is interesting too, and Morocco is attractive because it has a free trade agreement with Europe.
Where Europe's targets come apart
Europe is where Bernhart's numbers get uncomfortable, and the discomfort is in the detail rather than the headline.
The Critical Raw Materials Act sets a target of 10% for raw materials mined in Europe. Possible for lithium. Impossible for nickel, because the resources are not there. It sets 40% for refining and cathode materials, and from his firm's overview of announced refining and cathode material projects, that can in general be achieved.
Then look closer. If LFP takes the share of European passenger cars he expects, roughly 40%, current planning does not provide enough lithium carbonate refining capacity in Europe. Nor does it provide enough LFP or LMFP cathode production.
Nothing forces the issue. There is no carrot and no stick, as he puts it, because the value-add requirement that actually bites applies to ternary NCM cathode material, which has to be produced in Europe, and not to LFP. And LFP production in China is much cheaper than LFP production can be in Europe.
The competition is for scrap
On the EU Battery Regulation, Bernhart picks out two things.
The first is supply chain transparency: tracing material back to the mining side so that ESG requirements can be evidenced, with OEMs forcing their cell suppliers, who force their cathode material suppliers.
The second is recycled content, which starts to matter in 2031 for lithium, nickel and cobalt, with increased shares in 2036. Production scrap will be the major source for the next eight or nine years, until around 2033 or 2034, after which end-of-life vehicles have to carry it.
The practical effect is already visible in contracts. Cell manufacturers are required to use those volumes, and Bernhart says the commitments are written in, sometimes at larger shares than the regulation requires. No manufacturer wants to generate enough scrap of its own to cover the obligation, so the material has to come from additional sources, and that produces a competition for it.
Today that scrap typically goes to Korea as black mass, is recycled, and comes back. Nothing currently in the regulation forbids it.
Licensing in the US, factories in Europe
Asked what a win-win looks like, Bernhart separates the two regions again.
In the US it already exists in the form of licensing, royalty and service agreements, of the kind put in place between a well-known Chinese cell manufacturer and two American OEMs. Shared IP, some technology transfer, royalties back. A few companies still have plans to build capacity there, and may be able to, because their majority owners are not Chinese. He also expects joint ventures for R&D between Chinese and Western companies, set up outside the US, to reduce exposure to any one country's regulation.
Europe is where the direct investment goes. EV manufacturers including BYD. Several of the major Chinese cell manufacturers, even if one has just cancelled a plant on lower expectations. Cathode materials companies going to France, precursor companies, electrolyte companies. And, he expects, the first joint venture between a cell manufacturer and an OEM in Europe rather than only in the US.
That creates economic value in Europe, which is his definition of the win-win: both sides gaining from the transfer out of what he calls the most advanced economy in the battery value chain.
US direct investment, by contrast, he expects to stay very limited, and the risk in it is very high. Every company he has talked to has a plan B and a plan C, because nobody knows what happens after the next elections.
This piece draws on the full conversation, which is available with a complete transcript on the episode page.