In 2019, France and Germany agreed to pump billions of euros into a plan to boost Europe’s battery industry and try to catch up with China. Five years later, that effort is running out of steam.

As electric-vehicle sales slow, companies including Volkswagen, Stellantis and Mercedes-Benz are scaling back or refocusing battery projects. Chinese manufacturers are slashing costs and the US is drawing away investment with lucrative subsidies.

China already has excess battery-making capacity, can make cells at a fraction of the costs in Europe, and has a head start on the next generation of cell technology. All of this means the continent risks falling further behind in the race to build and power the EVs of the future.

“As a European company we need to change our mindset — we are changing from teachers to become students because we have to catch up on a significant backlog of experience,” Sebastian Wolf, chief operating officer of Volkswagen AG’s PowerCo battery unit, said on the sidelines of a conference in Stuttgart, Germany. “We have to all focus on becoming faster and becoming more cost-efficient.”

Scaling up production in Europe has been a challenge. Northvolt AB, the continent’s biggest and most promising homegrown battery maker, has had delays in ramping up output, and according to a report Thursday in Manager Magazin, BMW has cancelled a €2 billion ($2.2 billion) order due to quality problems.

Companies may cut back more on planned factories as European Union subsidies are hard to access due to bureaucracy, and because carmakers are looking to protect thin EV profit margins. VW may push out reaching full capacity for its €20 billion battery behemoth. Automotive Cells Company, led by Stellantis and Mercedes, has put on hold two of its three sites to weigh making lower-cost cells in light of slowing demand for still-expensive EVs.

The backslide isn’t exclusive to European players, with China’s Svolt Energy Technology Co. canceling a project in Germany because of uncertainties on subsidies and after a cornerstone customer fell away.

Disappointing EV demand is raising the bar for new entrants, who also face competition from leading Asian suppliers. China’s Contemporary Amperex Technology Co., the world’s biggest cell maker, has a site in Germany and is adding another in Hungary, while South Korea’s LG Chem Ltd. has been making batteries in Poland for about six years.

Resilience Play

European suppliers still have a role to play, even as they struggle, ACC’s Chief Executive Officer Yann Vincent said. “It’s not to say that we are immediately competitive, there’s clearly an issue.”

The stakes are high: If the region fails to establish its own EV battery value chain, as cells replace the combustion engine, large parts of the automotive industry — which makes up about 7% of Europe’s economy — will follow solar panels, consumer electronics and chips in shifting to Asia.

But Europe looks increasingly unable to keep up. China, which has been developing battery technology for decades, already controls more than 80% of the market, leading on cost by a wide margin. More recently, China managed to vastly improve the quality of a much cheaper battery cell that uses no cobalt or nickel, triggering ACC’s review to consider shifting to lithium iron phosphate, or LFP, cells.

Meanwhile, aggressive and immediately accessible subsidies and tax breaks in the US and Canada are luring companies like Norway’s Freyr Battery Inc. to move overseas.

The European Commission and the UK have approved less than €7 billion in state aid for battery manufacturing since the start of 2022 — a fraction of the estimated $140 billion needed to reach the target of 1.4 terawatt hours of battery-manufacturing capacity by 2030. The US will dole out an estimated $160 billion in tax credit spending before 2029 for solar and battery cells, according to BloombergNEF. Canada committed $25 billion in battery incentives last year, attracting investments from companies including Volkswagen and Stellantis.

“Europe really needs to wake up and provide a decent response,” Tom Einar Jensen, co-founder of Freyr Battery, said at the BNEF event. “If Europe wants to move from reliance on Russian gas to reliance on only Chinese imported batteries, that probably is a discussion that needs to be more thought about in the current structure.”

The comment echoes Europe’s energy crisis that hit Germany particularly hard after the invasion of Ukraine largely cut of gas supplies from Russia.

Deep Grip

Developing self-sufficiency will be difficult. China not only makes the most batteries, but also has a commanding grip on the industry’s supply chain, especially the refining of key minerals like lithium, nickel, cobalt and graphite, as well as the production of anode and cathode cell components.

So far, the bulk of Europe’s investments have been directed more toward cell manufacturing than the mining and refining industries, said Ilka von Dalwigk, senior technology and policy expert at EIT InnoEnergy, a venture capital firm co-funded by the EU.

“Europe is a little bit in the dilemma in that we need to develop a completely new industrial value chain and we need to develop all parts simultaneously,” von Dalwigk said. “We need to do it quite fast if you want to secure some market shares compared to US and the Asian players.”

Without substantial support, new entrants face a bleak outlook. According to BNEF, the world already has more than twice as much lithium-ion battery capacity as is needed. Manufacturing capacity in China, which has doled out incentives likely totaling in the tens of billions of dollars, was already three times domestic demand last year and will rise to more than six times in 2025, if all factories planned in the country come online.

Herbert Diess, chairman of chipmaker Infineon Technologies AG and former CEO of Volkswagen, said at the BNEF event that Europe is better off focusing on complex solutions to help cars access renewable energy.

“We should do what we can do best, and we should have China making what they can do cheapest and in good quality,” Diess said.