Power spike: How battery makers can respond to surging demand from EVs

As the auto market embraces electric vehicles, battery demand is soaring. Bold moves in gigafactory construction, supply chain strategy, and talent acquisition can help industry players get ahead.

As the world shifts up a gear in its transition to electric vehicles, the demand for batteries has skyrocketed in major automotive markets in Europe and the United States. Automotive and battery manufacturers face a difficult period of uncertainty in the battery supply chain, and many are turning to building their own battery gigafactories or forming joint ventures to address squeezed supply.

The demand is expected to grow by around 30 percent, nearing 4,500 gigawatt-hours (GWh) a year globally by 2030, and the battery value chain is expected to increase by as much as ten times between 2020 and 2030 to reach annual revenue as high as $410 billion. 1 In 2030, 40 percent of demand for lithium-ion batteries is expected to come from China (Exhibit 1). The forecast points to an even split between the two most common chemistries: lithium iron phosphate (LFP) and lithium nickel manganese cobalt oxide (NMC). Approximately 90 percent of the demand will come from mobility applications—most importantly, electric vehicles (EVs). Overall, the growth has catalyzed an unprecedented level of investment that battery manufacturers must get right to stay competitive while other industries pursue the same scarce resources.

By 2030, 40 percent of global battery demand could come from China—evenly split between the top two battery chemistries.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

This speed of scaling new technology leads to notable challenges: shortages of labor and materials, delays in the construction of gigafactories to produce batteries at scale, and competition for resources in the supply chain, among others. In fact, the battery supply chain risks facing a situation similar to the current semiconductor chip shortage, where demand growth has outstripped capital investment in new supply. Furthermore, environ­mental, social, and governance (ESG) factors will play a more significant role—raising another set of issues that companies need to address.

The situation is difficult and novel. Yet it presents significant opportunities for growth across the value chain for those who choose to address the issues at hand and accelerate their move into the EV battery market. These players are of three primary types: incumbent battery manufacturers expanding their operations, auto OEMs entering the space to support their EV ambitions, and smaller new entrants using disruptive technologies.

This article focuses on three key measures for preventing or responding to EV battery shortages: industrialization and scale-up of gigafactories, strategies to find and retain talent, and establishment of a robust and efficient supply chain.

Cost-effective scale-up of gigafactories

Most OEMs and battery manufacturers have built or are planning to build gigafactories to produce lithium-ion batteries at scale, either independently or through joint ventures, yet developing giga­factories is challenging. Even the most experienced battery manufacturers commonly encounter start-of-production delays of nine months or more. This has a significant effect on the economics of a project. For example, each day of lost production for a 50 GWh facility has an immediate cost impact of around $4 million. A one-month production loss can reduce profits by approximately $120 million, lowering the annual first-year margin by 2.5 percentage points—a $220 impact per vehicle. 2

Once facilities come online, first-year yields are often only around 60 percent of nameplate capacity, with losses split evenly between higher-than-expected yield losses and machine downtime. Quality issues during battery manufacturing also present a challenge in terms of both reputation and finance; for example, recalling batteries for 100,000 vehicles could turn a 5 percent profit into a net loss of more than 150 percent, due to lost sales and reimbursement costs.

Best practice for facing these challenges focuses on three critical building blocks: factory design, construction schedule optimization, and governance and performance management structures.

Factory design

To build in flexibility, companies could consider factory designs that are as modularized as possible, including prefabricated complex factory components. Companies could also adjust standard factory design in line with local battery plant design standards and optimize for space (such as clean-room volume) and cost.

Factory layout based on simple process flow, combined with a serious reduction of material conveyance, could further reduce operating expenses and production time. Reconsidering the different production processes not as separate areas but as pieces that fit together seamlessly could also help drive design efficiency. Allowing enough room for additional capacity would avoid extensive factory redesign down the line.

Construction schedule

Once a design is finalized, a robust, fully optimized construction schedule needs to be developed for the factory to be built without delays and extra expenses. A fundamental role of the construction or project delivery team is to avoid hindering the critical paths of equipment production; compared with conventional manufacturing environments, battery production equipment is vastly more complex to deliver and ramp up. Labor demand could be forecast by project stage against local supply to predict shortages and adjust the schedule accordingly, thereby limiting the degree and impact of reduced labor supply. Cutting-edge and AI-driven scheduling software could help determine optimal paths, such as the load-balancing capacity of different trades on the construction site, and could schedule updates as soon as new information becomes available.

Coordination between factory design engineers and base construction workers—using an integrated digital twin of the factory to support ideation and action—is the key to effective construction planning. Critical-path lengths could be reduced by running as many construction steps in parallel as possible, while digital and lean construction tools could be leveraged to improve the productivity of inexperienced workers.

Governance and performance management structures

Detailed governance procedures and performance management are essential to successful construction and to meeting planned start-of-production dates. Companies could create the necessary capability and performance management systems, such as scrapping-rate KPIs, at the head office and local level. They could also consider working with engineering or design firms to set up centers of competency to ensure that labor is used effectively with any available engineering, procurement, and construction management (EPCM) systems. Thereafter, a coordination model between the local facility, head office, and center of competence could be established to ensure closed-loop communication and synchronization between stakeholders.

All employees would need to be trained as early as possible, leveraging company and industry experts. Having leadership present can avoid bottlenecks in decision making. Principles such as ownership and flexibility to pivot on decisions can provide the basis for training and company culture.

Effective talent and labor retention strategy

A successful gigafactory project needs a highly competent and productive workforce, both during construction and in the subsequent operation of the factory. One of the most important practices here is to make the local labor market a key factor in site selection to ensure a sufficient supply of needed skill sets relative to industry activity in the area. Decision factors could include available construction and operations labor, the attractive­ness of the region within a reasonable commuting radius, and regional labor pools that could be tapped into—for example, for trades with limited local capacity. Another best practice is to invest in local infrastructure to facilitate a localized cell component supply base.

Companies could consider offering training to local supervisors at existing facilities to transfer best practices and navigate cultural differences. They also may need to look beyond the local labor market to fulfill the demand for technicians and battery technical specialists.

Robust and efficient supply chains

To avoid delays and cost overruns, companies need to consider sourcing—particularly battery manufacturing equipment and raw materials—during construction and production operations. All aspects of the battery value chain are expected to grow rapidly through 2030, with cell production and material extraction being the largest markets (Exhibit 2). That growth will likely create ongoing supply chain challenges.

All aspects of the battery value chain are expected to grow rapidly through 2030.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

Battery manufacturing equipment

For battery-specific equipment, lead times of one and a half years from ordering to commissioning are common because of the rapid growth in gigafactory construction. In fact, some OEMs are starting to secure critical equipment now for construction planned for 2025.

For battery-specific equipment, lead times of one and a half years from ordering to commissioning are common because of the rapid growth in gigafactory construction.

To secure the supply of battery manufacturing equipment, companies can choose from four approaches. The ideal scenario is to secure supply from equipment suppliers that have existing battery expertise; the next best option would be to find ones with similar expertise. A few OEMs might also leverage their own equipment expertise from other industries to revolutionize the production of battery manufacturing equipment or—in the most disruptive scenario—redesign the cell manufacturing process through technological innovation.

Raw materials

Developing a robust strategy for procuring raw materials can help companies control costs and secure factory ramp-up. Raw materials come from either newly extracted and refined metals or recycled end-of-life batteries or production scrap.

Newly extracted materials present challenges. They are expected to represent the vast majority of total supply through 2030, so battery manufacturers are highly dependent on commodity material prices. And recent supply chain disruptions have significantly increased the price of key materials by more than 20 percent, which caused the costs of lithium-ion batteries to increase in 2021—the first time in many years.

In the longer term, geopolitical and labor constraints will likely constrain material supplies. For example, while lithium is widely abundant, about 70 percent of current global production is in Australia and Chile, so these countries have an outsize impact on supply. 3 Similarly, the majority of global cobalt production is in the Democratic Republic of the Congo, where its extraction has been a source of controversy.

Further upward pressure on raw-material prices is likely to come from significant increases in demand. For instance, the battery industry’s demand for lithium is expected to grow at an annual compound growth rate of 25 percent from 2020 to 2030, while demand for nickel could multiply as battery demand shifts to nickel-rich products. 4

As of this writing, nickel appears to be at the greatest risk of shortages, caused by competition from other industries and long lead times for new sources. Approximately 65 percent of the demand for class 1 nickel (containing a minimum of 99.8 percent nickel) comes from other industries, particularly stainless steel. These industries are expected to continue to account for a high percentage of global demand for class 1 nickel in 2030. 5

Strengthening the supply of raw materials. In the short term, battery manufacturers could consider signing multiyear supply contracts with mining companies to limit the effect of price fluctuations. In the longer term, as more batteries reach end of life, battery recycling could provide materials both from the manufacturers’ own batteries and from other sources. Manufacturers could include a recycling agreement in the original battery sale, which would further expand the potential supply. Larger manufacturers might also consider investing directly in raw-material extraction and refining to secure supply and gain exposure to the rapidly expanding value pool of materials.

Localizing the supply chain. While significant investments across the battery value chain are expected globally, there is an increasing trend toward localizing battery manufacturing near EV manufacturing facilities. That said, the supply chain for battery manufacturing has not yet coalesced around this trend.

For example, more than 70 percent of the key equipment suppliers, for both coating and general cell assembly equipment, are based in Asia, with the remainder evenly split between North American and Europe. 6 Consequently, companies in North America and Europe may need to consider developing strong international sourcing relationships.

Similarly, battery raw-material refining takes place primarily in Asia, with potentially fewer prospects for localization than battery and equipment manufacturing. Since unrefined raw materials typically have lower fractions of the target material, refining facilities are preferentially based near the sources of raw materials, rather than their end markets. A further complication is that metal refining is an energy-intensive process, making energy cost-competitiveness another critical factor when selecting refinery locations.

Buying batteries from other suppliers. The challenges outlined above, as well as the large capital cost of gigafactories, leave some EV players buying batteries from larger suppliers rather than investing in their own gigafactories. This is often a tactically defensible decision for smaller players that are planning only a limited entry into the EV space, as well as for companies wanting to maintain strategic flexibility. For instance, start-ups may lack the assets required to build a gigafactory or the time to wait until construction is complete.

Larger companies entering the more nascent subsectors within EV markets—such as electric trucks or buses—may consider buying batteries because of the low demand expected for these specialized applications in the foreseeable future. And companies that prefer to be fast followers may choose to buy batteries initially as a way to learn about which technologies will become dominant and to ascertain their anticipated battery needs before making large capital investments.

Recycling and life cycle strategies for end-of-life batteries

As the industry grows and matures, battery recycling and reuse will become vital for both supply chain and ESG responsibility. Three potential end-of-life pathways have emerged to address this challenge, each with a different processing step. Probably the most conceptually straightforward is repairing battery packs for use in EVs, stretching their lifespans. A second option, reusing batteries in other second-life applications (such as grid storage), could provide significant benefits both for utilities and power users. Finally, using recycled battery materials as inputs for new battery manufacturing would ease demand pressures on major commodities and reduce batteries’ resource footprints.


The transition to EVs is bringing about a rapid acceleration in battery manufacturing, raising significant growth opportunities across the value chain. However, acting on the opportunity will require large investments and will create risk for manufacturers’ core business. Battery and automotive industry players that act on three key areas can seize the moment to expand their revenues and profitability while serving vehicle owners’ demand for EVs.

Explore a career with us

Related Articles