EV supply chains disrupted by Red Sea crisis 

Concerns arise as EV battery suppliers halt production and supplies due to shipping route diversion in the Red Sea amid tensions in the Middle East. Smruthi Nadig reports. 

A political map of the Gulf of Aden connecting the Red Sea and Arabian Sea. Credit: PeterHermesFurian via Getty Images

In addition to the ongoing humanitarian crisis in Gaza, a commodities war has erupted in the Red Sea region that is also impacting EV supply chains. Since October, there has been an ongoing campaign of drone and missile assaults on commercial ships by Yemen’s Houthi movement. Houthi attacks on commercial and military ships are aimed at pressuring Israel to end its bombardment of the Gaza Strip and enter a ceasefire, according to Houthi officials.

In a major retaliation strike involving fighter jets and Tomahawk missiles launched from warships and submarines, US and British forces bombed more than a dozen locations in Yemen used by the Houthis on 11 January, said US officials.

The attacks in the Red Sea have increased the cost of commodities and prolonged the time it takes for goods to be transported between East Asia and Europe. Among other things, the re-routing of ships, seized vessels and increased travel time and costs away from the Red Sea have disrupted global EV supply chains.

Impact on global trade and Chinese EV sales

Since the Israel-Palestine attacks began on 7 October 2023, global trade has declined by 1.3% due to ships making a detour around Africa and the Cape of Good Hope to avoid the Red Sea, resulting in higher freight charges. The cost of a 40ft container travelling from China to Northern Europe had increased from $1,500 in November 2023 to more than $4,000 by mid-January 2024, Offshore Technology reported.

Geely, a Chinese automaker, warned in the third week of December that it expects its EV sales to Europe to be impacted by delivery delays because shippers are taking longer, more expensive routes to avoid the Red Sea.

In 2022, China was responsible for almost 60% of all new EV registrations worldwide, according to the International Energy Agency. The ratio of electric cars in total domestic car sales in China grew to 29% in 2022 from 16% in 2021, surpassing the 2025 national target of 20% well ahead of schedule.

China is also increasingly exporting cars to Europe, to the extent that the European Commission has launched an anti-subsidy investigation into EVs from China. However, the Red Sea diversion could result in a five-fold increase in shipping expenses and an expected dearth of vessels by the second half of January, reports Reuters. This is primarily due to the longer time ships take to return to port.

Automakers can still use rail networks to export their products, but these trains are already running at full capacity, the China Passenger Car Association told Reuters.

Red Sea crisis disrupts EV supply chains

In recent weeks, several global shippers have announced that they will avoid the Red Sea route to avoid being attacked. This is also disrupting upstream EV supply chains, with EV factories pausing production due to a shortage of components.

Tesla announced on 11 January that it would suspend most of its car production at its Berlin gigafactory for two weeks, from 29 January to 11 February, due to the disruption of shipping supply routes in the Red Sea, Motor Finance Online reported.

“While this development is not completely surprising, it is certainly unwelcome news for Tesla. However, manufacturers typically have a better handle on supply chain crisis management [after] the chip-related disruption that followed on from Covid,” said Paul Barker, managing editor at Carwow, an online marketplace for buying and selling cars, according to Motor Finance Online.

“If there is any future escalation of problems moving cars, or car parts, across the world, it would likely lead to an increase in demand and value for good-condition second-hand cars,” he added. “Used car prices have been falling recently from historic highs, so I’m sure Europe’s whole automotive industry will be keeping a close eye on the ongoing geopolitical developments in the Red Sea.”

On 12 January, Geely-owned Volvo Cars said it was suspending production at its plant in Gent, Belgium, for three days due to a shortage of components. A spokesperson for the automaker told Reuters that the temporary halt would not impact car deliveries, production targets, or its other European plant in Gothenburg, Sweden.

How can manufacturers cope?

The reality of bottlenecks in global supply chains has emerged as a significant concern, with far-reaching consequences for manufacturers and consumers, and a push for “strategic autonomy” from policymakers.

Supply chains possess some flexibility, but managers strive to mitigate the possibility of the “bullwhip effect“, when considerable differences in the quantities of orders lead to even more scarcities further down the line. It is crucial to manage expectations and reassure buyers, writes Tom Stacey, a senior lecturer in operations and supply chain management at Anglia Ruskin University, in the Conversation.

Following the attacks in the Red Sea, Advantage Utilities, a commercial energy and sustainability consultancy, has advised businesses to look into energy optimisation technologies to reduce consumption as freight companies re-route. The company also suggests more flexible procurement methods or longer-term energy contracts to safeguard supply chains.

“Disruption lasting for two more weeks could increase prices further,” said Advantage Utilities CEO Andrew Grover. “This is at the forefront of our outlook as we head into 2024. Businesses should consider how they would react if further disruption does occur, and exploring the benefit of securing longer-term or flexible traded contracts should be considered as a means of mitigating further volatility in future.”

Transitioning away from supply chain monopolies and manufacturing EV batteries and cars closer to home could reduce the disruptions caused by geopolitical uncertainties. However, policymakers must convince consumers that “strategic autonomy” is worth paying for.