What California’s New Electric Car Law Means for Global Supply Chains
On August 25, California approved new rules that would end the sale of new gas-powered-only vehicles in the state by 2035. All new cars sold after that point must be electric or plug-in hybrids. On September 29, New York Governor Kathy Hochul stated that New York state would soon follow suit.
Why CA’s EV law matters for global markets
While these new rules have the potential to significantly reduce planet-warming greenhouse gas (GHG) emissions — eliminating up to 395 million metric tons of GHGs by 2040, or the equivalent of stopping 915 million barrels of oil from being burned — they will also have a huge impact on markets and electric vehicle (EV) supply chains beyond California and New York.
California has the largest car market in the U.S., accounting for about 9% of all new car sales, and California’s new law may inspire at least a dozen other states to pass similar laws. Even prior to this, auto manufacturers like GM and Ford began making commitments and investments to up their EV offerings. In sum, these laws are a microcosm of emerging trends and will likely create a domino effect of similar regulations.
What more electric cars mean for already stressed global supply chains
- Potential raw material shortages. Right now, EV battery supply chains rely on cobalt, nickel, and lithium. While lithium is in abundant supply, more lithium refineries are needed. Researchers are also concerned about cobalt — both for its supply as well as potential health and human rights implications. Other companies are exploring alternatives, but more research is needed to assess their environmental impact and effectiveness.
- More semiconductors will be needed. News of the semiconductor shortage first made waves at the beginning of the pandemic, and was exacerbated in the automotive sector. McKinsey estimates that the semiconductor shortage will persist in select industries for at least the next three to five years. This will likely continue to affect EVs, given that EVs require more semiconductors than vehicles with combustion engines. The U.S. government has committed more investments into chip manufacturing and is partnering with Mexico, but it takes time to get new plants up and running, negotiate deals, and produce the chips.
- Compliance will become even more important. As with any new law or regulation, companies will need to step up oversight of their EV supply chain. Supply chain organizations will need to ensure they have visibility into every step of their networks to catch potential violations before they cause disruption, and ideally, so they don’t happen at all.
- EV supply chains will need to include flexibility and optionality in their list of priorities. In order to make EVs more accessible to the average consumer, costs need to be kept down. At the same time, cost must be just one of many considerations. Given the situation laid out above, auto manufacturers must design their supply chains with optionality and flexibility in mind. They must also be able to stress test their supply chains, all of which requires embracing continuous supply chain design.
What's ahead for EV supply chains
Demand for EVs has been rising globally. Transportation contributes to 14% of GHG emissions globally, so these new electric car laws, combined with other industry trends and commitments could have enormous implications for lowering emissions globally.
This is one essential part of stopping the worst effects of the climate crisis. But there is a long way to go, and much depends on resilient and effective supply chains.
No short-term solutions exist, but here are some things to monitor going forward:
- Regulations: How these regulations, combined with the Biden Administration’s Inflation Reduction Act, will influence other states to potentially follow in California and New York’s footsteps
- Battery supplies: The race to build EV battery supply chains in North America, a related race for minerals to create these batteries, what companies like Tesla are doing, and how the Inflation Reduction Act could shift battery composition
- Demand trends: The rising global demand for EVs, including in China, where a quarter of all new cars purchased in 2022 will be all-electric or plug-in hybrid vehicles. Automotive companies may need to improve their short- and long-term demand planning, especially when it comes to semiconductors.
- Supplier shifts: Companies that supply parts for internal combustion engines will either need to rapidly pivot or risk going out of business. In the near-term, auto companies may also need to run more sourcing events to select suppliers who can support the EV shift.
- Technological advances: The cars of the future are becoming more connected, autonomous, shared, and electric (what insiders refer to as the rise of CASE or ACES). This could have implications for the workforce that designs and builds these vehicles, as well as on the importance of microelectronics to support these shifts.
Automotive supply chains are facing fundamental shifts. As EVs cut into the share of existing gas-powered vehicles, auto manufacturers need to be able to do more than just forecast demand: they need market-sensing capabilities that can help them predict and respond to market volatility.
Structural changes in these supply chains also mean that companies need to embrace continuous supply chain design so they can pivot quickly and adjust to new supply chain constraints and to new business opportunities.