Between 2010 and 2020, the cost of electric vehicle (EV) batteries dropped by nearly 90%, reducing a major obstacle to widespread EV adoption. Industry experts attribute much of this decline to learning-by-doing (LBD), where production experience leads to lower costs through improved efficiency and reduced waste. However, other factors, such as economies of scale and technological advancements, also play a role. In this paper, the authors quantify the impact of LBD on declining EV battery costs and examine how LBD influences the effectiveness of industrial policies like consumer subsidies and local content requirements.
The authors use a detailed dataset covering global EV sales, vehicle characteristics, battery suppliers, and financial incentives to build a structural model of the EV market. Their model estimates battery costs by analyzing EV prices, sales trends, and the evolving partnerships between EV manufacturers and battery suppliers. It also accounts for how consumers with different preferences make purchasing decisions and how EV makers and battery suppliers set prices. The model reveals the following concerning the role of LBD in battery cost reductions and its broader implications for EV policy effectiveness:
- The learning rate is estimated to be 7.5% after controlling for technological advancements, experience in EV assembly, input costs, and economies of scale. This implies that doubling battery production experience would reduce unit production costs by 7.5%.
- LBD greatly amplifies the sales impact of EV subsidies through positive feedback loops. In the absence of LBD, subsidies across different countries are estimated to increase cumulative global EV sales by 29.9% during the sample period, consistent with findings in existing studies that focus on the short-term effects of EV purchase subsidies. When both consumer subsidies and LBD were in effect, global EV sales surged by 170% relative to the baseline with neither subsidies nor LBD. This combined effect is 60% greater than the sum of the effects from subsidies and LBD individually, highlighting their complementarity.
- Consumer subsidies in one country generate global spillovers through LBD in battery production, but the magnitude of spillovers hinges critically on the nature of the supply chain network and trade patterns. For example, the estimated $13.10 billion in U.S. subsidies generated $16.47 billion in global welfare gains, measured as the sum of consumer surplus and firm profit on a global scale, net of subsidy expenditure. The U.S. (and Canada) captured 49% of these welfare gains, as the interaction between subsidies and LBD significantly reduced input costs (batteries) for domestic EV producers and lowered vehicle prices for domestic consumers. U.S. subsidies also benefited battery suppliers in Japan and South Korea, which captured 28% of the global welfare gains. Europe also benefited significantly from U.S. subsidies; in contrast, China captured only 3% of the global gains. This modest share reflects China’s limited trade in EVs and EV batteries with foreign countries during the authors’ sample period.
- Upstream LBD creates significant externalities through the supply chain, with upstream firms capturing only a small fraction of the associated economic benefits due to the oligopolistic nature of the supply chain.
- Lastly, China’s whitelist policy benefited domestic battery suppliers at a cost to other countries. The EU, Japan and South Korea, and the U.S. and Canada collectively incurred $5.88 billion in welfare losses. This was driven by a shift in global battery production from more efficient Japanese and South Korean battery suppliers to (at the time) higher-cost Chinese suppliers. Had the whitelist policy been delayed to 2021-2024, China would have faced net losses, as consumer welfare losses would have outweighed the gains to battery suppliers. The negative impact on other countries would have been smaller.
While prior research has linked industrial policies, such as purchase subsidies, to EV innovation, this study is the first to integrate learning by doing (LBD) into EV market analysis. Prior studies may underestimate the full impact and cost-effectiveness of subsidies by overlooking LBD and its reinforcing effect on lower battery costs and increased EV adoption.