How government, industry created lithium ion battery overcapacity
On Sept. 13, 2010, employees and political leaders at the opening ceremony for a lithium ion battery plant near Detroit patched in a special speaker.
On the phone was President Barack Obama, who touted the federal Recovery Act grant of $249.1 million that helped build the A123 Systems plant. He told the crowd that the plant represented "the birth of an entire new industry in America -- an industry that's going to be central to the next generation of cars."
"You guys are making us proud," Obama added. "The work you're doing will help power the American economy for years to come."
Little more than two years later, A123 filed for Chapter 11 bankruptcy protection. The move added to a chain of dismal news among battery makers that hoped to supply a booming market for electric vehicles and plug-in hybrids.
The drive to tool up lithium ion battery plants mixed environmentalism, national energy independence and a global race to dominate what seemed to be a coming boom. But in the excitement, boosters missed a key point: With gasoline prices below $4 a gallon, electric-drive vehicles were too expensive to attract mainstream car buyers.
The gap between optimistic projections and marketplace results created what is, at least for now, a mess.
Vastly too much capacity has been installed. Companies are going bankrupt or subsidizing battery plants limping along at a small fraction of their capacity. Some of the new technology has been sold to Chinese companies.
How did it get this way? And what is the sector's future?
Many observers blame the very Recovery Act grants that Obama cited. By insisting on "shovel-ready" projects that would quickly produce jobs, critics say, the administration created a bubble.
"This was not a free market kind of approach to building an industry," says David Roberts, CEO of battery maker EnerDel Inc. "It was an abnormal market condition."
Under its former CEO, Charles Gassenheimer, EnerDel won a $118.5 million federal grant to build a plant in Indianapolis. Its strategy was largely dependent on its equity link to the Norwegian EV maker Think -- but both companies wound up in bankruptcy.
Jon Bereisa, CEO of the consulting firm Auto Lectrification, says that Obama's goal of putting 1 million EVs on American roads by 2015 spurred the rush into lithium ion batteries.
"All of these plants are 10 years too soon, which was exacerbated by political statements," Bereisa said.
Bereisa and others also question the federal grant benchmarks, which pushed companies to build plants and hire workers -- A123, for instance, was expected to employ 3,000 at its Michigan plants by the end of 2012. The government's "quick, build something" approach created severe overcapacity, he says.
"The total [annual] installed capacity, if you run three shifts, is enough for 900,000 EVs or 1.8 million plug-ins," Bereisa said. "Depending on who you want to believe, that's probably capacity beyond 2020."
LG Chem’s Patil: Many reasons for excitement
Jumping into batteries
Not everyone blames the government. Prabhakar Patil, CEO of battery maker LG Chem Power, says his company didn't enter the market solely because of the $151.4 million Recovery Act grant it received. Plenty of other factors stirred excitement about lithium ion batteries, Patil says.
Renault-Nissan CEO Carlos Ghosn, who had enormous credibility after the Nissan turnaround, was a key mover, he says. Ghosn's big-bucks bet on EVs impressed the industry. In the United States, that included $1.6 billion for a battery module plant, now in operation, and an assembly line going on line this month for the Leaf EV in Smyrna, Tenn.
Wildly differing analyst projections of the lithium ion battery market also pumped up expectations, he says. Patil cited predictions of 2020 annual sales ranging from $17 billion to $75 billion.
"When people look at those kinds of numbers, anybody who could spell 'lithium ion' wanted to jump in and start this kind of business," Patil says.
In the auto industry, he adds, getting into the game means building a plant. Automakers want to see a supplier's production capacity in place before they award a contract.
"That's the nature of the business," says Patil, the former head of the hybrid-vehicle program at Ford Motor Co. "People need to have evidence that you can scale up and build the volumes they need. You can't do it on paper."
The plant-building boom created significant "redundancy in the market," says Dave Hurst, senior analyst with Pike Research. Inevitably, that put pressure on smaller battery makers such as A123, he says.
"Seeing who got the grants, you knew right off that not everyone is going to survive this," Hurst says.
Soaring gasoline prices
Optimism about EVs -- and lithium ion batteries -- had its genesis when the national average price of gasoline spiked to $4.11 per gallon in July 2008.
Gasoline prices subsequently fell, and consumers became accustomed to $50 fill-ups at the pump. But Eric Shreffler, managing director for cluster development at the Michigan Economic Development Corp., recalls predictions that even higher gasoline prices were inevitable.
"There were a lot of analysts who thought that by now, we'd be looking at $5-plus gasoline," Shreffler says.
Pondering that future, automakers started crash programs to add fuel-efficient cars to their lineups. It looked like EVs and plug-in hybrids would be a significant part of the industry.
For recession-ravaged states such as Michigan, the allure of a new manufacturing sector was strong, Shreffler says. The scenario was that lithium ion battery packs, being heavy and tricky to ship, would be built near plants that made EVs. States wanted to win those jobs.
On a national scale, Shreffler recalls, leaders saw a chance to avoid dependence on foreign energy sources: "You heard people saying that you don't want to exchange dependency on foreign oil for dependency on foreign batteries."
But Asian battery makers, which dominated production of lithium ion batteries for consumer electronics, had a head start. Dan Leistikow, a spokesman for the U.S. Department of Energy, wrote in an Oct. 16 online article (http://energy.gov/articles/update- advanced-battery-manufacturing) that "virtually all advanced vehicle batteries were built overseas, and it looked like the United States might miss out on this enormously important, rapidly expanding market."
That spurred the DOE to grant $2 billion to 29 companies building batteries or other electric-drive components, Leistikow wrote. Bereisa recalls that the race spread to China and Europe, where the German government set a goal of having 1 million EVs on the road by 2020.
Charles Gassenheimer: He led battery maker EnerDel when it won a $118.5 million federal grant but was later fired.
Core problem: Price
But there was a fatal flaw: failure to recognize that electric-drive vehicles were not viable mainstream products. The reason was simple. High sticker prices, mainly caused by the expensive battery packs, made them a nonstarter for most U.S. car shoppers.
Powered by packs such as the 24 kilowatt-hour unit in the Nissan Leaf and the 16.5 kWh unit in the Chevrolet Volt, EVs and plug-in hybrids carry hefty price tags. Although the companies do not disclose battery-pack costs, the industry rule of thumb is about $500 to $600 per kWh.
Roberts, for instance, says that EnerDel's link to Think was based on the assumption that a small EV from a little-known company could sell for the price of a premium vehicle. At $12,000 to $15,000, the vehicle might have sold, he says, but "at $42,000, it was just unacceptable."
Although "the fundamental factor is price," Roberts says, there are other reasons for disappointing EV sales.
Consumers also are wary of the vehicles' limited range, charging requirements and minimal charger network, says Jean-Francois Tremblay, advanced powertrain task force leader for Ernst & Young. Incentives such as the federal $7,500 income tax credit spurred some sales, but Tremblay says that EVs and plug-in hybrids will account for less than 2 percent of U.S. light-vehicle sales by 2020.
Automakers were mistaken in thinking they could rack up strong sales without a charging network in place, he says.
"We're not talking about a product line. We're talking about an ecosystem," Tremblay says. "A lot of companies were focusing on them as a product. I think we got caught up in the hype of the product, as opposed to the ecosystem."
More EVs coming
Today, battery makers take some hope from automakers' plans to launch a new wave of plug-in hybrids and EVs.
Nancy Gioia, Ford Motor's director of global electrification, said the combined number of EVs and plug-in hybrid nameplates on sale in the United States will rise from 13 this year to 61 by 2016.
But Gioia cautioned against expectations of high sales. Those vehicles won't sell in volume unless they offer a much shorter payback period to consumers, she said. Today's EVs and plug-in hybrids take eight years or more to pay off.
"If it's not customer-driven, no matter what we do, 'build it and they will come' will not work," Gioia said in a presentation at The Battery Show, an advanced battery trade show last month in suburban Detroit.
Battery companies are optimistic that automakers will find a combination of battery power, range and cost that attracts consumers. They also look to foreign markets and nonautomotive customers to stay afloat.
Christina Lampe-Onnerud, who recently left as CEO of battery maker Boston-Power, says China represents a growth opportunity. Boston-Power moved its operations to China this year after receiving a $125 million financing package for a plant and r&d center there. Boston-Power, which lost out in competition for Recovery Act grants, is supplying battery packs to Beijing Electric Vehicle Co. for an electric version of the Saab 9-5.
"I think there are other regions in the world where it is all going forward very nicely," Lampe-Onnerud says. "In the United States, it doesn't look very nice."
Christina Lampe-Onnerud: The former CEO of battery maker Boston-Power helped move the company’s operations to China.
Other uses -- such as providing energy for buildings and electric grid backup, powering larger fleet vehicles such as buses and helping to operate light-vehicle mild hybrid systems -- offer some potential. But Ernst & Young's Tremblay says they probably won't provide the volumes that were foreseen for light vehicles.
Also, lithium ion may be too pricey for some uses. A study by consulting firm Roland Berger says that advanced lead-acid batteries "are likely to become a viable and cost-effective solution for stop-start and micro-hybrid applications."
Battery makers say that the need for low-emission, fuel-efficient vehicles still exists. Increasing global demand for petroleum and stricter emissions limits eventually will make electrified vehicles more attractive, they say.
"The fundamental factors that drive electrification are still there and are still strong," says LG Chem's Patil. "I think there is no question that electrification will stay and will continue to grow."
Lithium ion advocates also say they expect advances in battery technology to lower costs. But which companies can stay alive to see if the market turns in their favor?
The Roland Berger study says that cost-saving improvements are likely, both in materials and in production efficiencies. But, it adds, they will "require more cash for introduction and industrialization." Only large, well-funded companies will survive, the study concludes.
Xavier Mosquet, leader of the Boston Consulting Group's global automotive practice, says that established suppliers will stay in the game: "It's easier for an LG Chem than it is for an A123."
But he adds that the turnaround looks distant today.
"At best, it's a 40,000 per year car market," Mosquet says. "That is not even sufficient for one plant."
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