Battery startups see fundraising windfall in a niche beyond China's reach

Despite automakers' delayed production plans and slowing electric vehicle growth, battery startups raised at least $5.2 billion from institutional investors this year, including $4.9 billion in August and September, according to an Automotive News analysis of fundraising rounds.

Their success indicates investor confidence in the industry transformation to EVs, as well as in a burgeoning domestic battery supply chain.

"There's plenty of investment that is being made in the U.S. right now in anticipation of growing electric vehicle demand," said Akshay Singh, an automotive partner at consulting firm PwC Strategy&.

Companies raising the funds are battery materials recyclers and refiners, those working on new battery chemistries and energy storage technology ventures in the U.S. and Europe. These are fertile pathways for firms looking to differentiate themselves in the EV battery space so heavily dominated by Asian manufacturers.

Battery materials recycler Redwood Materials raised $1 billion in August, while Verkor, a French manufacturer of low-carbon batteries, raised $2.1 billion in September. Those and others are now flush with cash and moving ahead with manufacturing facilities and other projects.

Much of the momentum comes from the Inflation Reduction Act.

The act has provided billions of dollars in tax credits for clean transportation technologies. Its structure favors domestic production and business with trade partners. EV battery supply chains in the U.S. in particular have seen a boost from the Inflation Reduction Act.

The legislation "has forced OEMs to look at their total battery supply chain and where they are going to get IRA compliant materials," said Mike O'Kronley, CEO of Ascend Elements, which raised $542 million in September.

While Chinese battery parts are significantly cheaper than those manufactured and assembled in the U.S., materials purchased from China don't qualify for the Inflation Reduction Act's incentives. Meanwhile, battery production byproducts and materials recycled in the U.S. are eligible for the federal tax credits.

The tax credits, combined with the cost and time advantages of local supply chains, have created opportunity for smaller U.S. and European battery materials recycling and technology startups.

The "manufacturer says, 'Hey, this is the best time for me to quickly set up my factory, start providing domestically manufactured parts to the automotive industry and just get my foot in the door,' " said Kshitij NR, a product manager at Enerdatics, which provides research and intelligence on transactions in the clean energy space.

The Inflation Reduction Act passed in August 2022, but the requirements went into effect this year. That timeline has prompted some automakers to examine their sourcing strategies to comply with its Section 45X tax credit. The credit has two parts relevant to the battery companies that raised money this year.

The act provides a credit for the production of cathode and anode materials. The government will award a credit amounting to 10 percent of the total cost of production for battery components made in the U.S.

That boost for battery component production has incentivized the already emergent field of new battery chemistries. Now, companies that produce more efficient or cheaper battery chemistries in the U.S. are made even shinier by a tax credit.

Mitra Chem, for example, develops iron-based cathode materials like lithium manganese iron phosphate, which has higher energy density than the more common lithium iron phosphate. General Motors led Mitra Chem's $60 million financing round in August, and said its support will help the Palo Alto, Calif., company "scale its current operations" and "expedite their novel battery materials formulation to market."

Our Next Energy, which raised $300 million in February, produces lithium iron phosphate batteries with more than 350 miles of range.

The new battery cocktails and designs have opened the door for smaller companies to compete with global battery manufacturing behemoths. Those firms are also able to offer a local advantage that makes them more attractive to domestic auto manufacturing plants.

Companies are "recognizing that there will be a bottleneck in the supply chain," said Alexis Georgeson, vice president of government relations and communications at Redwood Materials. "They should try and localize if they can." Automakers, she said, want to avoid global supply chain snarls like those that created the semiconductor shortage in the pandemic.

The second part of Section 45X that is boosting domestic battery buzz is a 10 percent credit for critical minerals such as aluminum, cobalt and nickel produced in North America.

That credit also applies to recycled materials, according to Inflation Reduction Act guidance. The rules apply to materials or elements that have undergone the "manufacturing process," which must "alter the form or function" in a way that adds value and transforms "those materials or elements so that they represent a new item functionally different," not just reassembled.

"If it's recycled in Canada, the United States or Mexico, it's considered to be a domestic product, a domestic output, and is therefore eligible to be used in a battery that could then qualify, to a buyer," for tax credits, said Conrad Layson, a senior alternative propulsion analyst at AutoForecast Solutions. That "legislative magic wand," as he calls it, has created an opportunity for battery recycling in the U.S.

Although EVs are so new that the U.S industry is just beginning to see end-of-life batteries available for recycling, there are still manufacturing byproducts ripe for refinement. Ascend Elements is commercializing a new way of making engineered battery materials from black mass, a byproduct of lithium ion battery recycling.

This byproduct transformation process will ultimately serve a domestic battery recycling — and, by the Inflation Reduction Act's definition, manufacturing — process in the U.S. that's eligible for financial incentives.

Redwood Materials is producing anode and cathode materials from recycled batteries. Northvolt, which raised $1.2 billion in August, plans to have 50 percent of new cells come from recycled batteries.

While battery supply chain infrastructure development is underway in the U.S., automakers are pressuring the federal government to maintain the flow of materials and parts from China, said NR. China accounted for 70 percent of production capacity for cathodes and 85 percent for anodes as of last year, according to the International Energy Association. More than half of the globe's lithium, cobalt and graphite processing and refining happens in China.

Domestic battery companies acknowledge there will be some balance of Chinese-mined and produced metals and domestic supply chains for recycling, different chemistries and storage technology.

"There certainly will continue to have to be a pretty significant reliance on Asia for these components and for these parts," Georgeson said. "That's inevitable, but the U.S. also needs to start making this investment ourselves, as quickly as possible."

But questions linger about how exactly the domestic battery landscape will take shape — and what it will mean for domestic battery players.

NR said domestic companies are saying, "Hey, if you don't block imports from the Asian countries, if you don't incentivize the adoption of these domestically manufactured components enough, why are companies on the upstream side going to buy from us?"