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Batteries, batteries, batteries. The race to attract this industry of the future, and power the electric vehicles that will rule the roads, is as frantic as the rush for AAA cells after an eight-year-old opens their birthday presents.
An orgy of subsidies under the Inflation Reduction Act is building so-called “gigafactories” across the US, while the UK is agonising over the collapse of its only big battery project. One sign of battery-induced insecurity is the number of start-ups wrapping themselves in the flag, with names such as the failed Britishvolt or American Battery Factory.
The logic of batterymania is straightforward. In the future, all cars will be electric. Electric vehicles must have a battery. Ergo, a flourishing auto industry needs battery plants. This is true as far as it goes and batteries will certainly be a large business. But what the mania ignores is many years of experience that shows batteries are a bad business: low margin, capital intensive, dirty and hemmed in by hard physical limits on technological progress. Investors and countries piling into this industry are going to get burnt.
The industry leaders, which do not boast of gigafactories, are all based in Asia. Sony pioneered the lithium-ion battery in the 1990s, but sold out in 2016 after years of struggling to make them pay. Japan’s Panasonic and Samsung SDI and LG Energy Solution of South Korea, the industry’s most established names, have been enjoying a sales boom, but even in good years they struggle to reach a 10 per cent operating margin and run balance sheets in the tens of billions of dollars. The most profitable and fastest-growing battery maker is China’s CATL, a good clue to where this industry will end up.
The basic economics of battery making explain the financial outcomes. You need to buy a large volume of scarce inputs — of which nickel and lithium are among the less exotic — and manufacture them into cells, at scale, using hundreds of millions of dollars’ worth of machinery. You sell the resulting output in an almost purely business-to-business market with no brand loyalty or aftersales revenue. The processes involved relate to the chemical industry. Light manufacturing it is not.
The pace of change in electric vehicles has created the impression that batteries are evolving fast. But this is misleading. The basic technology has been around for more than a century and advanced at a slow, linear pace. Batteries are a matter of chemistry. You cannot just make them smaller, like a transistor.
The chemistry of each battery — the combination of an anode and a cathode material — puts a limit on the energy it can store: its electrochemical potential. The biggest jumps in performance have involved a new chemistry, such as the shift to lithium. But a battery must work when it is hot and when it is cold; it must charge and discharge a sufficient amount of energy, at a sufficient speed, a sufficient number of times; it must be safe; and it must be affordable. To meet every constraint with an all-new technology is formidably hard.
There is steady, incremental innovation in anode, cathode and separator materials, although the value is often captured by specialist chemical companies, not battery makers. The big gains in the industry today come from “learning by doing” to reduce cost as volumes grow, but that points again to vast scale and capital investment, not particular technical breakthroughs, as the secret of success.
Scale, capital and cost: it all points to China. Battery gigafactories in high-income countries are likely to meet the same fate as solar panel factories, television factories and, indeed, a previous generation of battery factories in high-income countries. Certainly, there will not be a dozen national battery industries to support a dozen national auto industries.
What, then, is a rich country with a large car industry to do? Batteries are heavy so there may be value in local manufacturing, especially if there are trade barriers. Geopolitical risk may also hamper the growth of China’s exports. If the battery becomes a commodity, however, then nations throwing money at them will miss the real value in future vehicles. That will lie in the software, especially for automated driving; in the data a driver generates; in design, branding and interior quality; and in the safety of what will always be a large metal box that goes fast.
Silicon Valley has figured out all of that and is awaiting its chance. A battle for the future of the auto industry will soon be joined. National gigafactories will not win it.