Li-ion Battery Manufacturers: The Bleeding Edge of Energy Storage Technology

As a lawyer, I’ve had the privilege of working with some of the finest scientific minds in the world. They all started with brilliant concepts and impressive laboratory results, but a substantial majority failed to create a viable business.

After countless clients that started well and ended up mired in a swamp, I’ve come to understand that technology is a two-edged sword. On the leading edge, developers of low cost technologies can build fortunes. On the bleeding edge, developers that can’t control their costs and manufacture competitive products often morph into the financial equivalent of a black hole. Sadly, I believe most current developers of advanced Li-ion batteries are on the bleeding edge of energy storage technology and are doomed to spend years, if not decades, hemorrhaging cash.

I frequently feel like Cassandra, the Greek princess who was given the gift of prophecy and then cursed so that no one would believe her. When I read reports about how an MIT researcher has developed a new material that will allow Li-ion batteries to recharge in seconds or how Japan’s national alternative energy development agency has targeted a 50% reduction in Li-ion battery costs over the next year, I don’t get excited over the mirage of progress.

Instead, I start asking buzz kill questions like “How much will these new materials add to the cost of a battery?” and “How can anybody reasonably target a 50% price reduction over the next year when the average has been 5% for the last 20 years?” The answers, of course, are “plenty” and “they can’t.” The stories are cheerleading and hype, not rigorous analysis; and we all know what happens when optimistic forecasts collide with immutable economic laws.

The fact is that everyone, including me, wants an easy, quick and painless solution to our growing energy dilemma. However wishes, hopes, dreams and desires can’t change the fact that until somebody overcomes the cost, performance, abuse tolerance and cycle-life issues that the DOE has analyzed in depth and I’ve discussed in earlier blogs, there will be no Li-ion solution for the average consumer’s energy storage needs. Progress is being made, but it’s an uphill battle where the goal is measured in miles and the progress is measured in feet.

Every time I mention the elephant in the living room, I’m inundated with comments suggesting that the data I’ve cited is old or unreliable. The contrary authority invariably says something like “Lyons said that most estimates put the near-future cost for battery manufacturing at $250-300 per kWh once economies of scale are ramped up” or points me to a Chinese website. The only response I can offer is balderdash! With annual revenues of several billion dollars, the Li-ion battery sector already has plenty of scale. What it lacks are meaningful potential economies.

Economies of scale are modest savings that can reduce per unit cost as a profitable business grows. They arise from factors like discounts on raw materials purchases, greater worker specialization, lower financing costs and reduced spending on ancillary items like research and development. For a more detailed discussion of the topic, see “What Are Economies of Scale?

An estimated 75% of the cost of a battery goes for raw materials. So unless you insist on believing in a commodity fairy that will slash raw materials costs despite rapidly escalating global demand, you can’t honestly believe that vaguely defined economies of scale will make insanely expensive products affordable. Even the happy talk articles like the most recent one from Japan merely serve to prove the point:

“NEDO also analyzed battery cost (not a cell but a battery pack) as of March 2009. It estimates that the cost is about ¥200,000/kWh (approx US$2,016/kWh) for both types of batteries.”

In January I published a comparative breakeven analysis for an EV-40 and an EV 100 using the $1,333 per kWh value for Li-ion batteries that I took from a July 2008 Sandia Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage Program. That analysis showed that an EV-40 could not break even at gas prices of less than $3.70 and an EV-100 could not break even at gas prices of less than $9.20. Even if I use the latest happy-talk target out of Japan and give effect to the vainly anticipated battery price collapse, the breakeven points work out to $3.02 for an EV-40 and $7.54 for an EV-100. At those prices, there are only two classes of buyers, the emotionally committed and the mathematically challenged. This is not encouraging news in a recession.

When evaluating any company, the first thing I want to know is whether it can sell a product and earn a reasonable gross margin on the sale because without gross income net income is impossible. In general, high gross margins are wonderful things and low gross margins are very bad things.

The universe of publicly traded Li-ion battery manufacturers is small so there are not a large number of reliable data points. Nevertheless, I was able to do some digging through SEC filings and cobble together the following table that compares historical product sales, gross profit and gross margin data for five active Li-ion battery manufacturers (Click on the table for a PDF version).

From both a revenue growth and gross margin perspective, Advanced Battery (ABAT) has been an impressive performer and seems to be on the leading edge of Li-ion technologies. At the other end of the spectrum, Valence Technology (VLNC) and A123 Systems seem to be stuck on the bleeding edge. While Ener1 (HEV) and China BAK Battery (CBAK) have modest gross margins, their performance falls far short of leading edge; in fact, they’d be poor performers among the conventional battery manufacturers that I’ve identified in the following table.

Over the course of my career I’ve had substantial experience with both leading edge and bleeding edge companies. As a lawyer, I try to discourage potential clients from starting down a road that has a low chance of commercial success because life is short and dealing with disappointed investors is never pleasant. Once a project begins I carefully watch for signs that a client is tending away from the leading edge and toward the bleeding edge because an early failure is invariably easier to cope with than a client that lives on the bleeding edge for years. Factors I view as warning flags that a company is approaching the bleeding edge include:

Countertrend revenues	When companies like Ener1’s Korean subsidiary report revenue declines while their peers are reporting substantial revenue increases, I see yellow and orange flags.
Gross margins	High gross margins are usually a reliable indicator of a superior product and small gross margins can be tolerable in high volume industries, but negative margins are a red flag.
Debt financing	In the absence of a long and well-established earnings history, substantial debt is toxic and leading edge companies don’t have substantial liabilities to anyone.
Related party debt	A heavy reliance on insider financing is normal during the formative years, but when the insiders of public companies like Valence and Ener1 purchase secured debt instead of straight equity the risk to common stockholders skyrockets.
Idle factories	In the absence of a cogent explanation, idle factories are a red flag that the owner cannot manufacture and sell a commercially viable product. There are always opportunities for viable products and a manufacturer like Ener1 that can’t harvest the low hanging fruit will rarely succeed with more sophisticated customers.
Operating expenses	Leading edge companies like Advanced Battery aggressively control operating expenses at all levels, which permits them to take over 70% of their gross margin to the bottom line. Profligate spenders like Ener1, Valence and A123 are far closer to the bleeding edge.
Nosebleed valuations	When a market leader like Advanced Battery trades at 6.8 times earnings and has a market capitalization of $110 million, no reasonable investor can justify market capitalizations of $193 million or $483 million, respectively, for companies like Valence and Ener1 that have never even come close to reporting a profit.
PR perspective	Leading edge companies talk about events while bleeding edge companies publicize goals. What will happen if the DOE reviews A123’s $1.8 billion loan request or Ener1’s $480 million loan request and decides the requests don’t meet regulatory requirements?
Veiled hubris	New entrants in a technological field are almost never better at manufacturing and marketing than their entrenched competitors who offer comparable products. Li-titanate batteries from Ener1 may compete with Toshiba’s SCiB line, but they are unlikely to be demonstrably better or cheaper. Likewise Li-phosphate batteries from Valence and A123 may compete with products from BYD, but assuming competitive superiority without demonstrable proof is the pinnacle of veiled hubris.

On August 15, 2008, when the Dow [^DJI] was at 11,660 and the Ardour Global Index [^AGIGL] was at 3,370; I offered a short-list of pure play energy storage companies that were likely to benefit from an unprecedented surge in demand for manufactured energy storage devices that will be driven by cleantech, the sixth industrial revolution.

The intervening eight months have been a tough time as the Dow has collapsed to 7,401, a shocking 36.5% decline; and the Ardour Index has plummeted to 1,285, a breathtaking 62% plunge. As a group, my short list of pure play energy storage companies has tracked the Ardour Index and fallen an average of 60%. The following chart compares closing prices of those companies on August 15, 2008 with their closing prices on March 19, 2009.

Combined, the short list companies have a current market capitalization of $2.1 billion. As I previously reported, Federal grants for advanced battery manufacturing will inject $2 billion in new capital into the battery industry over the next two years and grants for electricity delivery and reliability projects are likely to bump that total by another $1 to $1.5 billion. Moreover, effectively unlimited debt financing will be available through an alphabet soup of DOE guaranteed loan programs. In combination, the likely impact on the energy storage sector is mind-boggling.

If one assumes that the DOE does not understand the difference between the leading edge and the bleeding edge and it decides to treat all applicants equally, there is a remote chance that the bleeding edge battery manufacturing companies will have sufficient resources to justify their current market capitalizations when the dust settles, but those market capitalizations are not likely to increase significantly from current nosebleed levels. Instead, the market performance is likely to come from companies that focus on their accomplishments rather than their goals.

At heart I’m an incurable optimist and I firmly believe that “In America we get up in the morning, we go to work and we solve our problems.” (From The Lost Constitution by William Martin). But our problems are not going to be solved by airbrushed centerfolds that thrive on the bleeding edge and promise simple and economically implausible solutions to incredibly complex problems.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

Comments

[John Petersen:]

Don, I think you've missed a post or two somewhere. The electrode fabrication lines were ordered a year ago. The first round was designed to make electrodes for 1,000 PbC devices or roughly 1 MWH per day. I would be curious to hear how your hypothetical 180,000 cell per month plant stacks up?

The equipment has already been built and Axion has staff in California making electrode assemblies on the line that are being shipped to Pennsylvania for integration into PbC devices. Which means the first fully manufactured commercial PbC batteries are already rolling off the line. The plan is to move the fabrication line to Pennsylvania during the current quarter and start making devices for the potential users who have been waiting years to test the product in their particular applications. From that point it will all be up to the users. They will either line up to order the product or they won't. I've made my bet that they will, but that's purely a matter of personal opinion.

OEM's may want the best available technology, but that desire is always tempered by the customer's ability to pay. Everybody may want a $50,000 car, but few can afford one. If given a choice between using best available technology and selling cars by the hundreds or using best affordable technology and selling cars by the hundreds of thousands, the OEMs will always obey the market.

You can tie a subsidy pork roast around the neck of an uneconomic technology and the market will play for a while, but when the roast is eaten and there is nothing left but the bones, the stockholders will be very sad.

Apr 08 03:56 PM

[Don Harmon:]

John, you may be right since I have just joined this forum - I am sure I have missed a few posts, but it's interesting that your Axion product is just now rolling off the line while LiFePO4 (Lithium-ion) has been rolling off the line now for more than a few years. A123, Valence, & LiFeBATT, are all U.S. companies who have been making product which is available now.

Your point about cost is certainly a valid one - but given the new push to build Lithium-ion mfg. plants here in the U.S. will become a moot point very quickly.

Lithium is one of the best ways to play President Obama's energy agenda. The power of the Office of the President of the United States will be backing the Eco-Energy Revolution and billions of dollars will be given out to develop the technology behind the lithium-ion battery. This energy revolution is a serious investable long-term trend and we, as investors, have to take advantage of the opportunities being presented. We'd be smart to get in early, ahead of the herd, to take advantage of the coming global rush to electricity - generated by solar, wind & geothermal power and stored in lithium-ion batteries.

Don Harmon

Apr 08 06:00 PM

[John Petersen:]

Don, I have the sense you're going to be a lot of fun. The great thing about storage is that the market is so immense there will be a target rich environment for decades to come and plenty of room for dozens of successful companies. I'm tough on Li-ion for purely economic reasons. Costs may indeed fall over the next few years, but nobody has ever shown me how costs will fall far enough for lithium to compete with lead when it comes to the grunt work. It may well be that everybody is just playing their cards really tight, but until the cards are face up on the table, I'll remain a skeptic.

Apr 09 12:09 AM

[NorthernPiker:]

John, on the subject of material content of a li-ion battery, this summer’s anticipated ANL report on LiFePO4 batteries will be a welcome clarification. There should also be available information on ENER1’s LiMn2O4 chemistry that was jointly developed with the DOE. However, in the meantime, there are some observations that can be made on the material composition and costs of EV battery cells.

According to the table on p. 37 of the 2000 ANL document that you have previously referenced, 48.8% of the material cost of a LiCoO2 cell is in the cathode which is composed of 7.1% lithium, 60.2% cobalt and 32.7% oxygen. At $30 / kg for lithium and $50 / kg for cobalt (5-year average price), these metals respectively would account for 6.6% and 93.4% of the cathode cost. Displacement of cobalt in the cathode by manganese at $2 / kg or iron and phosphate at $0.50 / kg would reduce raw materials cost by over 90% and 44% for the cathode and cell, respectively.

www.transportation.anl...

The first observation is that the raw material costs in a LiCoO2 battery are dominated by the cost of Cobalt. The second observation is that the rising price of metals in general over the last several years, particularly cobalt, which peaked at $110 / kg in 2008, has masked any cost reductions in the use of raw materials. As new raw material contracts are signed at today’s lower commodity levels, e.g., cobalt at $30 / kg, LiCoO2 battery costs will drop

Apr 09 03:45 PM

[John Petersen:]

Northern Piker, I am truly looking forward to the new report from Argonne. The information I have indicates a mid-July release date. The problem with trying to adjust cathode costs proportionally with material cost is that you end up carving out both the cost of the materials and the cost of processing those materials. You may be able to eliminate the hard material costs, but processing costs are with us always. I may be trained as an accountant, but I would not presume to make such a calculation without a lot more data on what it takes to make a cathode from a pile of metals.

I'm more than willing to assume that prices will decline, but price collapses of the magnitude that people want to believe don't pass the smell test. So let's wait and see what Argonne has to say.

Apr 09 04:30 PM

[John Petersen:]

On a collateral issue, all the DOE documents I've seen that refer to Ener1 (or Enerdel) talk about DOE-sponsored development of a Lithium titanate/Mn-spinel chemistry. However, in their Q2 earnings transcript available on Seeking Alpha Mr. Herlihy said:

"Well, we have several contracts. We have a $6.5 million Phase II for the hydro-electric vehicle, lithium-titanate battery. We have a $2.5 million PHAV contract, and we have $1 million grant from the DOE for bus development. It hasn't been turned into a contract yet, but that's all USABC and those are all 50% cost share."

A little later in the Q2 conference call Nakoi Ota added:

"For the Think– this is Naoki Ota. Actually this battery is not the lithium-titanate. This is hydrocarbon base – the battery."

In a similar vein, during the Q3 conference call, Mr. Herlihy said:

"The increase quarter-to-quarter was due primarily to $2 million for R&D material costs, related to the Th!nk battery packs and the materials for the continued development of the lithium titanate cell technology."

Likewise, during the Q4 conference call Mr. Ashtiani said:

"While most of our competitors have placed their bets on one chemistry or another, EnerDel has the capability and manufacturing know-how for developing multiple chemistry products. On the anode side, we have developed hard carbon, graphite, and titanate anodes. On the cathode side, we have mixed metal oxides, manganes-spinel and iron phosphate. We have a strategic alliance with Argonne National Lab for materials research and development that allows us to push the boundaries of energy not just by getting more capacity per unit weight of the material, but also pushing into high voltage for cathodes and electrolytes."

My simple mind tells me that something doesn't quite fit if Ener1 is still developing the Li-titanate technology but selling batteries with a "hydrocarbon base" to Th!nk. Of course my skeptical mind wonders whether they're talking DOE research but selling a simple Li-polymer chemistry that they bought as part of the Enertech deal.

I would love to have somebody who is more adept at battery chemistry take a crack at explaining the apparent inconsistencies.

Apr 09 05:13 PM

[Don Harmon:]

Hi John,

I just take the polar opposite view and hope you realize I come from the planet Lithium and recognize you Lead Acid earthlings don't have the benefit of our advanced technology yet. We will continue to try and bring you along with us because once you try Lithium you can never go back to Lead! Certainly we find your arguments highly amusing though and will continue to follow them. We find it beats your earthling television programs anyday....:-)

Don Harmon



On Apr 09 12:09 AM John Petersen wrote:

> Don, I have the sense you're going to be a lot of fun. The great
> thing about storage is that the market is so immense there will be
> a target rich environment for decades to come and plenty of room
> for dozens of successful companies. I'm tough on Li-ion for purely
> economic reasons. Costs may indeed fall over the next few years,
> but nobody has ever shown me how costs will fall far enough for lithium
> to compete with lead when it comes to the grunt work. It may well
> be that everybody is just playing their cards really tight, but until
> the cards are face up on the table, I'll remain a skeptic.

Apr 09 07:07 PM

[John Petersen:]

Don, I have no problem with intelligent opposing views and would certainly not exclude the possibility that all of my reservations about the cost, safety, performance and cycle life of Li-ion batteries will prove to be totally unfounded. Maybe it just comes from 30 years in the securities law trenches, but the fact is I've been burned so often by the hot that I blow on the cold. In the meantime I'll continue to believe that we should be taking lithium out of batteries and putting back into the medication of the people who so obviously need it.

Apr 09 08:51 PM

[Don Harmon:]

John, nice to see you do have a sense of humor. I have never found an accountant yet who has one. Like you said it's an immense target rich environment now, so arguing the relative merits of cost/benefit analysis is probably something that should be left to the bean counters. I will be focusing like a laser on all those targets out there!

Don Harmon

Apr 09 11:42 PM

[John Petersen:]

Don, Law School included a humor transplant and thirty years of representing entrepreneurs who dream of reaching the stars while worrying about how to make next month's payroll has left me knowing that you have to either laugh or cry, and crying ages you prematurely. In general, I'll give you the right-hand tail of the bell curve when it comes to applications as long as you give me the middle.

Apr 10 01:12 AM

[Don Harmon:]

Fair enough John - we entrepreneurs are stuck in that mode of reaching for the stars and worrrying about paying our partners like you said. Industrial Design school, and thirty years of being self-employed, I will take the right-hand tail of that bell curve because I have naturally ended up there by now anyway.

Best,

Don Harmon

Apr 10 11:10 AM

[John Petersen:]

Don, my best guess is that every battery company that survives will end up with more business than it can say grace over. However the one thing that 30 years has taught me about entrepreneurs is that most are very bad at managing investor expectations. You and I both understand that "it always takes longer and costs more." Most investors don't understand that reality and they often react violently to missed deadlines, delays and great performance that doesn't meet expectations. So I always end up nagging clients "trumpet your accomplishments but be quiet about your plans."

It's good to have another reader that can hold my feet to the fire, keep me honest and tell the other side of the story – and there are always at least two sides to a story.

Apr 10 12:08 PM

[Don Harmon:]

Very good advice, John. So far we've managed to do exactly that! We don't issue "press releases" like some of the other Lithium-ion super stars do and we don't have any investors to pummel us yet. We are quiet about our plans and prefer to operate more in a stealth mode until we can bring out the "brass band" for it's debut gig. Back to walking on hot coals........

Hope to be able to do that sometime soon?

Don Harmon

Apr 10 03:06 PM

[John Petersen:]

Don, my website is ipo-law.com. Do me a favor and drop me an e-mail with your contact information. I'd love a chance to talk with you.

Apr 10 03:18 PM

[realist2:]

Mr. Petersen. Thanks for the props, inintended though it may be.

If by e-bike, you mean very high performance motocross motorcycle, I agree:

hellforleathermagazine...

We had a great time. The riders were swapped far more often than the power packs. The technical off road course and friendly riding aggression was that intense, with the winning team putting in 507.5 miles in 24 hours, with zero maintenance issues, and none less than 300 miles (my team did more than 400 miles). The strongest correlation was that the teams with more riders had more total miles, with all else pretty equal.

Oh, the manufacturer just came out with their street supermoto motorcycle, roughly equivalent to a 400cc gas motard, but with a smoother ride.

It turns out that biggest limiting factors in transportation technology applications are the squishy pink things and their decisions and hardware components (especially for handling (tires and suspension), not power pack chemistries, energy carriers or drivetrain choices. The same goes for KERS in Formula One. It's an improvement, when designed, installed, managed and used appropriately, but only one of many factors in high performance applications.

I'm thrilled, Mr. Petersen, that your analysis of lithium based apps is getting more sophisticated as you learn more. 55% charge swing sounds reasonable to me as a user is it's backed by, say, a five year warranty. After five years, you'd probably want a plug and play performance upgrade to the drivetrain energy carrier hardware, anyway, with a rebate for the swap for its ability to sit alongside its lead brothers as adding low capacity storage value (say, for electric utilities) for an additional many years.

I'm just some Joe SixPack electric vehicle purchaser, so I appreciate your patience with my comments.


On Mar 23 09:28 AM John Petersen wrote:

> aquaculture, I love Li-ion for right sized applications like e-bikes
> and scooters, so even suggesting that I think the technology is a
> loser is 180 degrees off base. That being said, I think it foolish
> to try to power 3,000 pounds of steel and 300 pounds of passengers
> at highway speed using Li-ion, or for that matter any other battery.
> The economics simply do not work.
>
> jamesnach, I'm sorry but you're wrong. I live in Europe and have
> for the last 12 years. I'm used to paying $5 a gallon for gas during
> the good times. People here don't drive HEVs, PHEVs or EVs any more
> than they do in the States. What they do is drive much smaller cars,
> walk when distances are short and take trains when distances are
> long. My pricing data comes directly from the DOE and Japan's New
> Energy and Industrial Technology Development Organization and I always
> supply links to the source data. So please quit trying to trump governmental
> publications with rumor. My work is not mandatory reading.

Apr 14 03:56 PM

[John Petersen:]

Realist, the term for what you have is not EV, it is now formally E2W, meaning electric two wheeler. I've always been a big fan of Li-ion technology where the ratio of vehicle weight to passenger weight is less than two. As I recall, your ratio is closer to one. Your experience is meaningless for a purchaser who is considering the economics of a vehicle to passenger weight ratio of 10.

Apr 14 04:04 PM

[realist2:]

I said right up front that I was referring to a motocross motorcycle. You're the one who brought up e-bikes and electric scooters, as I clearly replied to above, and my reply is directed to exactly that class of vehicle and what it can do in the real world, so what does a purchaser who is considering the economics of a vehicle to passenger weight ratio of 10 have to do with the topic of two wheeled electric vehicles that you initiated in this thread?

My experience is intended for those who are considering the economics of a vehicle to passenger weight ratio that allows for high performance, blessed be Colin Chapman, and more specifically to those who are interested in high performance motorcross and supermoto electric motorcycles. I have to inform you that I'm a heavy, tall fellow, so my vehicle to rider weight ratio is 1.5, though 1.0 is about right for the average high performance EV motocross (off road motocycle) rider.

I've been following the EV literature closely for years now and had never seen E2W. A quick internet search of 118,000 results show no such acronym use as you suggest, except for yours above. I'll try to get others to adopt it, if you want, although the latest revisions for tax credits to electric vehicles goes in the exact opposite direct, with two and three wheel electric vehicles (with sufficient power pack size) now included for the purposes of electric vehicle power pack size based tax credits.

You know how hard it is for others to change years old traditions.

acronyms.thefreedictio...

evworld.com/guides/gui...

I guess since my vehicle is listed in the buyer's guide at EV World, I'll keep calling it an EV, which it is. It's a vehicle and it's electric. Moreover, it's my daily commuter and I own it, so I might call it Suzy KreemCheeze if I want.

Thanks again for the plug for electric two wheeled vehicles, whatever you want to call them. I like the high performance ones, like mine.

Apr 14 04:39 PM

[realist2:]

I meant rider to vehicle weight ratio is 1.5. Sorry. Freudian slip.

Apr 14 04:42 PM

[D. McHattie:]

John, just wanted to give a word of thanks for all your hard work researching advanced batteries and sharing your findings and opinions with us.

Thanks to you, I own small amounts of AXPW, ENS and XIDE. I could have timed my entry to AXPW a little better but today made it all worthwhile.

While I don't like to count my gains until I've actually sold and I don't plan to sell any of them soon, I'm up 56%, 11% and 48% respectively.

Please keep researching and writing - it is much appreciated.

Apr 14 07:21 PM

[John Petersen:]

Speculawyer, the dangerous thing about giving me links is I actually check them and I read things like the following introduction to your vaunted Table 4:

Thus, the capital cost assumptions for storage technologies considered in this study are shown in Table 4. Balance of Plant includes the auxiliary components outside of the storage subsystem or power converters. For some technologies, these costs are integral to the power system.

Capital cost estimates are exactly that - assumptions that somebody made up for the purpose of creating a financial model.

By the way, A123s cost of goods sold for Q-1 was about $2,000 per kWh although I was able to confirm that the overhead cost allocation will fall as production quantities increase.

Jul 21 03:47 PM