Why I Don't Expect a Lithium-Ion Battery Glut

by: John Petersen

It's no secret that I think plug-in electric vehicles are unconscionable waste and pollution masquerading as conservation. To support my opinions, I've published an easy to follow Excel spreadsheet that shows why plug-ins are 5x to 6x less effective than HEVs when it comes to reducing national gasoline consumption and 9x to 12x less effective than HEVs when it comes to reducing national CO2 emissions. To date, the only challenges to my analysis have come from die-hard EV fanatics who seem to believe battery factories grow on trees and raw material supply chains sprout like flowers in an alpine meadow.

In early February, Joann Muller of Forbes warned of a coming Electric Car Battery Glut based on published estimates that global lithium-ion battery manufacturing capacity would reach 36 million kWh by 2016. Just this week, Roland Berger Strategy Consultants released a study that forecasts a lithium-ion battery supply bubble between 2015 and 2017 and predicts an industry-wide consolidation where "only six to eight global battery manufacturers will survive in the next five to seven years."

Despite my abiding disdain for plug-ins and my high regard for Forbes and Roland Berger, I don't buy the theory that excess manufacturing capacity will be a major problem for two simple reasons. First, I believe the Roland Berger forecast of global demand for 1.6 million HEVs in 2015 is far too low given the history of the HEV market and Toyota's (TM) plans to increase its production capacity to 1 million HEVs per year by 2011. Second, the Roland Berger analysis does not consider large format lithium-ion battery demand outside the automotive sector, which is where I expect the exponential growth to occur.

The first hybrid electric vehicles were introduced in 1999 and through 2007 the annual sales growth was spectacular. While the following graph of US HEV sales from hybridcars.com shows that unit volumes fell off a cliff in 2008 and 2009, the decline is easily attributed to two independent but identifiable factors; the economic collapse of 2008 and the growing hype over plug-in vehicles that caused many likely HEV buyers to delay new car purchase decisions.

Click to enlarge
HEV Growth.png
Now that the roll-out dates for the GM Volt and the Nissan (OTCPK:NSANY) Leaf are only months away, two years of plug-in hype is about to hit an economic brick wall when potential buyers begin making relatively simple total cost of ownership calculations like this one.

Conventional Prius-class Volt-class
Sticker price $18,000 $22,500 $40,000
Tax credits -$7,500
220 Volt outlet $2,500
Amount financed $18,000 $22,500 $35,000
Monthly payment $307 $384 $597
(60 months at 7%)
Monthly gasoline $105 $63 $21
($3 per gallon)
Monthly electricity $20
($0.10 per kWh)
Monthly cost of ownership $412 $447 $638

The big beneficiary of this exercise will be the Prius-class HEV, particularly if the buyer uses an assumed gasoline price in the $5 to $6 range. No matter how you fiddle with the numbers, PHEVs will come in a distant third for any buyer who thinks the green in his wallet is more important than the green in his cocktail party conversation. Jerry Flint of Forbes recently predicted that Nissan's Electric Car Will Flop. I'll go one better and predict that every car with a plug will face a similar fate.

While the idea of plug-in cars is just plain balderdash, there is another developing transportation trend that holds immense potential for lithium-ion battery manufacturers. That trend is e-bikes and e-scooters, which are rapidly becoming the vehicle of choice throughout Asia and the developing world. To put things in perspective, Pike Research is forecasting global sales of 80 million electric two-wheeled vehicles in 2016. When you consider that the average e-bike needs about 500 wh of batteries, it's pretty easy to see how an 80-million unit E2W market could make a huge dent in a 36 million kWh battery market. It's not a market that most companies and investors are focusing on, but it's a market that stands a very good chance of sopping up any excess supplies of large-format lithium-ion batteries.

Currently, the only thing standing in the way of lithium-ion dominance of the E2W market is price. While roughly 85% of e-bikes currently use lead-acid batteries because they're cheaper, the E2W market is ripe for the picking by lithium-ion batteries because size and weight truly are mission critical constraints for a 50-pound vehicle that runs on a combination of battery and muscle power. In its report on the coming battery glut, Roland Berger forecast that the price of automotive grade high energy lithium-ion battery cells would fall from the current level of $650 per kWh to $400 per kWh in 2015 and $275 per kWh in 2020. Consumer products grade cells should be cheaper. As lithium-ion battery supplies increase and reasonable economies of scale are realized, there's little question in my mind that they will become the battery of choice for the E2W market.

Currently, the only company I track that focuses on the E2W market is Advanced Battery Technologies, Inc. (ABAT). They've been making e-bike batteries for years and decided to vertically integrate last year when they bought Wuxi Angell Autocycle, a Chinese e-bike manufacturer. In my view, it was a much smarter purchase than Ener1's (HEV) stake in Th!nk Global or A123 Systems' (AONE) stake in Fisker Motors. I haven't changed my view that the lead-acid sector is more attractively priced than the lithium-ion sector, but if I had to invest in lithium-ion, ABAT would be at the top of my list because its profit history is exemplary and its business strategy just makes sense in a world where six billion people are trying to earn a small piece of the lifestyle 500 million of us have and take for granted.

Disclosure: None.