[The Vector] Lithium – Squalls Before the Promised Land

It’s hardly news that the lithium ion battery industry is poised for huge growth. Lithium ion batteries account for about 20 percent of $50 billion battery sales worldwide and they are expected to play a major part in electrical and hybrid vehicles as well in the crucial energy storage sector for utilities providing a greater proportion of their electricity from solar and wind sources. But there are some who worry that lithium ion battery producers may experience considerable turbulence as they climb.

A group of experts at a California event hosted by Silicom Ventures last April pointed to opportunities for massive growth for the industry. According to Atiq Raza, CEO of lithium ion battery producer Seeo, even if electric vehicles only experience tiny growth, battery production will have to increase ten-fold in ten years.

Here’s what Mark Platshon, a partner with VantagePoint Venture Partners (San Bruno, Calif. — the folks who invested in electric vehicle maker Tesla Motors as well as battery companies) said recently:

“Every link in the whole value chain needs to scale up by three orders of magnitude.”

That was why there was such huge excitement at A123’s IPO last year – a company that had annual revenues of $91 million and losses of $86 million.

EV Technology breakthroughs needed

Excitement about lithium ion batteries does not translate into excitement about electric vehicles. Today’s hydrocarbon fuelled vehicles offer great flexibility. They can act as short distance run-arounds, they can carry considerable loads, and they can also cover long distances with relatively short refuelling stops. Those longer distance journeys are a particular challenge for electric vehicles.

Of course, the development work on battery technologies will deliver results. There are many ingenious solutions being developed at the moment. Researchers from Utah State, Oak Ridge National Laboratory, and the government of New Zealand are collaborating to develop inductive chargers that can be embedded in highways to charge while driving. Virginia-based Evatran are already piloting plugless power chargers that the driver simply parks over.

Those developments may prove market-changing. But the challenges explain why Honda (the world’s biggest engine maker) has been such a laggard in the electric vehicle market. Obviously Honda are well behind its Japanese competitors. Toyota was well ahead of the market with its Prius and Nissan’s Leaf will be a mass production vehicle by 2013. But even Honda cannot ignore the surge to battery-driven solutions. It plans to sell up to five hybrid vehicles in the USA by 2013 . (It is actually also developing an electric vehicle.) Reuters reported recently that Honda is considering building hybrids in the United States.

When skeptics like Honda are taking the plunge, it is understandable that lithium ion battery producers and investors get excited. New plants are springing up and others are expanding production. A Mitsubishi joint venture in Japan will supply batteries for 50,000 cars. A123 Systems is using a $249 million government grant to double its manufacturing capacity to supply batteries for 320,000 hybrid vehicles. EnerDel of Indianapolis unveiled its own plan to more than double U.S. production.

Demand doubts

But there is some doubt amongst analysts that the demand for all these car batteries really exists, according to an article in Greentechmedia.com.

There certainly has been considerable hype. Despite the attention Chevrolet’s Volt received, the GM company only plans to produce 20,000 Volts in 2011, increasing by 10,000 in 2012. Nissan is more optimistic. Its production numbers for the Leaf – all going well – will be around 500,000 by 2013. But compared to the numbers of hydrocarbon-fuelled vehicles these companies will produce over the next two years, the EV and hybrid production is tiny.

A glut in battery production would put pressure on margins. Some analysts believe the growth in supply will halve installed battery system costs over the next two years or so.

Other battery manufacturers are optimistic despite the boom in global production – and competiton. A123 suspects the adoption of electric cars may be faster than pessimists believe. They have good grounds for optimism. The company has already sold out its production right through to 2014.

On the other hand, senior managers at Applied Materials have expressed public worries about reports that lithium ion batter supply may be three times greater than demand. Managers at Johnson Controls-Saft worry that an artificial boom may have been created by stimulus funding.

It looks like lithium ion battery production will be a good long-term investment. But there may be rough waters for battery producers in the short term. If some companies are not storm-ready they could suffer damage – or worse.