Issue Date: July 27, 2009
A Jump-Start For Batteries
Start-up battery maker A123Systems proposed an initial public offering of common stock in August 2008 but, faced with the economic meltdown, never advanced the plan. Although the outlook for stock offerings is still quite chilly, A123 has revived the project and added two big funding partners to its prospectus: the federal government and the State of Michigan.
In a new filing last month with the Securities & Exchange Commission, A123 points to its application for up to $438 million in grants under the American Recovery & Reinvestment Act to expand U.S. manufacturing of its lithium-ion electric-car batteries. The company says it has applied for an eye-popping $1 billion in direct loans under a different Department of Energy (DOE) program. And it describes more than $100 million in grants and tax credits from Michigan for the construction of a battery-cell manufacturing plant.
The updated filing shows one company’s bold response to a tsunami of government programs for advanced batteries. The financial incentives on offer through the recovery act, as well as from other federal and state programs, will go a long way toward meeting President Barack Obama’s goal of putting 1 million plug-in hybrid electric cars on the road by 2015, experts predict.
The programs have been designed to meet two important goals, say battery makers and analysts. They will help build a new U.S. transportation industry based on electrified vehicles. And they will create manufacturing jobs to replace those lost in the current downturn and to the slow movement of manufacturing to the developing world.
The capital kick-start from the government has lowered the risk for battery firms to rapidly build U.S. capacity, but significant hurdles remain. One, of course, is that consumers must be convinced to buy pricey and untested electric cars.
And it is not yet clear whether the U.S. still has the manufacturing strength to build an electric-vehicle industry from scratch. It will have to catch up to countries such as Japan, which has a two-decade head start in lithium-ion battery production, and compete against countries such as China, which is also putting big money into electric cars.
Still, market watchers are optimistic. “With the government awarding low-interest loans and grants, there will be a lot of capacity planned for American manufacturing that will step up in parallel with demand for electric batteries for cars,” says Ying Wu, a senior analyst at Lux Research, a market research firm. With all major carmakers already planning one or two plug-in hybrid models, she forecasts sales of 250,000 to 500,000 electrified vehicles in the next two years.
The U.S. has committed much money to electrified vehicles. Of the $787 billion in the recovery act, $2 billion will go to DOE’s Electric Drive Vehicle Battery & Component Manufacturing Initiative. The agency has divided the initiative’s grant money into segments matching the supply chain needed to electrify tomorrow’s vehicles.
Cell and battery-pack manufacturing facilities will get $1.2 billion, divided among six to eight companies. Plants that supply materials for batteries will receive about $250 million for up to 15 projects, and $50 million is set aside for battery-recycling facilities. Finally, $500 million is targeted at electric drive-train components, systems, and subcomponents. The awards will be announced this summer, according to DOE.
Another DOE initiative, the Advanced Technology Vehicles Manufacturing Loan Program, was enacted as part of the Energy Independence & Security Act of 2007. It provides $25 billion in low-cost loans to companies working on a broader category of advanced transportation projects, including auto assembly lines. On June 23, the Obama Administration announced that $8 billion in such loans will go to Ford Motor, Nissan North America, and Tesla Motors.
Finally, DOE continues to support basic research to improve lithium-ion batteries for vehicle use. For example, it recently awarded $3.3 million to battery maker Ener1 for projects focused on battery safety and overcharge prevention.
State governments have already jumped in with incentives to land winners of federal funds along with their desirable manufacturing jobs. Michigan plans to provide $555 million in incentives and has already awarded credits to four projects (C&EN, April 20, page 9). Texas, Indiana, Massachusetts, California, and Kentucky are also offering tax breaks and other incentives.
Last August, Indiana Gov. Mitch Daniels boasted that an Ener1 plant in Indianapolis would bring high-tech jobs to the state. “Eight hundred fifty jobs of any kind is great news. When those jobs are in a technology of tomorrow, like electric cars, it offers the prospect of even bigger news to follow,” Daniels said at the time.
To access federal money and state incentives, battery makers must invest their own capital in U.S. facilities. Federal grant money requires a dollar-for-dollar match on the part of the company, though DOE has the discretion to lower cost-share ratios. Ener1’s Indianapolis plant, for example, was built with some $200 million raised privately. To help pay to expand production, the company has applied for $480 million in government loans under the advanced vehicle-manufacturing program and for an unspecified amount of recovery act grant money.
“The new Administration has created a tremendous tailwind,” says Rachel Carroll, the firm’s director of investor relations. “Ener1 can aim to quadruple its U.S. manufacturing footprint by 2015.”
Similarly, Johnson Controls, a maker of lead-acid car batteries, had electric-car batteries in mind when it joined forces with France’s Saft back in 2006, says Michael G. Andrew, director of government relations for Johnson Controls’ hybrid business. Saft was an attractive partner because of its lithium-ion battery production experience. But now, Andrew confirms, “the availability of grant money from the recovery act had a significant impact on our strategy.”
Johnson Controls-Saft opened its first plant in 2008, a facility in Nersac, France, that makes lithium-ion cells for the Mercedes-Benz S-Class Hybrid, which will be introduced later this year. Its first U.S. plant will be an existing facility in Holland, Mich., retrofitted with the help of state tax credits and incentives totaling $148.5 million. The $220 million upgrade will give the plant an initial capacity of 15 million lithium-ion cells. It will supply Ford’s first plug-in hybrid electric vehicle in 2012, according to the company.
In addition to the boost from Michigan, Johnson Controls-Saft has also applied for recovery act funding. But competition for the federal money is fierce. DOE reports that it has received 122 applications requesting a total of $6.1 billion in funding. In addition to Johnson Controls-Saft, A123Systems, and Ener1, other companies that have applied include Kokam-Dow Advanced Battery Group, Quallion, Valence Technology, and Boston-Power.
Clearly, not all who have applied will win. The successful applicants will be those that can build capacity rapidly and help the U.S. catch up to rival industries in Asia and Europe, says Timothy L. Hoffman, managing director at Scott-Macon, a boutique investment bank. To that end, DOE required applicants to demonstrate that they can put together a vertically integrated system, including domestic material and component suppliers, batteries, and battery systems.
The applicants are being asked to create a U.S. industry almost from scratch, because “the biggest manufacturers of lithium-ion cells are still the Japanese and Korean companies—and China is next,” explains Lux’s Wu. “Even U.S. companies like A123, Valence Technology, and Boston-Power have manufacturing in China.”
Analysts and battery makers all recite the same history to explain why the U.S. is so far behind. Starting two decades ago, U.S. researchers made crucial discoveries in lithium-ion battery technology, but U.S. firms were not interested in volume production because of low profit margins. Instead, Sony commercialized the first lithium-ion laptop battery in 1991. Japan had the market almost to itself until 2000, when South Korea and China moved in with lower cost products such as cell phone batteries.
In the past five years, new lithium-ion battery chemistries have proliferated, opening up uses beyond consumer electronics. For example, A123 developed high-power batteries made with cathodes of lithium iron phosphate instead of standard lithium cobalt oxide for use in power tools, electric bikes, and scooters. Unfortunately for the U.S., the intellectual property was not well protected, and Chinese companies quickly began producing similar batteries, Wu says.
But now, the potential market for electric vehicles gives U.S. industry one more bite at the apple. “This is a major change in the industry—everyone wants to target an application where the market size is very big,” Wu says. She points out that “even if only a few percent of vehicles in the world use lithium batteries, it’s still a market size of billions of dollars.”
Still, Johnson Controls’ Andrew acknowledges there’s quite a bit of work to be done on the production supply chain. “It’s not just materials and components that are needed but also the manufacturing equipment to produce and assemble the batteries,” he points out. Most of the equipment and material, he notes, still come from Asia, particularly Japan.
Andrew says Johnson Controls’ strategy is to convince its overseas suppliers to build facilities in the U.S. “We’re mitigating that risk by leveraging our global presence and our size. If there will be business in the U.S., we can make a strong case for our suppliers,” he explains.
The partnership of Dow Chemical and battery maker Kokam plans to manage its supply chain by leveraging Dow’s chemical expertise. “Dow has been supplying materials into the large-scale battery market for a number of years. In fact, Dow was founded 114 years ago on electrochemistry,” points out George Hamilton, vice president of government markets for Dow. “We have expertise in material science and technology and the ability to scale up quickly.” Hamilton says the joint venture with Kokam will supply batteries to Smith Electric Vehicles, which makes electric vehicles for private fleets.
While U.S. battery manufacturers organize their supply chains and plan expansions, other countries are also spending heavily to compete in tomorrow’s automotive market. “The rest of the world is not standing still” while U.S. companies wait for federal money to be doled out, Hoffman says. He points out that China has higher auto mileage standards, larger subsidies for electric-car purchases, a plan to invest in a recharging infrastructure, and a $440 billion renewable-energy package on the horizon.
Although the U.S. is behind in terms of manufacturing capacity, it will benefit from its strong foundation of battery research and development, analysts say. R&D remains critical because there is no perfect—or even great—electric-car battery on the market. The first transition will be from the nickel-metal hydride batteries used in today’s hybrid cars to high-power, high-energy-density lithium-ion versions.
Lithium-ion cells come in many chemistries. DOE is following three classes each of cathodes, anodes, and electrolytes that could be useful for transportation applications, according to David Howell, team lead of hybrid and electric systems at DOE’s Office of Vehicle Technologies. The anode-cathode combinations closest to commercialization for plug-in hybrids are graphite-nickelate, graphite-iron phosphate, and graphite-manganese spinel. All three were originally developed for hybrid-electric models like the Toyota Prius.
But to reach the DOE goal of a plug-in battery that can travel 40 miles or more on electricity alone will require ultra-high-density batteries with increased life span and discharge cycle capacity. To that end, DOE is sponsoring research on new combinations such as a lithium alloy anode with a high-voltage cathode and a lithium anode coupled with a lithium-ion polymer cathode.
But competing technologies may overshadow lithium before the 40-mile goal is met. “I’m not 100% convinced that lithium ion will be the best in the long term,” Hoffman says. He points to the cost of lithium materials as well as safety concerns—particularly the requirement for cooling systems to avoid thermal runaway.
According to Hoffman, new companies are developing batteries based on zinc. ReVolt Technology, for example, has a zinc-air battery, and PowerGenix is developing nickel-zinc batteries. The zinc batteries operate at ambient temperature, don’t need safety systems, are nontoxic, and are easy to recycle. But Hoffman says performance is still behind today’s lithium-ion versions.
New technology that has promise for tomorrow’s electric-vehicle market will find investors, even though the government’s focus is on lithium ion, asserts Dallas Kachan, managing director of the Cleantech Group, a data and research provider for investors and start-up companies. “The billions in government money give venture capitalists a high level of assurance,” he says.
In the second quarter of 2009, Cleantech reports, venture capital money for advanced battery start-ups reached a new high of $165 million, part of a huge influx of capital into the transportation segment. Kachan points to EEstor, a secretive company with a product based on ultracapacitors, as an example of a nonlithium battery firm that has raised significant money from the likes of Kleiner Perkins Caufield & Byers, a leading venture firm.
Ener1’s Carroll argues that lithium-ion technology will be the go-to-market technology for the foreseeable future. “In the past year, there have been over 75 models of hybrid and hybrid electric vehicle announced for production by various carmakers in the next three years,” she reports.
To access that large market from a base in the U.S. will require coordinated activity among many suppliers and manufacturers. “We’re a very nimble country and we can adapt to market changes,” Hoffman says. “We’ve been caught a little flat-footed on the need for electric cars due to our history of thinking there is no end to oil. Is $2 billion enough to make the U.S. competitive? It will be competitive, but I don’t know how competitive.”
Likewise, Wu sees no guarantees that the U.S. will become a big center of manufacturing. “I think the government is trying to do good things for the domestic industry, but in the end it still has to compete worldwide with Asian producers and in Europe as well.” However, she adds, “the U.S. has always been strong in advanced technology development and entrepreneurial spirit. Advanced batteries is an area where the U.S. can play a leading role.”
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