Is Massive Consolidation in Electric Vehicle Sector a Prerequisite to Long-Term Success?
Interview with Wolfgang Bernhart, Partner, Automotive Practice, Roland Berger
Thank you Wolfgang for speaking with us today. Before we begin can you tell us a bit about your background and the work of your firm?
Roland Berger is one of the largest strategy consulting companies in the world and is active in about 27 countries including both the developed and developing world. I am a partner in the automotive practice and coordinate our work related to new technologies and engineering. I have been a consultant for 17 years mostly in the automotive sector.
Substantial resources are now being allocated into battery development for use in electric cars and other applications. Can you tell us about these developments, the present state of the industry, who is driving this innovation and investment and how it is likely to effect automobiles and other forms of transportation?
The whole topic of electric vehicles reemerged after 2 or 3 unsuccessful attempts with a new approach based on lithium ion batteries. This is a $10 billion market in non-automotive applications and is dominated by Korean, Japanese and Chinese manufacturers. To make it successsful in the automotive market will require making them more efficient and reducing cost. Depending on the chemistry the present costs ranges from $700-900 per kilowatt hour. For EVs to really penetrate the market and to make them competitive battery costs have to be brought down to about $400 per hour. So companies have gone into this in a big way and there have been lots of subsidies by the US and Japanese government and to a lesser extent the Chinese to facilitate this activity. The investment and innovation is basically driven on two levels. One is the battery itself. Annodes and cathodes are produced by a coating process and here innovation is mostly in production technology to improve speed and output. More important area is improving the active materials used for anodes, cathodes, electrolytes and separators. The target of the innovation is to raise the output of energy. Currently the specific energy of lithium ion is 150 watt hours per kilo and that can be improved to 200 or 250. Currently the battery for the Mitsubishi iMiev, a vehicle which is already on the road in Japan, has about 16 kilowatt hours in capacity and it costs about $10,000. So the innovation is focused on improving the capacity and driving down the cost. And because of the high pricing at the moment this generates high revenues which is why companies are investing in the sector. On the other hand the battery is the core of electric vehicles so it is at the core of subsidy programs by the government.
Despite the potential of this industry you maintain the shift of major resources into the industry will lead to over-investment and a state of overcapacity and ultimately consolidation. In fact part of the title of your report is "the next bubble ahead". Why is this happening and how you view the likely outcome
Because of this growth opportunity a lot of subsidies and investment is flowing into the sector. So all the companies are seeking big market share to increase economies of scale. Therefore subsidies amount to 50% or more of the actual investment to build battery and cell manufacturing plants and the business plans rely on very optimistic projections despite that the output will be higher in cost than traditional vehicles. This optimism is always the case in new growing markets. So when one asks how big the market can be and compares investments against forecasts, investments seem to imply 2 or 3 times the needed capacity. And when you base your investment on needed 95% capacity you may not be able to realize this and then there will be trouble.
This will likely to lead to significant price wars which will go below cost. That is not good for the companies though this will help the industry to gain the penetration that is a prerequisite to launching the industry. We foresee 2013-2017 as a time of increasing overcapacity. This will become a real problem and become obvious. There will be price wars and then when some of the players go into bankruptcy, assets will come on the market at attractive prices which will lead to a new more attractive, competitive industry. This is unavoidable as these companies need to be big to justify the production scale and investment into R&D.
What is the alternative to the scenario you have laid out? To realize the potential of electric vehicles one will have to lower costs and initiate the innovation needed to drive its development and to make them competitive with traditional autos. Are there any steps that can be taken to prevent this "bubble" from developing or is it simply a case of the participants having to absorb the risk and competing in the hope they are one of the ultimate winners/survivors?
I think it will go in that direction as to a certain extent the investments have already been made. One hope that the manufacturers are already pursuing is to try to expand the range of applications for batteries. For example BYD is entering solar and others are using large lithium ion batteries in containers to stabilize electric grids. These and other possibilities where lithium ion batteries represent a good option might help to enlarge the market.
Rare Earth Metals are vital to the development of automotive batteries and automobiles in general yet there is real concern emerging there is not an adequate supply and what is available is largely controlled by Chinese producers who have begun to exert more control over their output. Does this have the potential to effect the production of automotive batteries and in any way effect your forecasts?
Rare Earth Metals are used in Nickel-Metal-Hybrid batteries, but not in lithium ion batteries. Electric traction machines do use them and they need magnets which use these minerals. The Chinese do control the metals and have restrictions on exports. So it will not effect so much the batteries directly but electric traction in a negative way. It is really not so much an issue in terms of battery production, but more in terms of higher prices for electric machines, and therefore also EVs, which impact potential EV sales negatively.
You note overcapacity will be particularly pronounced in Japan and the US. Why is this the case? Is it primarily due to stronger growth for automobiles in other markets, higher investment in these technologies by Japanese and US firms or some other reason?
It is mostly due to the subsidy programs. In the US demand is relatively lower than the investment. In the case of Japan they export a lot to Europe so it is a better situation. In Europe the subsidies are not that high. Who are the players today? The manufacturers are in the consumer goods sector, China, Korea and Japan. Only two non-Asian companies do have a significant size. These are in the US and include A123 and Ener1. China is also subsidizing but more indirectly in terms of R&D. In Korea I do not think they are subsidizing as much but L&G and Samsung are very strong in the consumer sector. Samsung also has a JV with Bosch, which holds lots of potential.
In your report you also highlight the need for Western governments to act to avoid "losing future technologies to Asia". Is this due to Asian countries becoming more active in R&D or a failure of Western countries to commercialize their own research? What do you propose governments do to avoid this development?
It is a bit of both. If you look at batteries a lot of the initial technology came from North America as well as the licenses. For example Hydro-Quebec sold technology they developed to Europe but in Europe itself the activity has been minimal. In the US it has resulted in the spin-off to A123 which is promising but a small player compared to the big Asian ones. Now in Asia they have more than $1 billion flowing into research on new batteries. China has made it a priority. Several of their universities are focusing on this are. Some are very big and dedicated to this area. It is both. Asians are already more active and have been active for years and Western countries are just realizing that they have lost ground.
The R&D is more on the materials side and it should be emphasized that is not subject to the same issues of overcapacity. So even if I am right and you are able to buy manufacturing assets later on you will be buying outmoded 2010 technology and the major leaders will already have advanced. There is production technology and the other side is the materials used in batteries. Both sides are important. And I do not expect the big advanced Asian players investing in the US to go bankrupt. It is more likely to be the smaller players.
Governments are trying and there are programs that are relatively small when compared to plant subsidies that fund research on battery chemistry. At the same time not a lot is being done now in Europe. In the US there are programs funded by the DOE, which exceed about $100m. While significant this much lower than what is going on in Asia.
You also advise battery suppliers to adopt well-defined strategies to gain market shares and survive, and note that investors should be aware of massive investment risks. Can you expand on these thoughts and how would you advise suppliers and investors to proceed in this market?
I would advise investors to take the overcapacity into account and monitor market closer so one does not get caught up in the bubble. And you need to realistic in terms of the price that you offer. At the same time if you are a potential producer and wait it out in the expectation of cheap assets and lower prices later on you are likely to find yourself behind in advanced R&D for these products.
Part of the problem in developing capital intensive technologies such as automotive batteries is that massive investment is required over long time frames which can then quickly become obsolete due both to conditions of overcapacity such as you outline as well as new innovations which build off earlier generations before they are fully amortized. Is there any way around this and if not how can these investments be justified except within a "public goods" scenario?
This is an embryonic market so it is always the case that some companies will not be successful and in essence it is unavoidable. So one has to keep in mind that it is a risky market and factor that into ones projections and planning.
Thank you Wolfgang for your time and attention. Before we conclude do you have any parting words you want to leave with our readers.
I think that is all. Thanks for your time and attention.
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